The search for good decisions continues

A fine video on the topic of practical wisdom by Barry Schwartz.  I was particularly taken on his point of view on “practical wisdom.”

“Practical wisdom,” Aristotle told us, “is the combination of moral will and moral skill.” A wise person knows when and how to make the exception to every rule, as the janitors knew when to ignore the job duties in the service of other objectives. A wise person knows how to improvise,as Luke did when he re-washed the floor. Real-world problems are often ambiguous and ill-defined and the context is always changing. A wise person is like a jazz musician — using the notes on the page, but dancing around them, inventing combinations that are appropriate for the situation and the people at hand. A wise person knows how to use these moral skills in the service of the right aims. To serve other people, not to manipulate other people. And finally, perhaps most important, a wise person is made, not born. Wisdom depends on experience, and not just any experience. You need the time to get to know the people that you’re serving. You need permission to be allowed to improvise, try new things, occasionally to fail and to learn from your failures. And you need to be mentored by wise teachers.”

Bill Smith has a nice Main Street business. He is the third generation of his family to run the company. The government is his biggest customer.  He’s a member of the community and his employees are too.  His employees pay taxes but Bill doesn’t because he made a sweet deal with the city fathers to keep his business in town. Bill hates the government.

Bill decides to sell his business to his good friend Dick. He needs the money to pay for his third divorce. Dick, who doesn’t know anything about Bill’s business hires Bill back at more than his existing pay package.  Dick doesn’t use his own money to buy Bill’s business, he borrows all of it from from Bob.

Servicing all that debt, paying that big salary, and generating a return for Dick puts a strain on the business Bill’s grandfather built.  Bill announces that he can no longer afford to offer health care and that people will need to take a pay cut.  He blames the government (the one he got the tax break from; the one that buys half his product) and foreign competition.  He blames his employees.

Meanwhile Bob has bundled Dick’s loan with a bunch of other loans and sold them to George.  This allows Bob to lock in his return while completely eliminating his downside.  George pays Bob to service the loans.

Bill becomes less and less interested in doing things that made his grandfather’s business great, like developing new products, thinking of new ways to delight customers, and keeping his employees motivated. He has too much to do courting his soon to be fourth wife.  He moves out of town to a big house.  He plays golf with Dick, Bob and their Senator.  They discuss things that they shouldn’t, but there’s nobody around to listen or to enforce the law anyway.

Dick needs more money to fund his other financial adventures so he pressures Bill to increase his margins and generate more cash.  Because Bill hasn’t been taking care of business, most of his customers have moved on.  In fact, the only customer he has any more is the government.  He blames his employees. He makes a contribution to his Senator’s PAC. Soon another contract shows up.  He also cuts benefits further, cuts pay, and fires his older workers.  He travels to China and negotiates a contract to have some of his manufacturing done there.  Margins improve. Bill and Dick pays themselves a bonus.

Meanwhile Dick buys three more businesses with money he borrows from Bob. He’s now his own conglomerate. Bob is celebrated as a hot shot at his bank. It’s a great American Success Story. Dick pays himself a bonus. Bob gets paid a bonus. George buys more loans from Dick which he packages and resells. He also buys a credit default swap that will pay off big if Bill’s business goes in the tank and shorts the stock of the bank where Bob works.

It turns out that the orignal loan to Dick had a variable rate and reindexed after three years.  Payments are now going up.  Dick, Bob, and George all want more money from Bill.  Productivity at Bill’s company has gone down, perhaps having to do with the fact that the employees have taken repeated pay cuts, have no more benefits, and have watched as their brothers and neighbors have been fired over the past several years. Bill blames them for the financial pressure he’s feeling . . . when he’s not blaming the government, the same one that buys his product and to whom he doesn’t pay taxes, and the Chinese competition that he buys from.

Bill makes across the board cuts.  He also borrows more money to buy some equipment that will allow him to replace even more employees.  He buys a new car with tinted windows so he doesn’t have to look at all those sullen homeless people that keep popping up. He gives himself a raise.

Oh no, suddenly the economy turns sour.  Who could see it coming?  Nobody.  These things just don’t happen.  It’s not supposed to be this way!  It’s a plot!

Bob is in a panic because his whole world has just collapsed: He may have to close up the summer place early this year! He pressures Dick to collect his loan even though it’s not due.

Now Dick is in a panic.  All of his loans are coming due, he doesn’t actually have any equity, and his investors want their money back . . . and there isn’t any.  It turns out he used it to buy art, boats, jewelry . . .

Now Bill is in a panic.  He fires even more people, becoming nothing more than sales agent for the Chinese. He blames rapacious lenders. He blames short-sighted shareholders. He blames his employees for not doing more.

Bill goes to town hall meetings and rails at the blight of all those homeless people in the town he used to live in.  He becomes apoplectic at the idea of the government stepping in to help his former employees, even though he doesn’t actually pay any taxes himself.  Taking money from the government is socialism.  It’s nothing but income redistribution from productive people like Bill, Bob, and George to people who should do more to help themselves.  He and Dick pay themselves a bonus.

In the end, the company that Bill’s grandfather built and his father turned into a success is closed. George makes a killing on the credit default swap and even more on shorting Bob’s bank.

Dick goes to jail where he finds religion.

Bob now specializes in troubled debt and is making a fortune. Again.

Bill rediscovers his grandfather’s entrepreneurial fervor.  He is now seeking stimulus money from the government he loathes and didn’t pay taxes to in order to start a new business building wind mills.  He will buy parts and assemblies from the Chinese and Fins and use equipment bought from the Germans, Japanese and Chinese to do final assembly. He will get a tax credit for hiring back some of his old employees at 60% of what he used to pay them.  He offers no benefits figuring that the socialist government he hates will take care of that.

The first thing he does upon receiving his stimulus money is pay himself a bonus.

The second thing he does is make a contribution to the local Tea Party.  He’s mad as hell and he’s not going to take it anymore.

And so it goes.

We are all like Goldilocks when it comes to choices.

For most of the things in our lives, we have too many choices and the differences are miniscule.  Walk down any aisle in your favorite supermarket, warehouse club, or electronics store if you need an example.

We hate making choices in situations like these.  There is more information than we can manage in working memory.  We become overwhelmed.  So rather than make a choice, we pick.

Making a choice means we have considered reasons for doing something.  We can discern the distinctions, they are relevant, and they are meaningful.

Picking something means the opposite.  We are not able to discern meaningful, relevant, or interesting distinctions (even if they exist).  So we give up and go with the (red, cheap, tall, short, closest, easiest, etc.) one.  Any reason will do as long as it makes the confusion stop.

[Read more →]

This is a must watch. You have never seen anything like it. It was forwarded to me by a colleague.

This video shows the winner of ” Ukraine’s Got Talent”, Kseniya Simonova, 24, drawing a series of pictures on an illuminated sand table showing how ordinary people were affected by the German invasion during World War II. Her talent, which admittedly is a strange one, is mesmeric to watch.

The images, projected onto a large screen, moved many in the audience to tears and she won the top prize of about £75,000.

She begins by creating a scene showing a couple sitting holding hands on a bench under a starry sky, but then warplanes appear and the happy scene is obliterated.

It is replaced by a woman’s face crying, but then a baby arrives and the woman smiles again. Once again war returns and Miss Simonova throws the sand into chaos from which a young woman’s face appears.

She quickly becomes an old widow, her face wrinkled and sad, before the image turns into a monument to an Unknown Soldier.

This outdoor scene becomes framed by a window as if the viewer is looking out on the monument from within a house.

In the final scene, a mother and child appear inside and a man standing outside, with his hands pressed against the glass, saying goodbye.

The Great Patriotic War, as it is called in Ukraine , resulted in one in four of the population being killed with eight to 11 million deaths out of a population of 42 million.

Kseniya Simonova says:

“I find it difficult enough to create art using paper and pencils or paintbrushes, but using sand and fingers is beyond me. The art, especially when the war is used as the subject matter, even brings some audience members to tears. And there’s surely no bigger compliment.”

Please take time out to see this amazing piece of art. Think about it often, particularly when you watch something vapid like American Idol

Obama just finished his first year as President, a young newcomer without a lot of experience who promised change.  How did his first year stack up against the previous guy, a youngish newcomer without a lot of experience who promised change?  You can score it yourself, and you can accuse me of partisanship, but I don’t see the argument that Bush’s first year in office was a bell ringer.

Financial Highlights

Obama

Dow at the beginning of the year: 8,281.22
Dow at the end of the year: 10,428.05

Bush

Dow at the beginning of the year: 10,887.36
Dow at the end of the year: 9,920

Advantage Obama

Obama inherited an economy that had incinerated on the previous guy’s watch.
Bush inherited a massive budget surplus.  9/11 didn’t help the market, but hey, it happened on his watch. [Read more →]

With great care I draw your attention to an article by Lee Siegel called The Zero-Sacrifice Presidency.

Obama tells us that we can have quality, universal health care without increasing the deficit. He tells us that he intends to have the 9/11 detainees given a fair trial in a civilian court but assures us that the trials will end in convictions. He declares that he will wage war in Afghanistan, but pledges to start bringing the troops home in 18 months. And everybody nevertheless takes these contradictory, irreconcilable statements seriously, as they parse, analyze, scrutinize Obama’s every word for some kind of coherent meaning. The president is like the character Chance in the novel and movie Being There, whose every fatuous utterance was celebrated for its profundity.

Some of Obama’s defenders chastise his exasperated listeners for their inability to detect the president’s “complexity.” But a fantasy of universal popularity that panders to every conflicting interest simultaneously is not the same thing as “complexity.” It is complexity if I tell my wife that I have to move to another state where I know I can find work, but that I realize the strain it will put on our marriage, and that I know the effect it will have on our child, and that I am aware of the consequences of such an attempt if I don’t find a job, having spent so much money on moving and establishing myself in a new place. It is not complexity if I tell my wife that I have to move to another state where I know I can find work, but that I will be back next week, and with lots of money.

In the spirit of full disclosure, my caution is based on two points.  The first is that I was and largely still am an Obama supporter (though I fully admit my reasons may not be rational).  The second is that I made a promise to myself that I would stop writing political screeds. So why this? [Read more →]

Decision making is a distinctly human activity: it is more than an instinctive “stimulus/response.”  Decisions aren’t found under a rock.  They are the result of cognitive processes that we can control.  They are what make us human. Because we are human, and because decision making is a distinctly human activity, decision making is subject to all manner of pitfalls, errors, traps and flaws.

Most of us are not as good at decision making as we think we are or would like to be. There are many reasons why this is true.  Here are some.

• While we are experienced decision makers, we are not necessarily skilled in the sense that we have not thought about and internalized processes that lead reliably to high quality choices.
• We are much more easily influenced than we care to admit: by people, by word choices, by events, and by our own emotions.
• We are driven by psychological forces most of us don’t really understand: We were not evolved in modern industrialized, information-overloaded, choice-rich environments.
• We are wired to take mental short cuts.  It’s how we go through without having to make decisions about everything that we need to do.  Those mental short cuts can and do work against us causing us to make low quality decisions (again, far more often than we want to believe).
• We hate having to make trade-offs.
• We are evolved to adapt to our circumstances and to revisionist thinking,  We quickly learn to live with the consequences and outcomes of our decisions and retrofit our stories so that we can be right.

Despite everything we appear to have going against us, most of us manage to be highly functional and successful in life: We can say with confidence that we must be good decision makers judging by the outcomes we’re associated with.  Either that or we just got lucky (or a bit of both). [Read more →]

Disclaimer:  I am not an investment adviser and I don’t give investment advice.  My expertise is in decision making and I am using the information quoted here to make a point about decision making, not about investment strategy.

One of the things we talk about when teaching decision making is that decision making is a distinctly human activity. That is to say that it is more than responding to stimulus . . . it is an cognitive act.

Because it’s a human activity, it’s subject to all the wonders and foibles that make us human. To the extent that it is a conscious act, the part of the brain most involved is the prefrontal cortex.  It’s a very cool piece of wetwear that is also not capable of keeping track of infinite amounts of data.  As a result, we construct mental short cuts (called heuristics by people who like big words) to get us through life.  So, for example, when we see scissors and we think about crossing the room with them, there’s a mental shortcut that pops up for most of us that says, “don’t run.”

Mostly these mental short cuts work well for us, but only mostly.  It turns out that there are lots of times they don’t.  We call those a lot of things, but in this context, a useful term is a “decision trap.”  It means what you think it does: a mental process that traps us, vs. helps us, make a high quality decision.

There are lots of decision traps which I’ll discuss at another time.  The class I’m interested in right here and now relate to how we evaluate information.  Again, there are fancy terms we could use but the general ideas are these . . .

• We tend to over emphasize the most recent news.
• We tend to give more wait to whatever was most vivid.
• We tend to over estimate our role in the good things that happen and understate our role when things go poorly.
• We generally do a terrible job of estimating nearly anything.

The list goes on. [Read more →]

Barry Ritholtz has written a must read book (assuming you’re interested in how we got in the pickle we’re in) called Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.  Basically I underlined the entire book when I read it.

Bailout Nation

Bill Fleckenstein (Foreword). Wiley 2009, Hardcover, 332 pages, $12.38

Reading back over my notes I was re-struck (is that a word?) by Barry’s point of view on what drove the vaunted American Consumer-led economy (we buy all the world’s doo dads): Real Estate.

According to a 2005 study by Asha Bangalore of Northern Trust Company, 43 percent of all new job creation between November 2001 and April 2005 was real estate related.

So what did that mean . . .

The housing boom was creating jobs for builders, contractors, real estate agents, mortgage brokers, and even employees at Home Depot and Lowe’s. But the most significant impact to the economy came from home equity lines of credit (HELOCs) and cash-out mortgage refinancings. With wages stagnant, Americans turned to home equity withdrawals in order to maintain their standard of living.

This was one of the single biggest and most unexpected elements of the debt-driven economic expansion. Outside of real estate, employment gains were modest and real wage gains flat. It was debt that drove the increase in consumer spending. Mortgage equity withdrawals normally a small portion of consumer debt‚exploded.

Without this home equity-based consumption, the nation would have been in recession territory, with GDP flat to 1 percent. At least, according to an unofficial Fed study by none other than Alan Greenspan

And this . . .

The wealth effect of home price appreciation is much more widely distributed than stocks. This made the generational-low interest rates the single largest factor that resuscitated the economy. Sure, tax cuts, deficit spending, increased money supply, war spending, and the like all played a role‚but it was the ultralow rates and the mortgage equity withdrawal they allowed that dominated U.S. economic activity.

As a result, the economy will continue to look  crappy to wage earners for some time to come (assets are still mispriced).

The book is just brilliant. Read it.

I recently republished a paper I wrote some years ago about the how’s and why’s of tuning up your go-to-market strategy.  Here’s the lead on it . . .

At some point it occurs to every executive. Maybe it’s a nagging thought in the middle of a meeting or while playing chess with a tough opponent. Maybe it’s a raging impatience. Hopefully it’s a strategic and permanent insight. “It” often sounds like this: “”We’re spending all this time, money, and resource on marketing, sales, fulfillment, information technology, and about forty other things. Tell me again how they all fit together“?

Or let’s put it in the positive.

The demand side of our business, the supply side, and the supporting infrastructure must all line up through clear strategies and initiatives that serve customers and produce value.

Well you’ve just defined a go-to-market strategy.

• Go-to-market strategy: A coherent set of choices that align your people, processes, products, premises (physical and virtual channels), and partners to deliver your brand promise, the desired customer experience, and tangible value.

This paper can also be downloaded from the DQI Website.