Category Archives for "Decision Making"

Nov 23

Investors and Uncertainty, a Bad Mix

By kevin | Decision Making

The foundation to behavioral economics is the idea that investors are not rational actors: That they overreact to uncertainty, are influenced by immaterial information, and act for all manner of reasons not consistent with their best interests (utility). I found a paper the other day published by The Paul Woolley Centre for the Study of Capital Market Dysfunctionality called How Do Investors React Under Uncertainty? that reinforces this point.  Here’s a clip from the conclusion:

It is proposed that uncertainty, rather than risk, provides a much more realistic representation of the setting that we face when we come to pricing asset, and particularly corporate equities. We have gone a long way down the path of developing pricing models that incorporate risk (e.g. CAPM, APT, Fama and French empirical three-factor model) but comparatively little work has been done on the role (if any) that uncertainty plays in asset pricing. In order for uncertainly to affect pricing, it must have some influence on how investors incorporate information into pricing. Our contribution is to evaluate whether uncertainty influences the way by which investors respond to earnings announcements which will provide us with valuable insights as to the role that uncertainty plays in asset pricing.

In particular, we evaluate the proposition that investors will follow maxmin expected utility and so will progressively overweight bad news and underweight good news as they become more uncertain. Using VIX as a proxy for market uncertainty and earnings announcements as our information signal, we find that there is an asymmetric response to good and bad earnings news at high levels of uncertainty which is consistent with uncertainty breeding pessimism in the minds of investors. However, we do find evidence to suggest investors might have a more optimistic bent than is allowed under maxmin expected utility as indicated by how they react to earnings announcements when uncertainty is at the lower end of the scale.

Nov 08

Valuable Statistical Insights Into Political Reality

By kevin | Current Affairs , Decision Making

A recent piece by my hero Barry Ritholtz on statistics and the problem with selective perception got me to thinking what other useful information might be out there. Here’s what I found . . . 



This first graphic shows clearly and irrefutably the correlation between the number of words in a piece of legislation (in this case the Declaration of Independence and the recent Dodd-Frank bill) and the price of Gold. The obvious answer is to write longer bills. 

 

This second graphic shows the strong (1:1) correlation between the number of Alaskans that voted for the winner of the 2010 Senate Race and the capacity of Spartan Stadium. One obvious conclusion is that Alaskan voters should build Michigan State a bigger stadium. 

 

This final graphic demonstrates the importance the Democratic party places on the price of cheddar cheese. Although there are month to month divergences (I calculate the coefficient to be roughly .8), the trend line is absolutely clear. Obama’s popularity is definitely tied to the wholesale price of cheese. Expect to see an earmark fight in the upcoming Agricultural support bill.

Aug 16

The Numbers Are Against Good Government

By kevin | Current Affairs , Decision Making

I have been in a running debate with a friend and colleague generally about the topic of whether or not our elected officials are able to vote knowledgeably given the large number of bills they need to track, the size of their staff, and the competing need to raise money and attend to constituents. It got me to wondering about what kind of numbers are we really talking about so I went looking.

Here are the raw numbers for the 111th Congress according to the Library of Congress:

  • House Bills: 6097
  • House Concurrent Resolutions: 100
  • House Joint Resolutions: 95
  • House Resolutions: 100
  • Senate Bills: 3751
  • Senate Concurrent Resolutions: 71
  • Senate Joint Resolutions: 38
  • Senate Resolutions: 100

That’s a lot of bills and resolutions, particularly given our legislators spend only about 140 days a year on the business of the people. Obviously there is a big difference between the number of things that are introduced and the number that our elected officials need to pay attention to. So let’s check out a couple of those.

One of the bills that has gotten a lot of attention lately is H.R.4173 – Dodd-Frank Wall Street Reform and Consumer Protection Act: “A bill to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

Bills go through a number of iterations from the time they are introduced to the time they get passed. Checking in over at OpenCongress here’s what we find:

Version Word # Changes From Previous % Change
Introduced in House 223,783 n/a n/a
Engrossed in House 301,214 2,502 43%
Referred in Senate 299,585 8 0%
Engrossed Amendment Senate 283,985 9,370 90%
Enrolled Bill 383,013 4,478 50%

The big health reform bill is H.R.3590 – Patient Protection and Affordable Care Act. As passed it weighs in at 327,911 words. Keep in mind that both of the bills cited contain vast tracts of language the direct the relevant regulator or agency to promulgate hundreds of thousands more words in the form of rules and regulations to sort out what those original 700,000 words really mean.

Just as an aside on this one, check out this link if you want to see the stunning amounts of money that were given to various of our elected officials, I assume in order to influence their votes (could there be another explanation?). The one I like the best is Senator Scott Brown from Massachusetts. He managed to be on the job for a few weeks before role call. That didn’t stop him from taking in $997,923 from parties specifically interested in this bill.  But I digress.

Those seem like pretty hefty numbers to me.  All those bills. Two big ones adding up to 700,00 words all by themselves. But surely our elected officials have a big staff to help? So off I went to check out one of my senators, Patty Murray.

Displaying salaries for time period: 10/01/09 – 03/31/10

Payee Name Start date End date Position Amount
Stephanie S. Arnold 10/01/09 03/31/10 Legislative Aide $19,500.00  
Jared E. Axelrod 10/01/09 03/31/10 Mail Administrator $20,070.13  
Sheila M. Babb 10/01/09 03/31/10 Deputy State Director $39,666.64  
Sherri A. Berdine 10/01/09 03/31/10 Staff Assistant $16,333.28  
Jennifer M. Berg 10/01/09 03/31/10 Constituent Services Representative/Grants Coordinator $19,666.64  
Steven F. Bergsbaken 10/01/09 03/31/10 Mail Manager $22,833.28  
Shawn L. Bills 10/01/09 03/31/10 Northwest Washington Regional Director $27,999.92  
Jeff E. Bjornstad 10/01/09 03/31/10 Chief of Staff $78,833.33  
Sarah W. Bolton 10/01/09 03/31/10 Legislative Aide $18,499.92  
Kim A. Brown 10/01/09 03/31/10 Constituent Services Representative $20,999.92  
Paula J. Burg 10/01/09 03/31/10 Legislative Assistant $44,666.60  
Mary J. Conway 10/01/09 03/31/10 Community Outreach Representative $22,333.28  
Carole S. Cory 10/01/09 03/31/10 Systems Administrator $25,333.28  
Sergio R. Cueva Flores 10/01/09 03/31/10 King County Director $22,999.96  
Carrie E. Desmond 10/01/09 03/31/10 Legislative Assistant $25,124.95  
Alexandra S. Glass (Alex) 10/01/09 03/31/10 Communications Director $60,333.28  
Mary Kay Glenn 10/01/09 03/31/10 Front Office Coordinator $18,666.64  
Adam S. Goodwin 10/01/09 03/31/10 Staff Assistant $16,666.64  
David M. Hodges 12/16/09 03/31/10 Constituent Services Representative $10,602.91  
Joshua D. Jacobs 10/01/09 10/02/09 Legislative Assistant $2,999.99  
Geoff Kirkwood 10/01/09 03/31/10 Legislative Aide $18,499.92  
Amaia P. Kirtland 10/01/09 03/31/10 Office Manager $7,166.65  
Brian L. Kristjansson 10/01/09 03/31/10 State Director $52,166.64  
Samuel Kussin-Shoptaw 03/30/10 03/31/10 Staff Assistant $77.77  
Grant W. Lahmann 10/01/09 01/15/10 Legislative Aide $10,997.17  
Travis T. Lumpkin 10/01/09 03/31/10 Legislative Assistant $43,166.60  
Jennifer C. Martinez 10/01/09 03/31/10 Eastern Washington Representative $17,749.92  
Matthew W. McAlvanah (Matt) 10/01/09 03/31/10 Press Secretary $38,000.00  
Mary E. McBride 10/01/09 02/26/10 Sounth Sound/Olympic Peninsula Director $24,944.36  
Rebecca L. Mengelos 10/01/09 03/31/10 Central Washington Director $21,666.64  
Evan D. Miller 10/28/09 03/31/10 Director, Specialty Media $11,124.93  
Miriam D. Mina 10/01/09 03/31/10 Constituent Services Representative $17,749.92  
Sean James Murphy 03/01/10 03/31/10 Regional Director, South Puget Sound $4,000.00  
Carey R. Nickels 11/04/09 12/04/09 Staff Assistant $2,411.08  
Edward J. O’Neill (Ed) 10/01/09 03/31/10 Deputy State Director $36,500.00  
Lauren R. Overman 10/01/09 03/31/10 Legislative Aide $19,166.64  
Jason A. Park 10/01/09 03/31/10 Legislative Assistant $40,833.28  
Maribel Peralez 12/08/09 01/13/10 Staff Assistant $2,877.06  
Nathanael David Prestwood (David) 10/01/09 03/31/10 Senior Policy Adviser $6,500.00  
Kristine M. Reeves 10/01/09 03/31/10 Kitsap and Olympic Peninsula Director $22,583.30  
Stacy L. Rich 10/01/09 03/31/10 Leadership Adviser $6,500.00  
Grace E. Rooney 10/01/09 03/31/10 Executive Assistant/Scheduler $7,499.99  
Andrew Rowe (Andy) 10/01/09 03/31/10 Legislative Aide $19,499.96  
Evan Tyler Schatz 10/01/09 03/31/10 Legislative Director $77,250.00  
Jaime L. Shimek 10/01/09 03/31/10 Legislative Assistant $41,666.64  
Neely Marcus Silbey 01/14/10 03/31/10 Legislative Assistant $17,111.09  
Michael D. Spahn (Mike) 10/01/09 03/31/10 Press Secretary $6,861.44  
Anna K. Sperling 10/01/09 03/31/10 Deputy Scheduler $17,166.60  
Erin K. Vincent 10/01/09 03/31/10 Eastern Washington State Director $22,999.96  
Anne Walden-Newman (Annie) 02/01/10 03/31/10 Staff Assistant $4,666.64  
Theresa Weil 10/01/09 03/31/10 Southwest Washington Director $27,999.92  
Erika A.O. Whinihan 10/01/09 03/31/10 State Scheduler $25,499.96  
Bethany R. Works 10/01/09 01/06/10 Southwest Washington Regional Representative $8,666.62  
Kathryn H. Young 10/01/09 03/31/10 Legislative Assistant $41,833.28  
Eliezer O. Zupnick 10/01/09 03/31/10 Deputy Press Secretary $27,333.28  
55 results

Keep in mind that this is half the term so the payroll for a fiscal year is roughly double. A couple of things stand out on this one.

Ms. Murray spent nearly $4 million in one month in her campaign for reelection. Not to worry, she still has another $3.2 million in the bank. If I were more ambitious I would go looking for her total campaign spend but those two numbers are impressive enough . . . and they’re trivial in comparison to some of the big bucks campaigns going on in California and Connecticut. Juxtapose that against her total pay of $174,000 and her entire payroll of about $2.6 million. Representative Scott Murray of New York took in half that amount of money just from spenders with an interest in one bill relating to health care reform.

On purely dollars and cents basis, Senator Murray spends considerably more money to get the job than she does on doing the job.

Of the 55 names I count just 15 with the word “legislative” in the title. The highest paid is the Legislative Director who is raking in $145,000 which is less than a first year associate makes at a front line law firm.  There are a couple of others who make $80,000ish, and the rest are making less than $20 an hour. The staff of the various House and Senate committees are paid similar (low) dollars and are stretched every bit as thin . . . the ones I know work punishing hours, don’t take vacations, and don’t get outside nearly enough.

I’m not picking on Senator Murray. She is no worse than representative of the other 99 Senators when it comes to the size of her staff, what she pays, how much money she raises, and how much she spends on her own election as well as those of her Democratic colleagues. In fact, she probably comes off as cheap.

Maybe it’s just me, and I say this with all due respect to the smart, motivated, hard working members of our legislators’ staffs, but this doesn’t seem like the kind of firepower you need to deal with the blizzard of bills and resolutions yet alone face off against all the big money players who are trying to influence the direction, course, and outcome of legislation.

Aug 10

You Say You Want A Constitution

By kevin | Current Affairs , Decision Making

Beatle fans may already be humming  . . .

You say you want a revolution
Well you know
We all want to change the world
You tell me that it’s evolution
Well you know
We all want to change the world
But when you talk about destruction
Don’t you know you can count me out

Don’t you know it’s gonna be alright
Alright, alright

You say you got a real solution
Well you know
We don’t love to see the plan
You ask me for a contribution
Well you know
We’re doing what we can
But if you want money for people with minds that hate
All I can tell you is brother you have to wait

Don’t you know it’s gonna be alright
Alright, alright, al…

You say you’ll change the constitution
Well you know
We all want to change your head
You tell me it’s the institution
Well you know
You better free your mind instead
But if you go carrying pictures of Chairman Mao
You ain’t going to make it with anyone anyhow

Don’t you know know it’s gonna be alright
Alright, alright

As I write this the 2010 election marathon has taken another step forward, echoing yet another cultural touchstone, with “something old, something new . . .”  I’m not sure which is which but it’s impossible not to notice at least two features of the current season of discontent:

  1. The reappearance of the perpetual dog whistle (currently most loudly blown by conservatives) of the need to amend the Constitution: Often around balanced budgets, recently about marriage, and now about birth rights.
  2. The palpable populist anger on the right in the form of the Tea Party (you decide if it’s coherent or not).

There are many lenses to put on the current political doings, mine is decision-making. One of the important thoughts in decision quality is giving yourself a good set of choices.  Another is to separate out the consideration of choices from values (another word for preferences, criteria, or what you want).  Only then can you make rational trade-offs. An important feature of modern political discourse is to do the opposite of both of those things: frame decisions as polemics with only two “choices,” one of which is a value masked as a choice, the other of which is framed as patently evil and therefore not a choice.

The US Constitution is a study in brevity and in the history of the Republic, there have been only 27 amendments, 17 depending on your point of view on the Bill of Rights (part of the original?).

The first 10 amendments fall broadly into the “oops” category (more accurately, they were the punt required to get the original 13 states to ratify the Constitution): The Bill of Rights was clearly and demonstrably meant to round out the Constitution, so “oops, we didn’t get this right the first time.”  Depending on your point of view, there are other amendments that fall into that category. Here is the cheater’s guide to the first ten:

  1. Freedom of  Religion, Press, and Expression
  2. Right to bear arms
  3. Quartering of soldiers
  4. No unreasonable search and seizure
  5. Rights relating to trials, punishment, takings, and compensation
  6. Right to a speedy trial and to confront your witnesses
  7. Trial by Jury in civil matters
  8. No excessive bail, cruel and unusual punishment
  9. Construction of Constitution doesn’t deprive you of rights retained by the people
  10. Powers not delegated by the Constitution to the United States reserved for the States and the People

Personally I find the first two especially interesting.  Why is it that Liberals fight for the broadest possible interpretation of the First and the narrowest possible of the Second (if not total disregard) and Conservatives do the opposite?  One polarity thinks the establishment clause was an “oops” while the other parses commas and wants a militia mulligan. What’s bad for the goose is bad for the gander. Just wondering.

Amendments 11 and 12 have a similar “oops” clean up element, one dealing with election of a Vice President and the other with limits of jurisdiction.

The next three specifically relate to the Civil War. The 13th abolished slavery.  The 14th is a doozy: The first paragraph deals with citizenship rights of people born here (and is the subject of much chest beating in the current poisonous political season). The rest is a serious smack down aimed at secessionists. The 15th states that race is no bar to voting.

Of the rest, two deal with booze (18 and 21), a total of nine, so more than half of the remaining 17, deal with voting rights  (12, 15, 17, 19, 20, 22, 23, 24, 26), one creates an income tax (16), one deals with Presidential succession (25), and one with Congressional pay (27).

Temperance and the abolition of temperance is the clear outrider. It came and went for two reasons: The federal government needed the tax revenue and sensible people realized that enshrining religious morality in the Constitution was a bad idea. The other 25 define and clarify the rights and obligations of the people and the people that act in our behalf.

People spend careers studying and litigating the Constitution and I’m not one of them. But I think I’m safe in saying the following . . .

  1. That’s not a lot of ammendments
  2. Getting an amendment across the finish line is a big, big deal. It doesn’t happen very often, BY DESIGN.
  3. The Constitution is fundamentally an exercise in making clear the rights of the people and the limits of the people acting on our behalf. Our rights are natural, not granted by a sovereign or by a non-terrestrial power, and everything flows from our consent.
  4. The Constitution is no place for imposing one group’s religious beliefs or morality on another. Lots of people have tried, they succeeded once, and their success was an abject failure. It is not a document meant to tell the people what we can or can’t do.  It is a document designed to tell the government what it can and can’t do.  That is a massive and important distinction.
  5. Any politician who campaigns on the idea of amending the Constitution is doing little more than pandering. It almost certainly won’t happen, and if it does, not in a time frame that matters. Remember the Equal Rights Amendment?  It passed, right? No. After 70 years of trying it died. Talking about amending the Constitution is a smoke screen to avoid talking about something real.

In every Congressional session presumably well meaning people from both ends of the political spectrum propose buckets of changes to the Constitution.  Some of these proposed changes show up every session like a bad penny.  Here’s the current list if you care. Here’s a list by recent sessions of Congress. Some of them will scare you. Many fall into the category of saving the people from the manifest inability of our elected officials to act like adults. Others follow in the path of the temperance movement, looking to do through legislation what apparently can’t be done through moral suasion. Many others seek to undo the previous 27 leaving me to wonder if amending the Constitution is the act of a conservative or a radical followed by the inverse question, is undoing a previous amendment an act of a conservative or a radical?

In these times of discontent, lots of people are mad about the decisions made by others.  The Tea Party populists think the current crop of legislators have made bad decisions when it comes to spending our money and telling us what to do.  Cultural conservatives think the rest of us make bad decisions when it comes to the thoughts we think, the prayers we do or don’t say, who we have sex with (and how), and whom we want to marry. Gun controllers think the rest of us make bad decisions when we seek to exercise our Second Amendment Rights.  Liberals are mad at the President for not being liberal enough. Many are now mad at the ratifiers of the 14th Amendment. It seems we’re all mad about something.

And the answer:  Use the Constitution as a cudgel to force people to do (or not do) what laws, codes, promises, ethics, and church edicts obviously can’t do (why else revert to constitutional thermonuclear war?). It’s another sad example of magical thinking . . . if we can just fix this one thing, if we can just invoke a power higher than ourselves (in this case the Constitution), all our ills will be cured.

In general, I buy the thought that if we want people to make different decisions, we need to do one of two things: Change the question and/or change the values they use to make trade-offs. In this case, the values that the fixers want to tinker with aren’t the small kind.  This is the founding document of the Republic. It belongs to the people.  Not just to the people who are alive today, but to our ancestors dating back to the 1700s and the generations that will follow us.  The good news is that the fixers won’t prevail any time soon or at all. In the mean time, may I ask as politely as possible that the fixers, whoever you are, put down the bong, step away from the ledge, and leave our Constitution alone. There are plenty of opportunities to mess around with laws and regulations to attempt to do what you want to do. If you can’t get it done that way, maybe that’s a sign.

Jul 28

The Summer of Numerical Discontent

By kevin | Current Affairs , Decision Making

I went walking with a friend last night and we got to talking about Obama’s polling numbers and the general uselessness of trying to project forward to 2012 and his political fortunes. So I went looking.

John Woolley and Gerhard Peters have an excellent site where they publish their work on The American Presidency Project. It’s an absolute treasure trove.  To the subject of approval ratings, we find that Obama’s numbers have moved from a high of 69 points early in his administration to the mid 40s 19 months in (currently 44%).

And what of W?  He entered office with much lower approval numbers, due in large part to the legal fracas surrounding his losing the popular vote but winning the Supreme Court vote: 9/11 handed him a popularity coup sending his approval ratings soaring to 89%.  19 months in his approval ratings had settled back to 68% and by the mid-term elections were closer to Obama’s current numbers at 48%.  At the end, only 34% approved of Bush’s performance.

Clinton, despite his manifest personal troubles entered office with a 58% approval rating and left with a 66% rating, astonishing given the rise of the conservative attack machine during his administration. Only Reagan and Bush the Elder managed the same trick. 19 months in his approval rating had also dropped, oddly to 42%, essentially the same as Obama’s.  At the time of his re-election, his approval ratings stood at 58%.

Bush Senior’s popularity curve looks like a roller coaster.  He entered office at 51% and left at 56%.  As was true with his son, his ratings soared to 82% during Desert Storm, seemingly proving that America loves a tough guy, at least for awhile.

And what of the Lion of the Right?  Reagan took over from a President suffering 34% approval ratings, due to many things not the least of which was the Iranian Hostage Debacle.  Despite the fact that Reagan won the electoral vote going away, he entered office with an approval rating of 51%.  At the 19 month mark his approval ratings stood EXACTLY where Obama’s do, 44%.  At his re-election, his popularity stood at 61%, roughly the same as Clinton’s.

Conclusions?  The first is what investment prospectuses always tell you: Past performance is not indication of future performance.  This has to be one of the most common, most insidious decision-faults going: looking at data about the past (data, by definition is always about the past) and using it to project the future.  Project is actually an apt descriptor, as it is an exercise in projecting our hopes, dreams, fears, fobias, and preconceptions on the future based on what we see in the past.

A second possible conclusion is the lesson of Bill Clinton: It’s the economy stupid.

Jul 02

Winning The UnWinnable

By kevin | Current Affairs , Decision Making

At the risk of beating a dead horse . . . Yesterday I blogged on what I regard as the craziness of spending billions of dollars on Afghanistan.  My lens on the problem was primarily the math but mostly it was about the impossibility of success given the frame on the problem.

Low and behold the always entertaining GOP Chairman Michael Steele was thinking the same thing.  Sort of.

The story everyone is focusing on his yet another Steele-gaffe.

Michael Steele, chairman of the Republican National Committee, drew fierce criticism on Friday after declaring at a party fund-raiser that the United States was on the wrong side of history with its conflict in Afghanistan, a military fight he called “a war of Obama’s choosing.”

“This is not something the United States had actively prosecuted or wanted to engage in,” Mr. Steele said in a speech on Thursday evening in Connecticut in which he offered a strong critique of President Obama’s military strategy.

“It was the president who was trying to be cute by half by flipping a script demonizing Iraq, while saying the battle really should be Afghanistan,” Mr. Steele said, according to a video of his remarks that was circulated by Democrats on Friday. “”Well, if he’s such a student of history, has he not understood that you know that’s the one thing you don’t do, is engage in a land war in Afghanistan?”

Wow.  Really? More than enough people have piled on this one so I won’t bother to comment beyond wondering when the spaceship is scheduled to return to the planet Mr. Steele comes from. No, the part that gets me spouting is what comes next.

Mr. Steele, seeking to clarify his remarks, issued a statement on Friday afternoon, saying, “There is no question that America must win the war on terror.”

And this . . .

“For the sake of the security of the free world, our country must give our troops the support necessary to win this war,” Mr. Steele said. “As we have learned throughout history, winning a war in Afghanistan is a difficult task. We must also remember that after the tragedy of Sept. 11, 2001, it is also a necessary one.”

He added: “That is why I supported the decision to increase our troop force and, like the entire United States Senate, I support General Petraeus’s confirmation. The stakes are too high for us to accept anything but success in Afghanistan.”

I have a good friend named John who always kindly reminds me that politicians aren’t to be listened to, especially when they’re talking to the true believers as was the case with Mr. Steele. Notions like telling the truth (in all its forms) are really only suggestions in these instances. My issue is more pedantic: You can’t solve a problem when you define it like . . .

“There is no question that America must win the war on terror.”

“The stakes are too high for us to accept anything but success in Afghanistan.”

“As we have learned throughout history, winning a war in Afghanistan is a difficult task. We must also remember that after the tragedy of Sept. 11, 2001, it is also a necessary one.”

Can someone please tell me what “winning the war on terror” would look like?  I mean really, how would we know?  Who would keep score? How would we verify? How would we enforce it? For how long would the win have to be won for it to be regarded as a real win? This isn’t meant to be an exercise in rhetoric, but really, words do matter.

The same line of inquiry applies to the concept of “success.”  For example, we have successfully burned through nearly $300 billion dollars and 1,000 American war dead.  If that was the objective, and clearly it was not, we succeeded.  Can we go home now?

And “necessary?”  Really?  How necessary?  Necessary enough to consider genocide?  That would do the trick.  There would be no more Afghans and by definition, none could engage in terrorist-like activities.

I get it, I get it.  This is political-talk, not decision-talk.  Mr. Steele is in the business of raising money from the faithful and scoring political points, not actually governing or solving real problems. Given the low standards of the job description he can be forgiven for his less that helpful words and thoughts about the trillion dollar black hole that is our foray into Central Asia. As a matter of public policy it would be nice if someone could offer we the people a problem definition that was useful, understandable, and achievable.  Not that I think anyone in Washington is in danger of doing that.

On a smaller scale, think about how you frame the decisions you make on a daily basis. Pay particular attention to the big ones.  Make sure you’re not declaring the equivalent of war on [fill in the blank].  You’ll never get there.

Jul 01

The Madness of Afghanistan and a Little Trick I Call Math

By kevin | Current Affairs , Decision Making

For the past decade I have made a living helping people and corporations make smarter decisions.  I say that by way of disclosing my bias when I think about nearly everything.  Yesterday I blogged about General Petraeus’ testimony before the Armed Services Committee in advance of his taking over as the overlord of the “not war” in Afghanistan.  You should read it.  It is a marvel of circumlocution.

Good decision making begins with an exam question: The entire rationale for making a decision in the first place; a statement of the problem we’re trying to solve. Use your favorite search engine and see if you can figure out the answer to the question of why we’re in Afghanistan. I figure the President’s own words from his State of the Union are as good as any . . .

As we take the fight to al Qaeda, we are responsibly leaving Iraq to its people. As a candidate, I promised that I would end this war, and that is what I am doing as President. We will have all of our combat troops out of Iraq by the end of this August. We will support the Iraqi government as they hold elections, and continue to partner with the Iraqi people to promote regional peace and prosperity. But make no mistake: this war is ending, and all of our troops are coming home.

So basically the point is to “take the fight to al Qaeda” or more broadly to “fight terror over there so we don’t have to fight it here” or something like that.  I’m sure that there are more precise thoughts than that but basically that’s the mission the American people have been sold for the past eight years by two different administrations.

There are lots of ways to think about this, so let’s pick one: The Math

From the State Department, here’s what we know about Afghanistan:

Area: 652,230 sq. km. (251,827 sq. mi.); slightly smaller than Texas.

Population (July 2009 est.): 28.396 million; slightly smaller than Texas.

GDP (2009 est., purchasing power parity): $23.35 billion.

GDP growth (2009 est.): 3.4%. GDP growth average between 2004-2009: 11.25% (est.).

GDP per capita (2009 est.): $800.

Keep in mind that GDP has been inflated by the US presence since we tossed the Taliban.

So how much have we spent to date on the “not war” in Afghanistan.  That’s a moving target, but here are some numbers that might help you understand. According to the site, Cost of War, the number to date (depending on when you read this) is $280 billion dollars. Add in the cost of the Iraq “not war” and we the people have spent about $1 trillion dollars “taking the fight to al Qaeda.”  To get a sense of some alternative uses of $1 trillion dollars, spend some time on the Cost of War site.

Keep in mind that these numbers don’t include the costs associated with the Obama surge of an additional 30,000 troops.  So what do those cost? One source I found put the figure in 2008 at $500,000 per year.  A more recent source puts the figure much higher.

The cost of sending one U.S. soldier in Afghanistan for one year is $1 million versus an estimated $12,000 for an Afghani soldier, according to Steve Daggett, a specialist with the Congressional Research Service. Those numbers fall within the calculations that the Obama administration has been using. The Obama administration is calculating $1 billion per 1,000 troops deployed to Afghanistan.

To put the cost of the surge in a different light, US tax payers will spend the entire GDP of Afghanistan to send 30,000 troops there to achieve what?

And how much does it cost the Taliban / Al Queda to fight back? It’s hard to put a number on that but a simple metric might be the cost of an AK-47.  It turns out that fighting Americans is a growth business.  A few years ago you could get a locally made knock-off for the equivalent of a few hundred dollars . . . so half a year’s pay.  Today, the price in Pakistan has bloomed to nearly $1,500. Throw in some ammunition and a year’s pay and call it $3,000 per annum, half that if you assume the person holding the gun is a variable cost.

This is the time when you need to stop and think about the mission and the math: $1 million vs. $3,000.  One bullet kills either one.

We have been in Afghanistan eight years.  Every year, on average, we spend the entire GDP of Afghanistan chasing after a couple of thousand bad guys that can be equipped and paid for less than one of our soldiers.

The war is unwinable for three reasons, all math related.

  1. It only takes one bad guy to do the thing we have spent $1 trillion dollars to prevent: commit a terrorist act on the homeland.  Call it 100.
  2. The other side can replace them faster and cheaper than we can kill them.
  3. We’re going broke.  The other side can wait.

The problem here is the problem statement. It’s like the war on drugs.  “Taking the fight” to the bad guys never ends.  There is no end zone. There is no way of knowing that you’re winning.  More importantly, the cost of the other side to stay in the game is orders of magnitude lower than what we spend. The other side ALWAYS WINS for the simple reason that all they have to do is stay in the game.  Eventually the high cost player is bled dry. The only way out is to change the question.

Finally, a reminder.  The people voting to keep us in this mess work for us.  You voted for them (or failed to). It’s time to speak up.  It’s time to stop the madness.

Jun 21

It’s the Unknown Unknowns that Really Get You

By kevin | Decision Making

A wonderful article/interview in the New York Times with David Dunning, one of the rock stars of decision-making . . . you get to be called that, at least by me, if you have an entire principle named after you (Dunning-Kruger Effect).  Donald Rumsfeld said it best but we were too stunned to hear him . . .

“There are things we know we know about terrorism.  There are things we know we don’t know.  And there are things that are unknown unknowns.  We don’t know that we don’t know.”

Here’s a snip from the interview.  Well worth reading the entire thing.  Apparently there are four more parts to come.

Dunning and Kruger argued in their paper, “When people are incompetent in the strategies they adopt to achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realize it.  Instead, like Mr. Wheeler, they are left with the erroneous impression they are doing just fine.”

It became known as the Dunning-Kruger Effect — our incompetence masks our ability to recognize our incompetence.  But just how prevalent is this effect?  In search of more details, I called David Dunning at his offices at Cornell:

DAVID DUNNING: Well, my specialty is decision-making.  How well do people make the decisions they have to make in life?  And I became very interested in judgments about the self, simply because, well, people tend to say things, whether it be in everyday life or in the lab, that just couldn’t possibly be true.  And I became fascinated with that.  Not just that people said these positive things about themselves, but they really, really believed them.  Which led to my observation: if you’re incompetent, you can’t know you’re incompetent.

ERROL MORRIS: Why not?

DAVID DUNNING: If you knew it, you’d say, “Wait a minute.  The decision I just made does not make much sense.  I had better go and get some independent advice.”   But when you’re incompetent, the skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.  In logical reasoning, in parenting, in management, problem solving, the skills you use to produce the right answer are exactly the same skills you use to evaluate the answer.  And so we went on to see if this could possibly be true in many other areas.  And to our astonishment, it was very, very true.

ERROL MORRIS: Many other areas?

DAVID DUNNING: If you look at our 1999 article, we measured skills where we had the right answers.  Grammar, logic.  And our test-subjects were all college students doing college student-type things.  Presumably, they also should know whether or not they’re getting the right answers.  And yet, we had these students who were doing badly in grammar, who didn’t know they were doing badly in grammar.  We believed that they should know they were doing badly, and when they didn’t, that really surprised us.

ERROL MORRIS: The students that were unaware they were doing badly — in what sense?  Were they truly oblivious? Were they self-deceived?  Were they in denial?  How would you describe it?

DAVID DUNNING: There have been many psychological studies that tell us what we see and what we hear is shaped by our preferences, our wishes, our fears, our desires and so forth.  We literally see the world the way we want to see it.  But the Dunning-Kruger effect suggests that there is a problem beyond that.  Even if you are just the most honest, impartial person that you could be, you would still have a problem — namely, when your knowledge or expertise is imperfect, you really don’t know it.  Left to your own devices, you just don’t know it.   We’re not very good at knowing what we don’t know.

May 17

And Suddenly We Bought A Car

By kevin | Business , Decision Making , Random Walk

So my wife and I were driving from point A to point B last Saturday.  Just a regular day running errands and spending time with each other.

Honest to God, no kidding, I have not been thinking at all about getting a new car . . . though I have to confess that I never loved the Camry Hybrid we have been driving and always felt like I made a mistake selling the Acura TL. Anyway, I say to my wife, “Do you ever think about getting a new car?” Gloriosity, she has!

There is an Audi dealer about five blocks from where we are so we go and poke around and drive an A5 coupe. Stunning to look at and very nice but pricey given the performance level. The one with all the goodies costs as much as a small town. There aren’t any used ones.

Very much out of character, we leave without buying one (as it turns out, this is the third time in the past ten years that we went to look at an Audi and bought something else which is weird and too bad because I really like Audis and would very much like to be like Jason Stratham).  Instead, we wind up home looking at everything we can think of on the web.

It turns out we actually have some decision criteria . . .

  • Coupe: We think that means two doors and an emphatic statement that we are now a) Empty nesters for sure, and b) Too cool for school.
  • All wheel drive: Well you never know, it might rain in Seattle, and it is always possible that after a 30 year hiatus, we might just decide to head to the snow and do some skiing. It could happen.
  • High fun factor: Antithesis of the Camry Hybrid.
  • Good economics: We don’t need to do this so there needs to be something compelling (like free money).
  • Good story value: If there isn’t a good story in here, what’s the point?

Basically something more fun that a four door hybrid (a very low bar to step over I might add).

There aren’t that many coupes out there at all if you think about it.

Audi A5
Infinity G37
Hyundai Genesis
Jaguar XK
Aston Martin
BMW 3 or 6 series
Mercedes CL
Ford Mustang
Chevrolet Camaro
Dodge Challenger
Cadillac CTS (coming soon)

There are probably some others (Bently comes to mind) and there are some four door coupes as well (we’ll get to that in a minute), but that’s what we looked at on our dueling iPads.

A bunch of those you can just cross right off the list for cost reasons. This is a car, after all, not a vacation home. The Ford, Dodge, and Chevrolet never made the list.  Too retro, too boy racer, too much. I didn’t want another Corvette or anything in that category either.  Cars like that are a hoot to drive three or four times a month for several miles without a break.  We also looked at other AWD cars not in two doors, kind of. Never for a second did we think about a SUV.

Basically it was looking like a two horse race between the A5 and the G37x.

There are almost as many Infinity dealers in the US as there are BMW motorbike dealers and they are slightly less convenient. We motored up to the one in Kirkland and low and behold they had a nice collection of G37x’s right out front. Very nice car it is.

For those not in the know it is a two door coupe with a stupidly powerful V6 engine, all wheel drive, and enough computing power and navigational gear to launch a first strike. I think there is a Predator Drone option as well. Various buff books have called it the best this and the most that.  It’s a fine, fine ride. In a pinch you can put your pet gerbils in the back assuming your luggage needs don’t exceed a laptop, credit card, and toothbrush.

We drove one.  We looked at all of them in detail. I really wanted to love it but I didn’t. Not really sure why. Just like I really wanted to love the A5 (a beautiful car with abusively priced options).  In the end, the dream of the racy coupe with two gigantic hard-to-egress doors and go-fast ergonomics got trumped by my creaking bones and sybaritic tendencies.

Meanwhile, I kept looking over at the G37 sedans . . . essentially the same car with two more doors, lots more headroom, and the possibility of transporting two more bipeds in relative comfort.  By this time my wife was talking with the sales guy about a Coupe with a particular interior color she fancied and I finally suggested that we go over to the sedans because they had a couple just like that.

For about the fifth time, one in the lineup kept whispering to me: A G37x in Lakeshore Slate with Stone interior, all wheel drive, Navigation package, and upgraded wheels and tires that come up to my waist. Our sainted car salesman (Ken, who just this week sold his 1000 Infiniti working at this dealer which is something indeed) tossed us yet another set of keys and off we went. We barely made it out of the lot and kind of looked at each other and it was done. The car had us at 2500 rpm.

Being a well known expert at decision-making I would give this about a six on a scale of one – 10. We had a decently clear idea about our preferences. We had a solid frame on the problem. We gave ourselves interesting choices. We did some research. The fact that we changed one of the major preferences at the last minute (expanding coupe to include the four door variety) brought other cars into play that we didn’t then go test drive, but what the hell. Ken made us an offer that was not insulting (remember we’re trading in a Camry Hybrid, the 2010 Torts Award Silver Medalist, tossed from the top step by British Petroleum).  Robert, the F&I guy made us a smoking deal on stuff to keep the paint and interior spiffy and then papered the whole thing in about twelve minutes. Bye-bye Camry, and hello rocket ship.

One day of ownership later, I can say with complete confidence the following:

The people at Kirkland Infinity were just superb, led by Ken.  It’s all part of the brand, but the difference in customer experience shopping for a luxury car and anything else is stunning.  Ken has been at this same dealer for eight years which is even more remarkable than the thought of Sarah Palin shooting a moose.  This sort of thing just doesn’t happen.

Ken, and people not named Ken, continually make an effort to a) communicate that “you’re family now” (in a really good way), and b) are constantly trying to figure out how to do something helpful. I was only sorry I hadn’t brought our laundry to be done.  I know I’m going to get a survey but let me cut to the chase and say that the folks at Kirkland Infinity get a 10.

Infiniti has ridiculously cheap money these days (there was a free option actually).  It’s like I couldn’t afford not to.

The car is all kinds of fun to look at, sit in, and drive.  I. Must. Drive. Slow.

May 03

Innovation Never Goes Out of Style

By kevin | Business , Decision Making

I get emails every week at www.decision-quality.com asking for permission to reprint, quote, and distribute one or more papers I wrote on decision-making.  It’s been forever since I actually looked at what I wrote so I went back and looked.  Here’s a snip from a paper on innovation I wrote.  The words seem useful even today . . .

Having participated in the tail end of it as a go-to-market consultant to a number of incubator companies, I had a ringside seat to both the good and the really ugly of the dot.com excitement. At literally the height of the boom, days before the wall started coming down, I wrote a kind of innovator’s credo that I called the disruptor’s dilemma, which had the following dimensions.

Nothing is Known. If it really hasn’t been done before, there are few if any known market requirements, and therefore your planning and projections are pretty much guesswork.

What Used To Work, Won’t.  The strategies and tactics that worked so well in the value system you just left probably won’t work in the market space you’re about to enter.

Half of What You Decide Is Wrong.  As a result of the first two points, you have to make the assumption that at least half of the decisions you make are probably wrong.

Half Of What You Learn Is Right.  You’ll spend every waking minute on a massive learning curve, and the feedback you’ll receive will usually be completely contradictory.  You should worry if that’s not the case.  The question is: where is the truth?

All Of What’s Right Is Only Useful For Half As Long As It Used To Be.  Just because something is true, doesn’t mean it will continue to be true.

Success Is Out There, It’s Just Somewhere Else.  If you keep learning, adapting, and innovating you might just succeed.  It’s just that success probably won’t lie where you thought it would.

Depending on your point of view, this is either a recitation of the worst of the dot.com hyperbole, or it is a reasonable set of guidelines for nurturing innovation. This led me to articulate what I then saw, and still see, as the “Six Laws of Successful Innovation,” which are as follows:

Your plans won’t hold up so compress your planning.  Bring the right people to the problem; stress test your thinking, make clear decisions, keep your documentation simple, and launch decisively.

Keep it simple. Complexity shows up all by itself.

Once you launch, go fast and hard.  Compress your learning into small segments of time and space. Think in 100-day increments.

Embrace your mistakes.  Mistakes are good because they tell you what not to do, so don’t cover them up. You’re probably going to make a bunch, so plan how you’re going to learn from your mistakes.

Expect the unexpected. You’re going to whack some beehives in the process (particularly if you’re really innovating), and the bees are going to swarm.  Don’t expect the market to sit around and watch as you try to redefine reality. Expect pushback.  Expect to be counterattacked from unexpected directions. Expect partners to make silly decisions.  It should all tell you that you’re doing something right.

You’re going to win in unexpected ways so build your organization, rewards structure, and partnership agreements accordingly.

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