Designing better futures

Checklists, hedge funds and human behaviour

Checklists are not sexy, but their results are.  I just finished the Checklist Manifesto by Atul Gawande.  I am sold and you should be as well. Checklists save lives, make money and make life less stressful.

Outperformance seems to be associated with repeat process and efficient group communication. Checklists allow for managing individual and team processes for better outcomes.  The book gives a great overview of how, where and for whom checklists work. How to design and apply a checklist for super-ordinate goals is an emerging science/art.

As a hedge fund guy and anthropologist, I am fascinated.  Checklist dynamics applied correctly could be a hugely important innovation in group dynamics and increasing human potential.  As a tool for facilitating group activity they appear to be incredibly effective.  Read the book to understand how they work.  It involves, group dynamics, social interactions, reducing cognitive load and a host of other things.

Checklists allow for efficiency of semi-structured tasks and better individual and group behaviour goal directed behaviour.  Effective checklists are finely tuned for effectiveness, brevity and looseness.  Looseness is required for creativity to come in.

Great design of a bridge, airplane, product or service comes from the understanding of a goal and the design problems constraints.  Checklists seem to work the same way but in a behavioural real time way.  By providing cognitive, behavioural and group constraints, individuals are freed to contribute more effectively when need be collaboratively. 

The Checklist manifesto is a great book and gripping read.  Converting process into gripping human drama is no easy feat, but this thing reads like an action movie.  My copy of this book is already on loan request to a friend who is a risk manager for multi-billion $ Fund of Funds.  

See and here a check list in action saving lives as Sully lands in the Hudson river and saves lives.  The video is a also described in the book.

Here is Mohnish Prabai's value investor checklist.  He only gives a bit away. 

How Mohnish Pabrai Uses Checklists

View more presentations from MShareS.

I am working on a Charlie Munger type approach to the investing problem.  Charlie preaches inversion as a way to solve problems.  So here is an inversion technique to build a value investing checklist, find some great sounding investments that failed or companies that disappeared from an industry and then list why they failed.   That causal list becomes your checklist.  You can start with firms or experiences that didn't work out.  After collecting data on 30-50 a few patterns should emerge.

Group the failure points or weaknesses into clusters, management, competitive loss, industry type etc.  you could even group according to Porters 5 forces etc.  That becomes your checklist.  Each industry has its own subtleties and the key is to identify the moats in each one and then run checklists around them. 

If you succeed you will end up with a few key rules or heuristics that makes groups able to makes decisions and act, faster, better and safer.  As a hedge fund you might try organizing into teams either by sector/asset class or specialty.  Instead of a beverage analyst, auto, tech etc. how about forensic accounting specialist, emerging threat specialist, regulatory specialist, organizational psychologist to analyze corporate culture etc. to analyze impact for a firm, oh and an anthropologist to capture major cultural trends that may be fading or rising.  This approach is probably cheaper and more effective than trying to find all those skills in one person.

One more note on process and safety: as many other have called for, I wish we had an economic/policy NTSB (national transportation safety board) to do post mortems on accidents.  Ideally the crash board, would have better resources than a university and be independent of industry and congress.  Seeing bubbles after the fact is easy, determining true causation isn't.

Real professional heroes at work: Sully and Team

Real professionals, no egos or issues, this is a team acting together for a common goal.  These guys, practice, they listen and they act professionally under the most extreme of pressures without hesitation.  Checklists also play a crucial role.  Watch one of the most moving human dramas of last year play out. I just found this on Barry ritholtz blog.

Full Disclosure, I am a flight geek: gliders, paraglider experience etc.

TED junkie and progress for the Bottom of the Pyramid

There is a great book about growing economies and finding new markets by serving the poor.  It is called the Bottom of the Pyramid.  I read and reviewed it in 2006 and was hooked. 

The thesis is that the poorest people are a huge market and they need services and will pay for them.  People who live on less then $10 a day have needs and they can be served if we listen. 

Here is a great story about the progress of the Aravind Eye clinic, which is an Indian for profit eye clinic modelled on McDonald's.  There is a lot to learn from and consider here.  The gift of sight is delivered efficiently to many who would have never considered it possible.  The ingredients are passion, entrepreneurial management thinking and drive. 

I have a met few people who do this including life insurance for the poor and a specialist in mobile banking.  These are mundane services in the developed world, but can be life changing in other parts of the world.

Full Disclosure: I am a TED video junkie.  I haven't owned a TV in 20 years and am picky about films and shows I watch, but TED almost always makes the cut.  If you want learn something interesting, check out some TED shows.

Shit book hints at one key to human development

Excreta, turds, poo, shit, etc. are all terms for something that induces disgust in most.  This response is innate and indeed wired into use at a visceral level and a key to survival.

All we need to know about shit, is that we want to be away from it.  Sadly many can't get away from it, they end up living, inhaling and consuming it.  This leads to death and disease. 

In development people refer politely to water borne disease leading to over 2.2m child deaths per year according to the UN.  Water borne diseases in most instances relate to drinking shit polluted water.  Too put that in context AIDs is estimated to kill 2.0 million and malaria around 1-1.5 million per year.  Shit kills.

This is a problem that the now developed world has kind of solved and that the developing world is still working on.  Like all human endemic problems it is rooted in behaviors, beliefs and fears.

Understanding shit and what happens to it is key to human development as much as economics, corruption etc. and curing diseases are.  Indeed, solve the shit problem and many of the diseases that limit human development and factors related to GDP growth may resolve themselves a bit.

Rose George has written a very entertaining and important book entitled The Big Necessity in which she travels the world discovering the cultural issues and mores around handling waste.  Her voice is that of the economist magazine, for which she once wrote, humorous, well read and considered.

If you are interested in the human condition and understanding the behaviors, and issues that may better it, read this book. 

I am fascinated by economic anthropology and sustainable development and appreciate the field work that George has done in trying to understand what the solution to the problem of shit may be.  Solutions aren't just about plumbing and digging toilets.  Like most aid dropping in money or technical help rarely does anything but minimize acute crises.

Marketing, behaviour, economics and technology, distribution and other issues.  Consider it a business problem/opportunity. This is a fascinating book about something that gets very little attention relative to its impact on limiting the human condition and capabilities.

Rose George's description of techniques used to change a village's behaviour, involve economic incentives and changing beliefs while raising awareness. The lessons about motivating people for sustained change are as relevant to the business manager as they are to the aid worker.  technocrats and major aid institutions often fail in these areas.

Factoids:

• Thomas Crapper helped improve the usage of the toilet in London, hence the phrase "take a crap" (perhaps best to leave it)
• For all of the butch culture, Americans are very prudish in the waste dept.  euphemisms abound in the culture
• the japanese have the most advanced toilets in the world, warm seats, water wash etc.
• Wiping with paper is very unsanitary relative to washing with water
• Since 1994, 935 million gallons of raw sewage have been dumped into lake Michigan
• German men pee sitting down
• Chinese put used toilet paper into trash bins instead of flushing it away
• Many chinese public toilets have no stalls or barriers, so people get to know each other very well
• The average shit session yields 250 grams about .551 pounds of solids
• 1.7 million people in the US don't have a toilet
• The corridors of the palace of Versaille used to be filled with urine and fecal matter as people had nowhere to go, it was an honor to hold the king's chamber pot while he filled it.
• 400,000 people get sick in 1993 in Milwaukee from feces contaminated drinking water killing 100
• The UK has 186,000 miles of functioning sewers that are 250 years old
• One of the only cures for a "superbug" infection is a fecal transplant
• Wash those hands: in the UK "more than 1 in four people have faecal matter on their hands"
• over 40% of people don't wash their hands after going to the toilet
• much more in the book about a key element of the human condition, namely shit

You get the point the Shit book (The Big Necessity) is interesting, educational and important about something "polite" people don't talk or think about.  If you are interested in sustainable development, furthering the human condition or understanding how to drive change among a group of people with a fixed behavior check out this book.

Don't trust your senses they can make things disappear: the Troxler effect and change blindness.

Stare at the red dot in the center of the figure for a minute or two. Before long, the green ring will disappear--it simply seems to fade into the white background. There are no tricks: This is a simple, static image file. The effect has been known for more than two centuries and is named for its discoverer, Ignaz Paul Vital Troxler (1780-1866), a Swiss physician and philosopher. "Troxler fading" is actually related to what you experience when you get "dizzy": You become so habituated to a phenomenon (spinning in a circle or seeing a green ring in your peripheral vision) that you stop noticing it's there.

Or, rather, you don't realize that your perceptual system has begun actively ignoring it. It's only when your circumstances change that you see what the phenomenon has done to your perceptual system. When you stop spinning, the world seems to continue, in reverse. When you look away from the green ring, you see a red ring in the same part of your visual field.  From the excellent blog Cognitive Daily.

Something similar to this happens in Media, if we don't hear about it is assumed to have gone away.  In many areas of risk, there are risks, I refer to as Oxygen risks, ie things that are so common and pervasive in the environment that we only notice their absence.  Liquidity and the efficacy of a Triple AAA rating used to be like that.  Flawed or un-considered assumptions due to unchanging environmental factors.

If that green circle doesn't mess with you check out the Change Blindness video. again Courtesy of Cognitive Daily.

Using the Iron Prediction Triangle to pillory pundits

Acme Rocket Motor's shares are going to the moon because Wily E. Coyote uses them all the time to chase the Road Runner....

A lot of financial writing and prognostication is poorly done.  I am not merely speaking of the outcomes, but rather the rigor of the presentation and thought behind the processes.   Few escape the sobriquet, of bad punditry, be it Joe Random Blogger or the once august periodicals such as the Wall Street Journal and the increasingly banal Barron's which serves as an over priced blog in paper form with increasingly dubious editorial quality and declining relevance. 

Forget John Galt, where is the Tyler Durden of Print? It probably isn't Matt Taibbi.

The pundit who says X will go up and Y will go down is noise.   A prediction or opinion to be useful and actionable needs 3 components.  

1. Entry (A time, price, fair value or point of entry)
   

2. Exit (A time, price, fair value or point of exit)
   

3. Risk : Reward (Sharpe ratio, Loss limits, Stop losses, Probability of success, risk of ruin etc.)

Please note that a useful prediction does not mean a correct one.  A useful prediction is one which can be acted upon with some measured degree of confidence and then assessed for effectiveness in hindsight.  Not all predictions are correct, but some are useful. 

In project management there is a standard triangle model of framing the boundaries or constraints of a project.  Using these constraints, communicating and managing a project and its participants becomes easier as the expectations are understood as bounded. 

The graphic shows, the traditional project manager's model.  If you are a project manager you tell the respective parties that they can move any 2 points on the project triangle, thus keeping the potential quality area realistically fixed.

The equivalent in the prediction sphere is that all three components need to be explicitly stated or implicitly understood for an effective prediction to be potentially considered much less acted upon.

If an individual suggests you buy this or that stock, your next questions should be for how long and at what risk in addition to why?  Without the other 2 legs to the prediction triangle you have pretty much nothing. 

It is tough enough with all 3 legs to choose a prediction or model, but without 3 legs, it is impossible in retrospect to assess the value of a prediction or selection process.

Entry can be explained as buy now or this asset is worth price $ or value.  An exit can be expressed as hold for 10 years or until price/ value Y is reached.

The trickiest and most often missing component is the Risk:Reward qualifier or quantifier.  If one is investing/trading/betting, it is better to know whether to bet the farm or merely a farthing. 

Predictions are acted on in the context of alternative choices in a portfolio of options, so it is important to understand the risk reward scope of a particular choice.   Risk can be expressed as a stop loss, likelihood of major loss or potential probability weighted outcome etc. even the dreaded VaR.  This doesn't mean the risk assessment will be correct, but it is better to discuss risk in some context leave it as the unmentionable issue blighting the brilliant predictor.

So there you have it.  If some joker shows up on television, print or digital form lacking a robust prediction triangle with an Entry, Exit and Risk Reward stated, please discount said blather, ink or bits accordingly.

Flaw of Averages a useful book and tool

Sam Savage's latest offering Flaw of Averages is a useful book and set of thought tools he calls mindles.    If you have a PHd in statistics or mathematics, your job or role rarely begins and ends with you.  Often your models will need to be explained to people.   More importantly the places where the models could or would go wrong need to get explained.

The Flaw of Averages provides a great read and introduction to basic concepts in probability and real life situations where things behave in un-intended ways, such as the hidden stories in the "average". 

The book's core strength is the author's fun and helpful voice .  He is the stats teacher you wish you, your kids or co-workers wish you had.

Sam Savage has spent a long time in industry explaining and teaching how statistics and models work across sectors.  His chief skills is as a creator of simple stories and mental models that let managers and regular people understand the value of statistics applied.  Dr. Savage sells powerful "light bulb goes on in the head moments" for a living and sells the tools that let people have those light bulb moments in their own respective domains.

If you want a way to understand something from a new angle or some interesting new thought tools, take a look at the Flaw of Averages.  Quite a few useful examples and free simulations are available at his website. 

Topics covered include:

• Flaw of averages in finance and real estate
• Flaw of averages in supply chain management
• Examples of more successful product launches
• Petroleum (peak oil is hinted at)
• Many other real world applications and examples that would allow managers to share powerful concepts.  If you can't afford a $2k/day stats manager to assess some of your business issues, try a few hours of reading this book.

Disclosure: 10 years ago, I bought one of Sam's modeling tools for excel and over the course of 4 years proceeded to lose it somewhere between living in Dubai, Denmark and Brussels.  I called Sam up explained the situation and he let me pick up an upgrade for minimal cost.  He is not only a great teacher/practitioner but a nice fellow as well.

Negative options lead to Black Swans

The original Black Swan story was interesting because it correctly used an ecological model and behavorial shift to show a "surprise", ie. the discovery of a Black Swan.   The ecology was the new environments which allowed for the discovery of the black swan and the behavioral shift was the exponential rate of increase in exploration of those new ecologies.  The swan metaphor is more apt than first appears.

Europeans had only seen white swans up until the 18th Century and could have created a White Swan Swap, if they possessed our contemporary financial nous. 

Imagine our smart 18th  century Dutch banker, Don Dutchman betting with Bob Blackswan that there are no black swans and never will be.  Don wagers with Bob Blackswan, that they will never capture evidence of such a creature. 

Don and Bob agree to an ongoing wager, that for every year, there are no known Black Swans Bob will pay Don 1,000 guilders, a princely sum. If a Black swan is ever spotted Bob gets 1 million Guilders a 1:1000 payoff.  The wager is drawn up and copies of the contract exchanged.  A bilateral black swan default discovery swap has just been created with a notional value of 1 million guilders.

Bob Blackswan believes in Black swans and Don Dutchman doesn't.  Bob and Don have just created a sort of Black Swan default swap. 

Before the arrangement was settled Don had his accountants and experts comb the evidence and historical record of white swans just to be sure.  Don had astronomers and mathematicians calculate the "odds of a Black Swan" using the hot new Bayesian approach that all the 18th century quants were trying. 

Don has created the perfect bet, no black swan has ever existed and the statisticians (quants) tell him the probability of finding such a creature approximates zero.  Don Dutchman believes he is in for free money and may even set up a Black Swan insurance company or bank selling these black swan swaps if he can find enough Bob Blackswans to pay 1,000 guilders a year for the privilege.

Negative Optionality lies out of the box.

Bob has a different opinion and is betting on negative optionality.  Positive optionality is found in companies or bets in which there is an internally perceived "option" or bet embedded within the company that allows for extra upside. 

For example people purchase bio-tech companies not on cash flows per se, but rather the optionality of some new wonder compound eventually becoming a cash stream via the FDA process.  People probably buy shares in apple computer based on the next hot " i-something" being released.

Negative optionality is the inverse of this, it is looking at something of current value and pricing the potential for the loss of that value based on an external event.  This even might remove market share, eliminate the market with a substitute or in some other way diminish the economic value of the investment.  Value investors see moats as negative option protection.

Don Dutchman looks at his pile of historical white swan data, finds a few off-white colored swans, but assesses his risks as low.  To be sure of his bets, he back tests 150 years of historical swan birth records using millions of swan samples.  All the samples come up white swan. 

Don even creates a "whiteness" measure for swans tracking the variance of the whiteness.  The greyest newborn swan eventually turns white.  Variance in Don's sample is so low that when he plots his swan variance relative to the risk of "blackness" he perceives it as negligible. 

The variance among swans or Don's VaR (value at risk) is incredibly small.  Don calculates his risk as so small that he takes Bob's Blackswan's bet and runs around town with it looking for other takers.  Each year Don is going to rake in 1,000 guilders from each bet holder.  The low variance in white swan samples means that seeing a Black Swan is a 25th standard deviation event greater than 1:1 trillion odds against.  Don is betting 1:1000 against, a sure thing.

Bob thinks outside of the box and outside the swan environmental data set, which is limited to Europe (the center of the 18th century universe).  Negative optionality manifesting itself as a black swan event rarely comes from within a historical data set.  Black Swan size impact negative options are environmental / contextual.  Things operate in multiple shifting environments, or frameworks: political, geographic, technical, scientific and human behavioral.

Bob is aware of 2 factors in his favor.  He knows that he just needs a single black swan sample to win his bet.  Bob also knows things are changing in in the "known" world.  It is 18th century Holland and the world is opening up due to travel and trade. Everyday, new creatures and exotic lands are being discovered, the swan environment is growing exponentially. 

The negative optionality is increasing exponentially with each new exotic environment. Every exploring ship or expedition that comes in from a new environment is a negative option that might help Bob win.  The number of exotic species discovered is increasing exponentially and each new find is a negative option that might let Bob win his bet. 

Eventually Bob wins the bet due to understanding the environmental drivers of negative optionality. 

Negative optionality sits outside of historical price and is therefore not measurable by historical data.  The only way to "price" the risk of negative optionality is to measure the "drivers" of price or value properly.  Don looked at today's swans and the historical sample, Bob thought in terms of environment, evolution and geography as drivers of negative optionality allowing him to win the bet. 

Consider the simple pundit quoting this and that fact about the US stock or housing markets or the economy.  A sample size of one isn't a serious analysis, certainly not worth betting the farm on.

The drivers of a value are important.  Unfortunately few risk managers are polymaths or interested in drivers, they are hired for their math skills or PHDs more than their imaginations, so they molest the data they have with ever greater finesses until it tells them what they wish to hear.

Behaviorally the brilliant PHd risk manager is being asked to fit the data to the need. 

The New risk manager is always wrong, because the group says so.

Consider that on the first day of the job a young risk manager walks into his boss' office, presented data from 30 housing markets globally and said, I think there is a 1:10 chance our bank will fail.  We should cease mortgage securitizations operations immediately.  It probably happened.  Collective myopia isn't all encompossing, just strong enough to facilitate belief systems that reject challenges to the group needs and beliefs.

There will be more bubbles and people who see them for that, but group behaviour will ignore them at their peril.  Read Kindelberger's mania's panics and crashes. We aren't that special, we like every other culture alive, just needs to believe so.

The bank above couldn't accept or internalize a 1:10 failure rate and so listens selectively to those who deliver the most complex and obtuse narrative backed by "rigoruous" equations about why the bank would succeed and CDS and CDO's were money machines.  Group's select for belief support and re-inforcement especially if it re-inforces a recently successful narrative. 

In many cultures, high priests or astronomers and mathematicians promised a good harvest or success in battle.  Not much has changed, we are still social animals who need a sufficiently complex narrative delivered by an "expert" to further the group.

Group behavior and need is one of the things a a good risk manager should assess and report on.  If everyone in the group needs real-estate or oil to go up, there is a risk that no one is looking out for the other side of the bet.  If that group's need has been wish fulfilled a few times, it becomes an unchallengeable belief. 

If a risk manager is any good, most people won't like them, because they challenge fundamentally held personal and group beliefs that may be highly successful.  Positive result deviance can be more dangerous and telling than small negative deviance, for it can re-inforce dangerous behaviour.  If you want to find trouble before it happens, watch a group who just made a bunch of money and is scaling up to really "go for it", without understanding what "it" is or what makes "it" viable.  If possible ask, "how high is up and why".  Everything has an upper bound limit.

I am not against PHd's, I managed 70 of them in an advanced research institute.  Like any group of people about 10% of them were deeply interesting and creative in addition to being scientists.  Others were plodders, bright but plodders.  Cross field thinking imaginative polymaths are where the "good" stuff gets discovered.  Feynman came up with his electron spin equations by watching a plate on the floor.  He knew how to see and how to think critically. Watch this video to learn a bit about that.

Where do negative optionalities that lead to Black Swans come from?

Negative options are everywhere. Luckily, we have to worry most about the fast moving ones, i.e. the cases where these "extreme" options start being created exponentially.  Some types of negative optionality impact what I call "oxygen risk", the risk that something  ubiquitous and taken for granted is removed, like oxygen. 

Consider cheap plentiful memory chips mostly produced from Taiwan.  The probability of something happening, earthquake, typhoon, china etc. is not negligible, the follow on impacts would be huge.  The probability in any given year of such an event is probably >1%, the same goes for earthquakes on the West Coast of the US and yet everyone will be shocked.  Hint: a 1% annual risk has a roughly 1:3 chance of occuring over a 33 year investment horizon.

Technological innovation due to its' exponential growth curve is one of the greatest current negative option creators. Technological innovation for many firms is the Black Swan gun pointed at them.  Technological innovation is also Schumpeter's growth engine. 

To really understand the power of technological change in society read The Singularity is Near, the best book on the future out there and something the average MBA/PHd risk manager can't/won't think about.

Example:Pharmaceutical companies are under a negative option Barrage

I used to manage what was to be the world's largest gene sample gathering project. Gene Sequencing is an example of technology negative option. The cost to sequence a gene is declining on an exponential curve.  Each decline in costs makes sequencing cheaper, what cost $3 billion in 1999 will cost $1,000 in 2011. 

As the cost to sequence drops, the number of experiments for drug efficacy or adverse affects increases.  Each study done with a SNP type analysis is a potential bullet "negative option" cleaving off the addressable market of a current drug.   The cheapening sequencing curve is creating a huge environmental shift in drug markets that you can't see, yet.  The number of gene studies will grow exponentially and with each one, current potential market size could shrink. Drugs will be safer for patients, but big pharma is under an incredible negative option attack, that will show up as a black swan. 

Knowing how to see negative options growing exponentially is a powerful thing.  When everyone believes or more importantly needs to believe the same thing, negative options abound.  Today's ridiculous conjecture, could be tomorrow's, "whocouldanodeit?".

Technology advances along exponential curves and throws negative options up all the time.   Technology and behavior represent environmental shifts similar to the "un-discovered" lands of Australia.  Think about the behavioural shift about "home ownership".  From home to part ATM, part get rich quick lifestyle.  Culturally this is a big glowing warning sign.  Everyone needed and believed home prices would increase.

It is important to recognize ethnocentric biases and beliefs.  To the Aborgine, Black Swans weren't that rare.  He who writes the history books defines the black swan. The black swan created by a negative option could be someone elses gain and good fortune.

Many technology firms trade at market premiums as "growth" companies all the while being directly under attack as their environments shift.   Consider the telcos,cable firms and networks with their walled gardens.  Every year they inch closer to being commodity bit pipes and being valued as utilities delivering an ever cheapening commodity.  The negative options of cheaper faster pipes grow exponentially making a controlled digital experience seem all the less relevant.  AT&T 2011= AOL 2007, discount accordingly.  What got you here in technology won't get you there going forward. 

I just finished Michael Covels' book, Trend Following.  An interesting statistic on page 335.  The average lifespan of a "winning" stock is 9.35 years.  If true an 8% dividend yield is required for breakeven.  Choose wisely.

If you want to hire a risk manager, hire a ploymath generalist with imagination.  Going deeper with the same data, isn't helping, thinking outside of the box and about the drivers that make a portfolio or exposure work is important. 

Scenario planning at Shell was a great revolution and yet math people don't like narratives so much and story telling isn't viewed as serious enough for a bank.  Bringing a biologist, social scientist, historian, organizational psychologist or other type onto the risk management team and then don't let the math geeks bully them. Read the living company to understand how difficult it is to change organizational beliefs.

Scenario simulations, historical narratives, scenarios with a "b" team taking the other side of the bet might tell you a lot.  Just remember, the guys who made money and its usually guys last year didn't just gain 50 IQ points, they were most likely in the right place at the right time.

Luck and intelligence are often confused in Finance.  From an anthropologist's perspective chest thumping males celebrating a bonus are just showing a standard primate victory display, but not necessarily possessing greater prowess in predicting the next quarter or year.  

After all who could have imagined that house prices across the US would go down simultaneously, didn't seem to be the quant looking inside the shiller index.  Even a bad historian could have had a bit to say about it, but the group probably wouldn't have listened as it would have been, "just a historian".  Economic's current heavy reliance on math is really just a way of denying the fact that it is just one of the social sciences with serious physics envy.

P.S. for those of you who scoff at the Black swans analogy as simplistic, how about a glow in the dark rabbit? Biotech is going to change everything it means to be human, que the swan machine.

comittees and the designer dilemma: Stop signs....

Found on the always interesting Mocoloco

Sometimes group input isn't always the best way to arrive at a decision.  Some studies have shown that a dictator, consensus model can sometimes be more effective.  This is a model of group behavior in which the group elects an arbiter for decisions and then entrusts that individual.  This goes against my democratic political philosophy but I think I understand it more after watching the video above.

An interesting book with tips on how to lead, manage groups and make better decisions. is "The Psychology of Judgement and Decision Making."  It is a brilliant book packed with snippets from social science research (caveat emptor) on personal and group decision making.    Warning the book is expensive, but then so is ignorance or poor decision making.  The book includes concepts on listening management styles and other applicable aspects of the human and group psyche.

The process of decision making important to understand as it is the pre-cursor to both belief forming and behavior.

Central bankers on vacation, inflation gone mild

Government reports of inflation are derision magnets.  The freshly released inflation figure is easily the least popular kid in the economic class of statistics and can usually be found seeking solace next to his old punching bag buddy the quarterly GDP estimate.

Why are inflation numbers so unpopular?  My own opinion is that the anger and debate this statistic engenders is due to the fact that it can’t possibly handle the work load assigned to it.  Everyone wants inflation to tell a story about their current view on the economy and the future, yet it can’t do that. 

The whole problem with inflation is that it is a point metric describing a complex system. What?  Yes you heard me, it is a point metric, a single point trying to describe the state of a complex system. 

One Average I feel fine.

Inflation is limited as an economic barometer in that it is an average.  There is old introduction to statistics about a man with his feet in a block of ice and his head an oven, the old fellow replies that, “Oh, on average I feel fine.”  Inflation currently reports the US is feeling relatively fine.  Inflation is a point metric describing a complex system.

 

How it really works and why we should be nervous.

The system illustrated isn’t fine, eventually the output is going to be in for a wild ride.   One could suggest that variance in the system components may say more about future GDP change than inflation alone. 

 Tools & entrails

Most people assume the inflation number represents a flow metric driving another flow metric, namely future GDP growth (economic output).  One could argue that inflation metrics are better used when combined with component variance as an indicator of future likely GDP variance.  Most likely variance is tied to inefficiency and thus temporary GDP contraction.

Central bankers, economists and other dangerous folk try stabilizing inflation using basic monetary tools.  The assumption being that stable inflation is correlated with higher stable GDP growth.  The reason I call these people dangerous is that they are attempting to control something mostly outside of their control with blunt tools.  Most central bankers are oracles with only half the required amounts of entrails required for predicting the future ;).  What should one advocate as proper policy for the system illustrated above?

I believe central bankers to be well meaning people, but my hunch is that outside of regulatory oversight roles, the least active central bankers are probably the most effective ones.  Many interventions meant to stabilize the system may actually increase uncertainty and variance in the system, thus lowering long term GDP growth. 

The safest thing a central banker can say is, “I don’t know what is really going on right now, but I am going on holiday until it sorts itself out.”  The economic system eventually stabilizes itself.  This is the laissez faire economics schtick after all.  Unfortunately oracles who claim not to possess the gift of fortune telling typically get replaced, so we are all a bit to blame as well.  Please put down those monetary control tools, you may hurt someone.

Pattern recognition is psychologically wired into all of us.  Biology makes us prone to many errors of judgemen and beliefs in contol that flawed.

The working thesis is that low 1-2% stable inflation is correlated with growing GDP.  The things that create stable GDP and stable inflation are probably regulatory certainty and monetary stability.  Perhaps the politicians should go on holiday with the central bankers and let the rest of us get on with it. 

No more stimulus checks please, its beginning to economically look like Zimbabwe around here.  What next will they get up to next, perhaps adding a zero or two the currency to create a perceived “wealth effect”.  Bread and circuses folks, that’s what we are asking for, and what we are getting delivered.

The typical assumptions of dampening the economic cycle via active monetary policy is nice, but may be flawed due to the multiple feedback loops in the economy.  See or better yet play the beer game to understand how this works.

So the next time you see a central banker or politician, encourage them to take it easy and perhaps find a bit of sun somewhere far away.

If anyone has some pointers or research on economic component variance as a future GDP indicator or monetary policy inactivity as it relates to GDP growth please post a link in the comments.  I enjoy listening and learning.

Comparables valuation tool

Years ago I built a valuation tool for running Comparables.  This was a way of looking at an industry and assessing the comparable valution of other companies.  I am now a value investor, which means the comparable is now the effective T-Bill yield vs intrinsic value as calculated from free cash flow.

This tool took me 30 minutes to build in 2002.  It is free anyone to use here.  The comparables table needs updating, but may be interesting for someone all the same.  Again if you are an investment professional or consultant and this adds value to your life please make a donation to Reporters without borders in the amount you feel worthwhile.  My suggestion is $500.  the download is here Download valuationsheet.xls .

a tool for corporate due diligence

for all of you consultants out there here is a fill in the blank tool, I used to assess start-ups when I was doing some VC screening in London many years ago. 

Basically just fill in the tabs :marketing, sales, management etc. and you get a report and ranking from 1 to 10.  How you use it is up to you?Download due_dilf_ullreport.xls

If you like it and get value from it.  Please assess its value and make a donation rounded to the nearest $500  to reporters without borders  this is donation ware. :)

Hidden Asset: culture

When I was in college and working at my first software start-up, my buddies (colleagues) and I were flown into a company to meet with some project managers etc. about collaborating.  This was a big deal for us, we were all in college (high school) or about to be and this would be our first major customer.

I was the "experienced" member of the team (CEO) being all of 21.  We introduced ourselves and backgrounds.  I explained, that I was studying anthropology, this got a laugh from the mid-level manager I was meeting with.  He wanted to know what "good" anthropology was. 

I explained to him that within 5 minutes of walking through his company, I had identified indicators of it values, belief system and organizational structure.  As I get older, I realize that a field anthropologists viewpoint can identify a lot of interesting things about a company that may be more important than the balance sheet. 

The book Less is More by Jason Jennings, is a study in productivity.  It is similar to Good To Great in that it seeks to capture the traits of winning companies.  Most of the you will have heard of.  The general consensus is that it is culture.  Whether it is NUCOR Steel, RyanAir, IKEA, or other world productivity champions, the final assessment is that culture and values are what allow these firms to win again and again.  The traits identified with runaway corporate success are:

1. Attention to Detail
2. High Moral Fiber
3. Embracing simplicity
4. Competitiveness
5. Long-Term Focus
6. Disdain of Waste
7. Coaching style of leadership
8. Humility
9. Rejection of Bureaucracy
10. Belief in others
11. Trust

Taken out of the full context of the book, they sound like obvious platitudes.  They aren't.  Think about it, how many b-school courses have these as titles.  How many companies acknowledge individuals for these attributes.

The companies highlighted in the book live and breath these values even when they appear out of fashion. Think of "Creative accounting", Greed is good ethos, EGO based leadership etc. 

There are some great quotes from the book:

Men stumble over the truth from time to time. But most pick themselves up and hurry off as if nothing happened.  Winston Churchill

Management is doing things right; leadership is doing right things. Peter Drucker

According to Less is more the average life of a corporation is 12 years.  The ones that count are the ones that instill values in people that extend to serving customers with humility and value.  I think thats important.  Reading this book combined with a bunch of other reading I have recently been doing has made appreciate the value of culture in a corporation. 
Recently I have been assessing the value of technology companies, I firmly believe that the only great competitive advantage a firm can have is its culture.  Patents, markets and brands come and go, but if a solid culture with the 11 traits mentioned above is lived and breathed by all the members of an organization, then they really have something powerful.

?'s are the most important thing.

I just finished reading Change your Questions change your life.  It is an interesting book which is all about a questioned centered approach to life. 
For many people this might sound frightening as it presumes they don't have answers.  From my perspective there is nothing more interesting or intriguing than a good question.  A question centered approach to life allows one the ability to learn, listen and grow.  It also implies a degree of humility and ignorance.  Acknowledging ignorance is a far more powerful position than positioning oneself via expertise. 
The most interesting and best scientists, leaders and managers I have worked with always had questions curiosity and a desire to discover and learn.  Experts fear being "found out" to not have all the answers.  If you have a chance pick up the book Change your Questions change your life, it is a fun read.  Its proposition is to not judge, but to question and then listen others and yourself.  This falls very much in line with Carol Dwecks' excellent approach to leadership and education.    Learning, listening and questioning makes people far more interesting and capable to lead and grow.   I have two ears and one mouth, I try to use them proportionally.

property wiki works like wikipedia see video

here is the founder of wikipedia, jimmy wales at the TED talks.  More popular than the New York Times

The wikipedia has 7.3 million articles in over +200 languages all non-profit and contributed efforts.  Property law wiki is going to try and make "processes and procedures" for property holders formal and informal better all over the world.

Anthropologists and mobile phones

Stopping a conversation at a cocktail party is easy. Claim to be either an accountant or an anthropologist.  You will quickly find your conversation partner has an urgent need to visit the bar, buffet or bathroom. 

The truth is anthropologists are fun.  We get into things, go native etc.  One of the best technology anthropologists works for Nokia.  His name is Jan Chipchase and his blog is here .

He does great field work and has helped Nokia dominate in the field of phones in India +70% with growth of 9m handsets/month. 
I used my anthropology skills to study entertainment and gaming needs of mobile users in the Middle East in the past.  It was an eye opener.  I still look, learn and study with the eyes and approach of an anthropologist and designer.  For anyone in product design, I have one recommendation, please, please get out of the office.  Visit your customer where they live, then visit them where they work and play.  Then and only then start designing a product. 
Everyone will be a lot happier and have more fun that way :)

networks presentation and charity

I am trained first as an anthropologist, that means listening and looking.  Networks wether bio-chemical, biological or digital are fascinating.  Social networks are the Mot du jour.  Here is a nice presentation about them. 

I have written a few posts on a few books I have read about networks, see the math or books section of this blog. I am currently working on my property wiki charity which is trying to use wiki's to solve a super-ordinate problem of making property law more effective and simple for people.  I have been thinking about the problem since 2oo1 and slowly putting together a solution.

project from the past Hispanic Phone company

In life you should never stop learning or trying.  A few years ago my wife and  anI spent a significant amount of time together researching the female Hispanic phone market.  We put together a plan and this presentation.  Like an architect, most buildings never leave the paper stage.  A creative entrepreneur launches many a powerpoint company.  Here is an example of the collaborative work both of us did.  Everything from market sizing to Venture capital pitch.  Practice makes perfect...

display and images get cheap Fast!

Displays and images are going to get cheap fast.  Combine an economy who's scarce resource is people's attention with an ever falling cost of display technology and expect to be entertained and engaged everywhere.  I don't know if that is such a great thing, but it will happen.  Here are some of the technologies that will make it happen.

Laser TV's Still early and only in the microwave range, but could work in the visible light range at some point:

Fixed vs. growth Mindset

Do you ever feel that things are too hard or why try.? Ever have a boss insist competition and prizes are the best way to incentivize people?  In school were you the person who could answer easy questions but didn't like hard questions?  Did you feel uncomfortable not knowing an answer in public?

What makes a great athlete, student, manager?  What keeps us happy?  How do we avoid putting our kids on the road to success or failure that has only 1 path?

Mindset is the work of 30 yrs of research into psychology by Dr. Carol Dweck.  The basic premise is this: People can fall into 1 of 2 mindsets: fixed or growth mindsets.  Surprisingly the growth mindset which leads to much higher rates of achievement and happiness over the long run is anathema to solely competing for prizes or grades or money. 
The growth mind set is about learning how to compete against oneself.  It is surprising how angry people become when they have a label affixed to them and how it traps them.  Labeling is the trap of the fixed mindset.  If you are on either side of the debate with regards to "identity politics" I would suggest reading this book.

Even the positive labels limit people and hold them back.  If you teach your kids they are "smart" they may not pursue challenges that are hard as it will upset the "mindset" they have.  If you instead teach children they can work hard and constantly learn then they can pursue higher goals.  This is the classic difference of intrinsic and extrinsic rewards.  The most most successful and happiest people by and large are internally motivated to learn and grow.  Teaching team members, children or students that every effort only has an intrinsic reward is limiting.

The book uses examples from psychology test, group behavior and even sports anecdotes explaining the behaviors of john mcenroe (fixed) and Tiger Woods(growth).  Mcenroe in a sad sort of way hated the game he devoted his life to.  If you have kids in sports  read this book.

The book is a fascinating read and probably one of the more interesting works I have come across in many months.  Do you enjoy a tough new puzzle in life or would rather stick to the easy puzzles you have solved before?  I would suggest purchasing Mindset if only to learn more about how you learn and more importantly how you can teach and share with those around you to be more successful and get meaning out of what you do.

Getting Great

Good to Great is a fascinating book which uses rigurous quantitative analysis to indicate that values based companies succeed.

These companies use slow and steady growth to make impressive results.  They organizations all know who they are and what they are doing.  Organizational belief and strong culture are not to be under estimated. 

If you haven't read the book, I recommend doing so, to understand that the organization you work with can improve.

There are some interesting concepts which involve things such as

1. Getting the right people on the bus. i.e. building a strong long term team. 
2. The flywheel, a concept of slow and steady momentum
3. Good is the enemy of the great
4. The hedgehog concept (focus)
5. A culture of discipline

and quite a few others. 

A great addition to this book is Good to Great and the social sectors. I plan on using this for my property wiki project.  This project aims at building a massive open wiki to aid making it easier for people to register property around the world.  I believe that by focus and effective communication a $9.3 trillion opportunity to make things better can be undertaken.   If you are interested in property wiki, take a look at this video highlighting the opportunity to make things better.

Jedi Mind Tricks....

"these aren't the droids you're looking for."  a classic line from a great cultural icon of a film, Star Wars.

One of my pet passions is the human mind and how it works on the individual level and in groups.  Hence my anthropology, marketing, psychology interests and even AI.

Made to Stick is a great book about how to get into other people's heads.  Our minds work in mysterious ways.  Try this exercise...

Whatever you do: don't visualize any purple rhinos......

Dammit.  To late.

Made to stick is written by 2 brothers who have spent years studying the phenomenae of communication via marketing messages, urban myth, effective teaching and other ideas that get stuck in peoples heads. 

Sticky communication is power.  We are surrounded by information.  This is a pain, because what we really want is entertainment, knowledge or things that helps us.  Most of the information we take in is clutter and stressful.  Imagine an empty beach...very little information there but a nice feeling of calm.

Now imagine a crowded street, billboards, traffic people, clothes that socially signal things etc  Wow a lot of information.

Made to stick is a study in what works for creating effective information.  My only suggestion if you have any job involving communication (leadership, marketing, teaching, listening, presenting) is to either buy this book or ask me to lend you my copy. 

If you don't want to know how to make sticky ideas at least you may learn a few Jedi mind tricks.  OK, you can stop thinking about the purple rhino now.

management quote of the day

I am currently reading a book called Meaning inc.  It is a good way to pass the time on the New York subways.  I came across a great quote from Lou Gerstner.

Basically the book is all about how truly successful organizations have a purpose and belief that is held by their employees in what they are doing.  We spend a lot of time working, so we better care about it.  Those organizations that foster meaning for their staffs and customers excel, it is that simple. 

As an amthropologist I love this quote about creating meaning and belief from a CEO who got it.

"I used to think culture was part of the game. Now I realize it is the whole game." Lou Gerstner CEO IBM 1993-2000.

The fact is all organizations are held together as belief systems.  Belief in the goal mission etc. organizational structure even its rights and rituals.  I have used my amthrpology (amateur anthropologist) when I am in corporations and market study roles to better understand these belief systems.  It is powerful stuff playing field amthropologist on a sales call, corporate visit or market researcher. 

A sense of love, duty and meaning are what can happen in corporations that get this right.  This doesn't mean manipulation or abuse of people or beliefs, on the contrary it means everyone doing extra ordinary things they can feel great about at the end of their careers.  What kind of kind of company do you work for?  What kind of company do build?   

Ok it is 2012 your X+5 years old (X being your age today).  Say it out loud, I am X years old.

Now what kind of company do you work for?  Have you made things better, do you believe in what you do? Ok, now it is 2022 you are X+15 year old.  What do you do?  Do believe in it?  A lot of people avoid this question.  Some lucky ones use it change their entire lives and are happier for it.

Slow Down.....

A great lecture from the TED conference (Technology, Entertainment and Design) lectures.  The virtues of living a slow life.  watch the video here

As a fan of the less worked more thoughtful culture.  Sweden, Denmark and Norway all have the most successful cultures from an (economic, health and happiness) perspective.  They are slow, comfortable and thoughtful.  Happiness,  Wealth, health. 

So all this speed and stress in some countries even my own isn't getting us anywhere fast. 

We rank crudely put from the above: 13th in happiness, 7th in wealth and  29th health.  I think focusing on going slower and listening would allow us to get better in many senses of the word.

Ironically part of the solution to be wealthier, healthier and happier is give more vacations, slow down and get out of your current rat race.  Go and discover your slower, wealthier, happier, healthier self.

McDonalds of Blindness

here is a great video from the book Fortune at the bottom of the pyramid.  It is about business chasing the poorest consumers and thus enriching their lives.  Great stuff. 
The video is about an Eye clinic modeled on McDonald's processes that is bringing site to people all over India.

ROWE worth a look

"Leaving early AGAIN?”

“You’re obviously not a morning person!”

“Did you see how late he came in? No way he’s putting in 60 hours like the rest of us!”

Yuck nasty stuff.  Maybe ROWE (results only work environments) can minimize this stuff.  We have all had moments, where we sit in the office, because that is the expected behavior even if we are burned out for the day.  The boss gets nervous when we aren't at the desk, because, that means we aren't productive.  Office time isn't always productive time.

Here is a good business week article about it.

These guys CultureRX may have a solution.  It is worth a look

Vital Friends

Vital Friends  is the kind of book that social scientists and business people like.  Vital friends explains something we all kind of know as a common truth, but backs it up with facts.

Friendship in life and work counts.  As an anthropologist with a quant background in finance, science and applied technology, I constantly find myself using soft skills to bring impact to traditionally "hard areas". 

At the end of the day the outcomes of any product or service are emotional benefits.  Even cash in the bank gives satisfaction or security via spending, having, boasting or sharing.

Vital friends is all about relationships, a word we males typically only hear when something is going wrong and we most likely aren't going to be having sex in the near future :) 

Relationships count.  Marketers are constantly trying to build relationships between us and stuff, but the most important ones are with people.

A good friend of mine recently mentioned that he doesn't "get close" to the people at work as he want to be more professional.  Big mistake.  Getting close, doesn't mean a big hug fest, but it does mean listening sharing and maybe a little out of work collaboration. 

People spend more time at work with colleagues than they with their families.  It seems silly not to foster a sense of caring and respect with people around one at work.

The book vital friends shows how important this is and backs it up with empirical data.  Work environments where people care are work environments where amazing results happen.  This kind of reminds me of the core findings of Good To Great by Jim Collins.  The long term sustainable business winners grow via their people.  Those are  people who are passionate and have strong culture. 

A great company is a belief system that spins of lots of great externalities, one of which is growth and cash.  It boils down to the old story about the 2 men cutting stone in the 15th century.  One of them when asked says he is a stone cutter, the other says he is building a cathedral.  Now imagine 2 team or organizations made of 2 such people.  Who would you bet on and who would you want to work with.

For those who think it is all about the numbers (and yes I am a quant MBA by training), I would urge reading these books and then listening to the people around you at work and home.  What do they care about and more importantly, what do they think you care about.  Ask the people in your lives to list out what they think you care about.  Hopefully they put people or their own names on the list.   

Some of the highest compliments I have received from people I have worked with is that I listened and they knew I cared about them.

Building something important means building something for and with people.  Those who understand that become the biggest winners in companies and societies.

Out there! Science

I used to be Chief analyst at a place called Starlab, best job I ever had.  I am a huge science and engineering fan. I use the word fan, because I am only a bystander from the sidelines.  I have a deep love of structures, order, pattern and relationships in things and people.

One of the more interesting projects I have been watching over the last few years is Black Light Power .   The thesis begs us to question classical quantum mechanics and the nature and state of some of the constants that make our model of the physical universe.  For those of you with a deeper Physics understanding, I would be fascinated to hear a critique of Mills Grand Unified Theory. 

The concept of a compressible state and fractional Quanta seems pretty wild.  The impact for physics and our understanding of a lot things could be profound.  So far the larger world at least Nature, Science etc. seems to be ignoring the work, albeit the less skilled popular press has picked up on it.  Almost free limitless energy tends to attract the press.  Anyway it is fascinating stuff and Dr. Mills has promised some major announcements in the coming months.  I am interested in seeing peer recognition and of course applications as the could be profound.