Thales' Press

Friday, February 17, 2012

Figuring Out the Truth - Rules of Thumb to Live By

One of the great benefits of empowered social networking these days is the opportunity to meet (virtually, of course) fantastic people. While Facebook has been great for keeping up with friends from high school, college, and more non-vocational social circles, and Twitter has been fun for following the latest snarky comments from people I never meet but might like to, LinkedIn has been great for actually expanding the circle of people I meet with more vocational interests. Recently, Mary Ritenour and I met in a discussion forum as we both detected that someone on the interwebs was wrong (I tell you, they were totally wrong!). A sort of emergent tag team arose between us in which we attempted to help bring a few entrenched mindsets to, at least, the realization of the existence of an alternate viewpoint. No one yelled, "Uncle!" in the end, but the exchange proved largely exciting and challenging while maintaing a sense of reasoned decorum and respect. On the internet! I know! I'm speechless, too.

In our sidebar conversation, Mary and I got into a discussion about reasoning, persistence of belief systems in the face of disconfirming evidence, and bias - not just of others, but our own. It was through the thread of this conversation that Mary told me about an exchange she had with a friend who confided that she was having difficulty making sense of the claims from experts in important complex issues. Mary's friend's complaint went something like this: "This underscores my frustration with science/technology and politics. As a non-scientist, I can and do follow the debate, but how can I understand the problem when both sides produce different sets of facts and thus generate conflicting theories and computer generated futures?" Obviously there seems to be a true desire here to understand and yet a frustration and lack of tools to sort through "competing facts."

Mary then suggested the following to me, which I thought was pretty good. "It occurred to me that perhaps the greatest need is...demonstrations of HOW to think through issues, without advocating a position." I think she's on to something here. "If we truly practice what we preach (of freedom of thought, of individual’s right to self determination) then we should demonstrate HOW to think, rather than just provide more facts. It changes the game. It provides respect to the searchers, and tools for them to use in their search for the truth. If the logic and truth of our beliefs are not discoverable by those means then what hope is there?"

The following are what Mary eventually suggested to her friend. I loved its crunchy goodness so much I wanted to share it with you. While you read it, I'm going to refill my coffee. I'll be right back.

Mary Ritenour's "Figuring Out the Truth" Ten Rules of Thumb:
Work to strip out the emotional reactions; try to be as factual and data driven as possible. Go to original sources for data whenever possible.

Expect complexity. Don’t settle for simplistic solutions or claims. Life and life’s issues are, for the most part, not one-dimensional. That does not mean that you should avoid decisions, but recognize that nearly all of life’s choices come with not insignificant trade-offs.

Credible experts are the ones that are transparent about their information, acknowledge when their opinions change, willingly share their thinking processes, and invite debate as a way to improve EVERYONE’s understanding of an issue.

Never let anyone tell you what to think or how to feel about an issue. You have the right to form your own opinion, to do your own fact gathering, consult your own experts (and hold those experts to your "Rules of Thumb" standards!).

You have the right to change your opinion as you become aware of additional information. Indeed, learning and developing more depth of understanding is part of my definition of maturity.

The behavior of those advocating a position can tell you something about their own commitment/belief in what they are advocating. Someone who tells me that fast food is toxic, but eats at McDonald’s every day has no credibility with me.

Be wary of "emergency" or "crisis" claims." The sky is rarely truly falling, and those who insist on immediate action usually want you to act before thinking for a reason. ("Experts" have been predicting awful calamities since the first hominid saw the first meteor – the accuracy rate of these predictions nears zero.) Reserve the right to take your time to think through your options.

Learn enough about statistics, logic (especially fallacies of reasoning), basic research, and risk analysis to be BS inoculated. This includes learning to ask questions like "How did you arrive at that conclusion?" "Where did you get your data?" "What assumptions did you use in gathering/analyzing that data?" "What is your ultimate objective/goal?" "How do you know that?"

People act in ways that they perceive are in their best interest. That "best interest" includes being socially acceptable in their circle of friends, feeling as though they are part of some larger good (recycling, etc) or simply the pleasure of "doing good." To more clearly understand someone's choices, you need to understand the options they had to choose from (or that they thought they had to choose from) – the context of their decision is important to understand. Without understanding that context, their decisions may not make any sense to you. Your reaction to them may appear hostile, which just impedes the process toward understanding each other.

Those who insist you be either "for" or "against" their position are not advocating a position on an issue so much as asserting a dogma. If they don’t have enough respect for you to hear your opinions and questions, or searching for some alternate "none of the above" solution, it speaks poorly of their own reasoning skills and quality of their proposed solutions.

Pretty good, huh? I knew you would enjoy it. Now, let's go live it.

In the meantime, there are two books within this vein that I would like to recommend to you. Go check them out.

Sunday, August 14, 2011

Are Your Business Intelligence Systems Complete?

I've been concerned lately about the state of business intelligence (BI) systems I've seen implemented in the wilds of business.

Currently, BI systems are essentially accounting and reporting systems, oftentimes accompanied with very sophisticated data visualization. That is, they show current and past states of collected information. From this information, trends, correlations, and anomalies can be determined and observed, but they don’t say what they mean to stakeholders. Do the trends and anomalies imply that something important is happening and should have some attention applied to them, or are they simply passing stochastic fluctuations? If they do need attention, what should the action be:

Correction/mitigation - to bring the system back into control or avoid undesirable outcomes
Exploitation - to take advantage of new opportunities to gain competitive advantage?

How do you decide?

Furthermore, there is, I suspect, another risk that lurks within the use of BI systems related to cognitive biases. There is quite a bit of research that shows that there is an optimum to the amount of information executives need to make well-formed decisions. If there is too little, executives are exposed to unfortunate surprises due to lack of critical information. Action based on recent or colorful available information is called, unsurprisingly, recency and availability bias. It’s easy to help people see why this bias is so pernicious. Just remind them of events they didn’t anticipate, or show them how being too careful in consideration of extreme events or too prejudicial in consideration of emotionally vivid information is likely costing them too much money. The other extreme is having too much information, and it’s difficult to convince people why this is a problem. Here the executive has so much information that they place higher and higher confidence on the validity of their reasoning, while the research shows that their performance doesn’t improve in a commensurate way. It’s often difficult to explain why this is the case because people typically don’t tie the success or failure to their initiatives to the level of information they were using when they made their decisions, and the time lag between when decision are made and when results are measured often extends beyond the memory of participants as well as the presence of the participants. This latter cognitive failure is related to overconfidence bias. (For a longer list of cognitive biases, go here.)

The effects of the interactions of BI systems within the presence of the various cognitive biases is

A failure to create a shared understanding of how goals and objectives work together to create value, leading to frustrated ambiguity about the real reasons for taking corrective or exploitative action
Only the "tangible" costs and benefits are estimated, leaving the fuller range of "intangible" costs and benefits unquantified, treated only in qualitative manner, or disregarded altogether
The full range of business uncertainty and risk is often overlooked or not understood, leading first to endless discussions about assumptions and forecasts, and finally to unanticipated outcomes and continual rework or unrealized value
Decision prioritization is based on politics rather than a quantified value to the business
Trade-offs between decision timing, optionality, and value are ignored

So, when you do decide take some corrective or exploitative action, how do you know that the actions you take are the most valuable ones and not simply satisficing decisions or, worse, inconsistent and incoherent?

What is missing is an intelligent decision management system that guides decision makers consistently through the thorny issues of what to do in the presence of trends and anomalies reported by their BI systems. An intelligent decision management system will do at least four things reporting systems coupled with unguided thinking cannot do:

Synthesize seemingly unrelated information
Abstract information into requisite models that includes the characterizations of appropriate uncertainties controlled for bias
Compare/contrast possible strategies to address trends and anomalies against the stakeholders’ subjective preferences
Interpret results of the analysis into competitive responses

It does not throw out the BI systems. It complements them. It provides an executive monitoring and feedback loop into the current state and trajectory of an enterprise.

Saturday, August 13, 2011

Thinking about Thinking

I'm just thinking "out loud" here...about thinking.

Intelligence is a kind of measurement of the quality of problem solving.

Agents are systems that have at least one preferred state. A simple agent possesses one to many preferred states, but they aren’t connected. Complicated agents have at least two preferred states, and the achievement of one increases the likelihood of achieving the other. In fact, one state cannot be achieved unless a predecessor state is achieved. The preferred states are hierarchical in nature. A complex agent is one in which its preferred states are interdependent upon each other, and they operate as a network of self-supporting preferences. These are complex systems in which one of the preferred states feeds back into another.

When an agent is perturbed from its preferred stated or its preferred state changes relative to the one currently occupied, a problem occurs that must be solved. A problem is a deviation from a preferred state. Problem complexity is determined by the number and timing of the coordinated activities that are required to solve the problem; i.e., restore the agent to its desired state. Therefore, an agent is a system with a preferred state(s) that solves problems.

Intelligence is the measure of the ability of an agent to solve problems relative to that of other agents. It has five(?) dimensions to it: speed, cost, soluble limit, elegance, and abstraction.

Speed: For two agents facing the same novel problem of a given complexity, the agent with the greater intelligence solves the problem faster than the other agent. In this case, intelligence is a function of "clock speed." More intelligent agents find ways to operate faster.
Cost: For two agents facing the same novel problem of a given complexity, the agent with the greater intelligence solves the problem with fewer tokens of cost.
Soluble limits: For two agents solving novel problems in the same amount of time, the agent with the greater intelligence solves the more complex problem.
Elegance: For two agents facing the same novel problem of a given complexity, the agent with the greater intelligence solves the problem with fewer computational or execution steps. This is a measure of insight. The agent sees through the clutter and noise of the problem to the simplest of solutions. The net result might be faster computation, but not because step-wise operations are performed faster (e.g. due to higher clock speed), but because fewer operations are performed at a given clock speed.
Abstraction: For two agents facing a similar problem again, the agent with the greater intelligence solves the problem faster than the other agent. This may sound like a repetition of the first measure, but it really is a measure of the memory system that permits recall and comparison. Less intelligent agents face more novel problems (from its own perspective) over an equivalent life span than more intelligent agents. The more intelligent agent observes similarities across problems and reuses prior solutions. Given this, the intelligence of an agent at time t can be compared to its own intelligence at t-k. A learning agent, then, is one that improves its intelligence over time because it can recall and abstract problem characteristics to other problems.
(Are there others?)

We shouldn’t think of intelligence as something that necessarily occurs in nervous systems. Intelligence is the quality of any goal seeking system to achieve it’s preferred goals, usually in comparison to similar agents. Thus, a gazelle that is capable of escaping a stalking lion more quickly than an aardvark is more intelligent regardless of the cognitive effort employed. The intelligence may result in the ability to run faster than aardvarks. The intelligence is not a measure of a specific gazelle’s capabilities, but that of the gazelle system that produces gazelles versus the aardvark system that produces aardvarks. Of course, aardvark systems have produced solutions to the problem of stalking lions that gazelle systems have not found.

Here are a few questions I have about human intelligence.

Is there a limit to the kinds of problems humans can solve?
Is there a limit to the kinds of problems any agent can solve?
People commonly referred to as “idiot savants” are those who seem to be able to solve fantastically difficult problems with little effort, but the type of problem solving is of a particularly isolated kind. Would it be possible to isolate the characteristics of cognitive development that allow for this concentrated effort? Then would it be possible to extend that development to a wider range of problem kinds?
The history of the world’s intelligences seems to be characterized by systems of evolutionary genetic organic chemical systems. Gene systems solve environmental problems of survivability for gene populations. Humans seem to represent a peak of genetic problem solving capabilities in the form of complex nervous systems that have the ability now to ask questions about their own capabilities to solve problems. Sophisticated nervous systems solve problems much more efficiently than genetic systems alone. Has the problem solving ability of nervous systems, itself the product of genetic systems, now found the layer of problem solving for a gene population that doesn’t require genetic rules to continue to find solutions to its environmental problems of survivability? In other words, is it possible that human intelligence is now circumventing it’s own genetic evolution, even to the point that genetic evolution will be unnecessary?
What if one problem brought on by self awareness (a genetic solution to another survivability problem) is the awareness of death. The preference for self aware systems might be to avoid death. Would it be possible for self aware systems to solve the problem of terminating self awareness (death) by engineering a mechanism by which awareness exists beyond the current genetically determined neural solution?

Thursday, July 07, 2011

A Hard Pill to Swallow

Consider this:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed.

Three days ago I reaffirmed my belief in the historically radical idea that people have an innate, unalienable right to life, liberty, and the pursuit of happiness. I ate some barbecue and ignited some small scale incendiary devices with good friends to commemorate this ideal. These banal means of celebration are actually more profound than I think we usually give thought to. They represent the culmination of society's progress. I mean that. Stay with me here.

If we are going to put an end to a person's life, we had better have airtight knowledge that the person committed an act of such unconscionable magnitude that society itself cannot tolerate that person's continued existence; i.e., that society's effective operation and possible existence is jeopardized by that person's continued existence. That's a tall criteria to satisfy.

Particularly, what I'm driving at is this: the death of Caylee Anthony is a tragedy. There is no doubt in my mind that the person responsible for her death or responsible for her wellbeing at the time of her death has evaded justice. That is a hard pill to swallow for a society that loves justice. But if we as a society, via the jury in this case, had convicted her mother, Casey Anthony, and sentenced her to death while a plausible doubt existed about her actual guilt, much less her actual involvement in the death, we would double the harm done to our society in this affair. That would be irrational, which means that it would be arbitrary. And if arbitrariness rules the day, then society actually poses a threat to itself. This is not just high minded idealism. It literally means no more barbecue in the comfort of sedate neighborhoods and shady cul-de-sacs. Really. The barbarians would gather their hordes again. I don't know how long it would take, but it would eventually happen. The arc of cultural progress over the last 2,500 years has converged on bringing at bay the irrational judgements of the hordes and the superstitious with judicial progress, a situation I suspect that we have mostly forgotten. Would we now jeopardize that progress to satisfy a need for emotional closure, even a justifiable one? Of course, it's more than barbecue and fireworks. Those are just symbols for something more important. They are a type of communion that commemorates a greater ideal. Not only would we now find ourselves threatening the life of another person, we would be threatening the lives of all of us, dishonoring the unalienable rights we hold dear.

Life is full of ambiguous situations, and we often make decisions facing a great deal of uncertainty and ambiguity. We usually try to do the best we can given the information we possess at the moment of decision, and then we make corrections along the way. We even anticipate that corrections will be needed because we know that life is subject to ever evolving influences. In some cases, though, decisions produce totally irreversible consequences* - such as executing a person convicted of a crime. Yet we want and need justice to be served? How do we proceed?

Suppose you face making a decision that impacts someone else directly. Ask yourself: would you be willing to submit to the same information conditions and outcomes the recipient of your decision faces? Now, suppose you had a gun that could deliver that outcome to you. The gun is omniscient. It knows the absolute truth of the case in question. In the moment of decision, you pull the trigger. If your judgment is coherent with the knowledge of the gun, you walk away unharmed. But if you are wrong, the gun delivers the same consequence that you would dish out. If you believe your judgement is certainly correct, then pulling the trigger is no problem. But if there is any doubt in your mind that you are correct in your judgment, and, more importantly, that you cannot tolerate the outcome, you might delay pulling the trigger or just defer altogether. When doubt exists, when the stakes are irreversible, deferring our sense of satisfying justice may deliver a higher degree of actual justice.

I don't know whether Casey Anthony killed her daughter or not. While I may harbor suspicions, that's all I have. My suspicions have been wrong in the past, and sometimes with embarrassing consequences. Fortunately for me, the stakes associated with my judgements based on poorly formed suspicions have usually been relegated to some loss of face, property, or relationships. In this case, a jury held the LIFE of another person in their consideration. Given the emotional content of the case and the ambiguous evidence brought to trial, as best as I can tell, the jury behaved in a circumspect manner that is commensurate with a society that values reason and maximizing justice. The jury behaved in a manner that recognized that pulling the trigger on the truth gun possibly led to an intolerable outcome - another (potentially) innocent person losing her life.

Unserved justice is a hard pill to swallow. But mis-served justice is a bigger travesty. A rational justice system operates on this idea.

*Actually, all decisions involve irreversibility because all actual decisions occur in time. While a perturbed bearing or position might be eventually restored, the time required to regain it cannot be.

Tuesday, March 08, 2011

"Tactics Are the New Strategy"? Only if you want to be whipsawed

Inc. Online published an article on Feb 24, 2011 entitled "Tactics Are the New Strategy" and opened the article with the following: "Strategic management can be a huge time drain for managers. Why not just ditch the conventional wisdom and go with your intuition in order to innovate once in a while?"

It sounds fun and certainly less constraining than the pathology the article describes, but we take some issue with some key points in the article.

Unfortunately, many managers who "devote an excessive amount of time developing, researching, and validating their strategy" may have fallen victim to a pathology commonly referred to as "analysis paralysis". This pattern of behavior seems to be based on a belief that every detail of execution can be planned beforehand, forecast precisely and executed without hindrance. This micromanagement approach may be called strategic planning, but it fails to be effective as real strategic thinking. Companies that commit themselves to this approach frequently destroy value by missing opportunity windows or simply wearing out people's patience.

However, the other end of the spectrum from "analysis paralysis" is really just a series of ad hoc tactics that make sense in the moment. Without strategic alignment, these actions can whipsaw an organization into a kind of swirling motion that results in no real progress. Wins, when they occur, may be more a product of luck than strategic design and are rarely sustainable. Companies that follow this approach to management often destroy value because they don't anticipate important events that require mitigation or off-ramps from their current course of action. And probably worse, they don't have the framework to construct the type of creative hybrid strategy that develops from alignment of the combined wisdom and various internal viewpoints. The players with these viewpoints may remain adversarial to each other or even in open conflict if they are independently carrying out their own ad hoc tactical approaches.

A third approach that provides managers amazing flexibility is outlined in our paper titled "Quantifying - Not Assuming - Making Sense of Intangibles, Uncertainties and Risks". Our approach leads to effective strategy alignment and decisions in days and weeks compared to the months or years of the "analysis paralysis" type of strategic planning. It also avoids the ad hoc tactical approach of "flying by the seat of your pants" with its related risks. The net effect is that our approach actually accelerates value creation because managers quickly find a strategic theme to align informed and efficient tactical execution while avoiding the rework that inevitably arises from a "ready, fire, aim" approach that lacks clear strategic alignment.

Monday, January 24, 2011

Why Almost Everything You Hear About Medicine Is Wrong

This is the second article I've read recently about Dr. John P.A. Ioannidis. The implications are staggering.

The Atlantic published an earlier article about Ioannidis: "Lies, Damned Lies, and Medical Science".

Now, if medical research can go so wrong, how likely is it that business research suffers from many of the same failures?

Tuesday, January 18, 2011

"The Heroes of Freedom" by Lawrence Reed

The Foundation for Economic Freedom (FEE) has been linked on this blog for several years now. It provides a great set of resources for students of economic thought and liberty.

I just found out today that FEE has opened an office in Atlanta, GA, and that President Lawrence Reed will be hosting a talk in my hometown of Newnan, GA on February 15. You can obtain more details here.

I am really looking forward to this.

Wednesday, January 12, 2011

The Tau Manifesto

Or Tauism - seeking the way of tau
by Michael Hart

Just for fun on a cold winter's afternoon.

Tuesday, January 11, 2011

Have you tested your strategy lately?

McKinsey offers some useful tests to determine the quality of a corporate strategy. But do you know HOW to create a strategy that passes the tests?

Here are four of the ten tests. They aren't necessarily the most important, but the issues they address crop up in EVERY client I serve. My suspicion, then, is that those same issues crop up in every organization.

Test 5: Does your strategy rest on privileged insights?
Test 6: Does your strategy embrace uncertainty?
Test 7: Does your strategy balance commitment and flexibility?
Test 8: Is your strategy contaminated by bias?

So, I ask...

How do you gain insights where others don't?
How do you handle uncertainty in the decision making process of strategic planning?
Do you quantify the effects of uncertainty? Do you know how to?
Do you know how much uncertainty leads to potential risk?
How do you make tradeoffs in the decision to gather better information and the cost to do so?
How do you make tradeoffs in the decision to gain more control over uncertain events and the cost to do so?
Do you attempt to optimize strategies (exposing them to fragility) or make them robust to a wide range of events?
How do you control for the effects of bias and avoid committing to favorite strategies versus better ones?

Tuesday, October 05, 2010

How ambivalent are you?

I'm not sure what to make of this.

Wednesday, September 29, 2010

The Unintended Consequences of GA's New "No Texting While Driving" Law and Others

Georgia's new "No Texting While Driving" law went into effect on Friday, July 2, 2010. I know of no one who questions that texting while driving - indeed doing anything that distracts a driver - is smart behavior. However, mobile phones with multiple functions represent a deeply embedded part of our culture now, supplying quick communication and information in situations where we find ourselves untethered to our computers.

But every policy, law, and action produce unintended consequences. What unintended consequences might you conceive this new law will create? As you think about that question, read the results of these two new studies here and here. I've got your unintended consequence right here:

Drivers may now be texting in ways so as not to get caught doing so, such as lowering their phones and thus drawing their eyes down away from the road.

I don't pose this question to debate the merits of the new law. Rather, I thought it might be a good way to help us think about how, in our businesses, we often initiate policies with good intentions only to find that something unanticipated, desirable or undesirable, emerges as a consequent. So...

What unintended consequences might you conceive this new law will create?
What policies have you initiated that produced unintended consequences?
How did you deal with those consequences?
What efforts do you employ now to limit the effects of undesirable unintended consequences?

Anyway, here's my solution.

Tuesday, September 28, 2010

"Five Monkeys in a Cage" Is Its Own Monkey Story

If you have attended a motivational speech recently, you likely have heard this story:

There was an interesting experiment that started with five monkeys in a cage. A banana hung inside the cage with a set of steps placed underneath it. After a while, a monkey went to the steps and started to climb towards the banana, but when he touched the steps, he set off a spray that soaked all the other monkeys with cold water. Another monkey tried to reach the banana with the same result. It didn't take long for the monkeys to learn that the best way to stay dry was to prevent any monkey from attempting to reach the banana.

The next stage of the experiment was to remove the spray from the cage and to replace one of the monkeys with a new one. Of course, the new monkey saw the banana and went over to climb the steps. To his horror, the other monkeys attacked him. After another attempt, he learnt that if he touched the steps, he would be assaulted.

Next, another of the original five was replaced with a new monkey. The newcomer went to the steps and was attacked. The previous newcomer joined in the attack with enthusiasm!
Then, a third monkey was replaced with a new one and then a fourth. Every time a newcomer approached the steps, he was attacked. Most of the monkeys beating him had no idea why they were not allowed to climb the steps or why they were joining in the beating of the newest monkey.

After replacing the fifth monkey, none of the monkeys had ever been sprayed with water. Still, no monkey ever approached the steps. Why not? Because as far as they knew it was the way it had always been done around here...and that is how company policy begins.

Or racism. Or religion. Or Aunt Gertrude using a certain sized pot to make roast.

(Not wanting to withhold a multimedia learning experience from you, you can watch the full length motion picture here, starring Ashton Kutcher and Keanu Reeves.)

I grew suspicious of that story, so I’ve been trying to corroborate it. Curiously, I cannot. I do find a multitude of retellings with variations, which makes me more suspicious. Some n-th degree sources suggest that the experiment may have some origin with the famous Harlow rhesus monkey experiments.

But that brings up another interesting point, at least about humans and their desire to construct just-so stories to explain vexing phenomena. Most versions of the story purport to explain how corporate policy gets made, by which we have all been unceremoniously doused. And we rage inside against it in our cubicles. Or we complain at the water cooler about the guys upstairs in their ivory towers who don't understand what we go through down here in the trenches, on the front, everyday, slaving away for this measly check. Ultimately, a funny story gets written about how monkeys are used in an authoritative sounding experiment to help explain how corporate policies or unreasonable social norms develop, possibly for long forgotten reasons, and get passed along to robotically observing generations. The explanation gives us a sense of order to the universe that helps us cope with the world we can't control. But of course, I haven't conducted an experiment yet to prove that proposition.

Ironic, isn’t it, that a story’s credibility that attempts to explain unquestioned adherence to cultural norms is unquestioned for years? The story is its own monkey story! How’s that for self-referencing?

Unfortunately, the “best explanation” is usually the most emotionally satisfying one. It could also be the most dangerous one, too. And the Five Monkeys Experiment is a beautiful example of how that can be, not for it's uncorroborated content, but for the way the story has a life of its own.

Friday, September 10, 2010

A colleague asks, "Can we really make predictions?"

"Knowledge of the future automatically alters our actions. These, in turn, alter the future. Are attempts to predict the future futile?"

I would not strictly say so, but you have to modify what you mean by "predict".

Before the Modern Era, people believed that the state of the universe was determined by fate (pre-Enlightenment) or strict deterministic mechanics (Enlightenment). For the most part, they did not believe in a two-way dynamic entanglement between the state of the universe and human intention and action, nor did they strongly believe in random events. So when people spoke about making predictions, they believed that if a prophet did make a prediction about some future state, the prophet would be able to foretell the exact state, if the prophet possessed true clairvoyance or spoke with authority from God. Colloquially, people still have that idea in mind when they think about the term prediction.

Since the advent of the Modern Era, we now have a better understanding of dynamic systems and "random" events and how to characterize them. Now we know that a prediction must be accompanied by a statement of probability or degree of belief about anticipated outcomes. We can still make statements about the state of the universe at some time in the future*, but we also have to understand (and potentially manage) the odds when we do.

Believing that, as a decision analyst, I'm not so concerned about making forecasts or predictions about how the universe will turn out before I make a decision. Rather, I am more concerned with how many resources I need to apply and where in order to reduce that likelihood that I will regret one course of action over another.

[*Or when we have a greater resolution of the facts. By that, I mean that we don't always want to know what will occur. Rather, we want to know what has occurred but the actual state of the event is for the time being hidden behind a curtain, so to speak. Think petroleum reserves, the latent demand for a product (ok, that's a kind of hybrid time/resolution problem), whether you have cancer or not, or whether a pot of gold or a goat sits behind Monte Hall's curtain.]

Wednesday, September 01, 2010

Making a Measurable Difference

An acquaintance recently asked me the following:

"Can you quantify how risk management actually makes a difference? I'm tired of struggling with this issue. Any ideas?"

Indeed, I do have some. I take a slightly different approach to risk management than is commonly associated with the term and common practices. Risk management to me is really decision analysis and management. Of the several benefits that decision analysis affords, the two that address your question directly are those associated with the revealed value of information and control. The value of information (VOI) tells one how much maximally to spend in order to make an unambiguous decision. It is essentially the marginal utility of obtaining more precise information. The value of control (VOC) tells one how much maximally to spend in order to get a desired outcome by controlling what was otherwise a critical uncertainty*. It is the cost to turn critical uncertainties (which expose us to risk) into decisions under our control.

In three of my recent projects, here is how such analysis played out.

A major exploration & production company wanted to reduce the capital cost of an ERP system rollout in order to justify the economic value, which was originally judged to be $0 on a spend of $100M. Critical uncertainty analysis show that the areas targeted for capital cost reduction would actually destroy the value of the system further. VOC analysis showed that spending additional capital in those same areas could provide an additional $300M of opportunity value.
A start up company estimated they needed ~$500K of capital. Our decision analysis showed that this level of capitalization bought about a 30% chance of success, while ~$2.5M bought about a 90% chance of success. The company had underestimated their required capital by ~5X. Furthermore, VOC analysis showed that the means to maximize the long term value was related to getting good sales people on board as fast as possible and the level of sales staff that was needed.
A biomedical device company believed they needed to control the cost of development R&D on all projects as a means to improve the value of the company through improvements in capital efficiency. For a new product under consideration, VOI analysis revealed that practically all the effort for improving the value of the company should be placed in understanding some essential market parameters (e.g., actual market size, potential market penetration, and time on max penetration). In other words, instead of spending resources on an immediately inwardly tangible but ineffective area of control, VOI analysis showed what the max budget should be for understanding the target market better and how much that better understanding was worth over the potential improvements in development R&D.

*A critical uncertainty is one that exposes you to some form of risk or regret.

Assessing Leaders Who Might Make Bad Decisions by Dr. Karen Steadman

"I have a friend in the mortgage industry who shared the following sentiment with me about refinancing:

Do not try to use common sense to understand this process, there is none of that in our industry at the moment. The mantra in our industry is “rules over risk” which means that they are not concerned whether your loan represents a risk or not, it is all about whether we are able to meet the guidelines.

Rules over risk? This approach concerns me."

Me, too. Read more here.

Monday, August 16, 2010

If I crash, just let me lie there

The other day I was feeling up to a brisk ride through the countryside. I wanted to feel the wind in my hair, experience the open road and open sky, and savor the thrill of facing death head on.

The original Son of Anarchy, about to my mount my Daimler crotch rocket.

Thinking that I would also enjoy sharing the adventure with a friend, I asked adventurer extraordinaire, George P. Burdell, to accompany me on the ride. He looked at me, and asked, "Why don't we just spend the day at the hospital?"

For the sheer thrill of facing risk head on, few activities beat going to the hospital, even a 420 mile ride on a motor bike.

Tuesday, August 10, 2010

Cosmology's not broken, so why try to fix it?

This is another interesting article on the difference between Bayesian and frequentist statistics.

I posted a link back in March to another related article in ScienceNews: "Odds Are, It's Wrong".

How do you recognize critical risk factors?

Whenever I conduct a business case analysis with a client, the model's assumptions are always treated as uncertainties until indicated otherwise. A typical analysis can incorporate anywhere from 10 to 50 such assumptions. The analysis rank orders the most important assumptions by how sensitive the decision metric (e.g, net present value, positive cash flow, sustainable levels of resources, etc.) is to the assumptions and by how likely each assumption might cause regret for taking one course of action over the next best course of action. This latter considerations reveals which uncertainties are critical to achieving satisfaction.

Without doing this kind of analysis, decision makers face thinking through a bewilderingly immense number of implications among the assumptions, which often hampers their ability to commit to action. Sometimes, in an effort to shortcut analysis, decision makers focus on favorite or easy to identify risk factors instead. But this is akin to looking for your keys under a street lamp even though you dropped them in the dark bushes ("But the light is better under the lamp!"). This behavior exposes organizations to undesirable outcomes that could have been anticipated, wasting time and resources fixing potentially avoidable problems.

For discussion:
1. On average, what percentage of the 10-50 assumptions do you think are actually critical to success?
2. How does your company identify critical risk factors and measure their potential impact on important decisions?
3. How does your company ensure that proper attention is placed on important risk factors and not just favorite ones or those easy to identify?

Tuesday, July 20, 2010

The Anosognosic’s Dilemma

Something’s wrong, but you’ll never know what it is. Yep. We're doomed.

How Facts Can Backfire

We're doomed.

Thursday, June 10, 2010

Planning is Guessing?

So says 37Signals.

37Signals has a lot of good ideas about software design that I like. In fact, I absolutely love Writeboard and use it often. Unfortunately, their generic statement about planning really only works when the cost of development and other opportunity costs are near zero. Otherwise, when one faces committing expensive capital to the task of generating a return, especially with other people's money, good planning is not only prudent but a moral obligation.

When most people plan, what they are generally doing is laying down a series of tasks with desired durations and costs, essentially a deterministic script, leading to a poorly defined goal. Then they express surprise and frustration when life doesn't follow their script. Then, possibly after several failures, people replace one type of pathology (over analyzing with deterministic assumptions) for another (shooting from the hip).

The big problem is not with planning but with a failure to plan properly. When people come up with one idea about "how to get there", they fail to consider that there is often more than one pathway to their goals (if they even have a clear understanding of what their goals should be), maybe a more valuable one. Furthermore, they don't assess the impact of uncertainties on reaching their goals, both within and between alternate pathways to the same goal. As a result of both failures, they don't develop a proper understanding of comparative capital efficiency of choosing one pathway over another, nor do they develop proper contingency plans when things don't go as anticipated. Good planning is mostly about clearly framing an opportunity, comparing alternative approaches, developing a reasonable plan forward, and developing contingency plans for when deviations occur. But I cannot overemphasize proper framing and comparing alternatives.

I understand 37signals point. Analysis paralysis leads to slow death by value attrition. Unfortunately, when people tire of analysis paralysis, they frequently resort to a "just get it done, already" approach that can actually lead to bigger problems, namely, costly rework or disaster control. I've seen that outcome in about half of the decision failures I've encountered over the last 15 years of decision support and risk consulting. Right now, we're all too familiar with an ongoing disaster in the Gulf of Mexico. A broader body of published evidence shows that "just getting it done" is probably more destructive to shareholder value than analysis paralysis. The solution, though, is not to replace one pathology with another.

Planning is guessing. Yes, but the real question is: what kind of guessing is best? The right approach is one that avoids both pitfalls of analysis paralysis or flying by the seat of one's pants.

Thursday, April 29, 2010

We Have Met the Enemy and He Is PowerPoint

"Senior officers say the program [PowerPoint] does come in handy when the goal is not imparting information, as in briefings for reporters."

Read more here.

Saturday, April 24, 2010

Small Business Decision Analysis: A View from the Trenches

By Robert D. Brown III and Gerald A. Bush

On a rainy winter afternoon, the board members of Columbia Jewelry excitedly discussed the results they were hearing about their business. Even in a poor economy, they were pleased with their business’s performance during 2009. Due to quick action to control expenses and a decision taken earlier in the year to delay store expansion plans, profits grew by 6% compared to a 40%+ decline in the rest of the retail sector.

As the board members talked about the next year, they put forth ideas to take advantage of their strong position in a weak industry. Also, they discussed the eventual transition out of the business by the founders in a few years time. As ideas swirled around, the group provided well-worn concerns about things they could not control that might put the business at risk. After all, the current systems and personnel were taxed to the limit just managing the existing stores. How could they ramp things up to grow significantly in 2010?

To read the entire article as published in Decision Analysis Today*, click here (This is a downloaded PDF file. See page 16).

*The newsletter of the INFORM Decision Analysis Society.

Friday, March 26, 2010

The Real Risks Lurking in Your Product Portfolio

If you happen to be in town:
Date: Tuesday, March 30th (rescheduled from February 15th)
Time: 8:30 a.m. to 10:00 a.m.
Cost: FREE for all attendees
Location: Georgia Tech Enterprise Innovation Institute
3rd Floor, Wayne Hodges Room - Centergy Building
75 Fifth St - Atlanta, GA 30308
Registration details are here.

Saturday, March 20, 2010

Odds Are, It's Wrong

During the past century...a mutant form of math has deflected science’s heart from the modes of calculation that had long served so faithfully. To find out more about this mutant, read more here.

Saturday, January 30, 2010

"Fear the Boom and Bust"

A Hayek vs. Keynes Rap Anthem

If you want to sing along, here are the lyrics:

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits
[Keynes Sings:]
John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson
BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!
I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly
We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits
You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season
So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…
because…
Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…
The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health
And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score
My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now
We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?
Hayek sings:
I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation
And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch
If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest
Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepare to get schooled in my Austrian perspective
We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits
The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy
The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones
Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few
So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.
Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed
Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.
We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
John Maynard Keynes
The General Theory of Employment, Interest and Money

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
F A Hayek
The Fatal Conceit

Monday, December 28, 2009

Predicting the Future of Legal Services

WHAT BUSINESS MODEL WILL PREVAIL?
- by Gerald A. Bush, Ph.D. and Robert D. Brown

UNDERSTANDING THE MOVES OF LAW FIRMS AND CORPORATE COUNSEL

Seeing what will happen in the future can be incredibly valuable. Is there a reliable way to look at the legal services market and predict the future business model? Better yet, by knowing what model is likely to emerge from the ideas being discussed today, are there actions that law firms or corporate counsel can take to engineer an outcome that better meets their goals? Can understanding the psychology of the game help create a business model that will work better for everyone?

Questions such as these are the domain of game theory, the cold-eyed calculations of multi-player interactions that made John Nash of Princeton famous in the movie “A Beautiful Mind”. More recently the amazingly accurate predictions that Bruce Bueno de Mesquita described in his book “The Predictioneer’s Game” have revealed some of the secrets behind the models used in many transformative geopolitical negotiations and high stakes business conflicts.

Read more here...

Sunday, November 22, 2009

The Valuable Paradox of Uncertainty

View more documents from robertdbrowniii.

Wednesday, October 07, 2009

Autonomy, Mastery, Purpose

Listen to this presentation by Daniel Pink. The first 10 people to complete this task will get twice as much as I paid you last year.

Wednesday, September 16, 2009

Saturday, September 12, 2009

The Flaw of Averages

Everyone in your company who makes decisions or supports decision-making needs to read
by Sam Savage. Why? Because together you are likely committing the flaw of averages, wasting time and exposing yourself to unnecessary risk. Savage shows you how to avoid this pitfall in a cleverly written, enlightening, and fun to read guide to making better decisions.

Most likely you have never heard of Jensen's Inequality, and most likely you don't care. However, you should care, and The Flaw of Averages introduces why this concept poses profound implications to the way we tend to think about making decisions. The problem is that in thinking about the issues or opportunities we face and the decisions we exercise to address them, we often go through a kind of accounting process in which we consider the best case, most likely case, and worst case scenarios (or any number of scenarios) and the corresponding conditions that have to exist for each scenario to be realized. We let ourselves believe that those assumed conditions are averages that we can use as proxies for the full range of uncertainty we face. Our final conclusion is that the outcome of our analysis closely corresponds to the average real-world outcome and the extent of possible variation (if we get that far). Understanding that, we commit to action, often disastrously so.

Savage reveals the flaw in the traditional way of thinking by explaining the implications of Jensen's Inequality. In short, Jensen's Inequality says that in situations where the output we care about varies in a non-linear way to inputs (which is much of life), the outcome as a function of average inputs (the flawed traditional analytic approach) is NOT equal to the average outcome as a function of the inputs treated as they naturally vary. [For those mathematically inclined, if E() is an operator that determines the average of a sample, and f(Xi) is a function of inputs, then E( f(Xi ) ) does not equal f( E(Xi) ). For those not so mathematically inclined, don't worry. The Flaw of Averages is not a math book; rather, it is a book about making decisions and how math can be used constructively to support that process.]

The way around this failure is to use Monte Carlo simulation to consider simultaneously the effects of the range of the assumptions as they naturally vary on the outcome we care about. Instead of thinking about the outcome as a single point or a constellation of points representing exhaustive guesses about the future, we see the full range of potential outcomes and their likelihood as a distribution. We see the implications of our decisions and corresponding uncertainties as a picture and not a point. As a result, not only do we avoid never ending analysis paralysis, we gain a deeper appreciation for the effect of typically unconsidered outcomes, both good and bad, and are able to plan accordingly with contingencies and options.

Friday, August 07, 2009

Counting Crows?

This explains what happens to the money in my wallet. Well, that's my story.

Where would we be if they had opposable thumbs?

Wednesday, August 05, 2009

Weighty Choices, in Patients’ Hands

Great article in the Wall Street Journal today: Weighty Choices, in Patients’ Hands.

Wednesday, July 22, 2009

Selecting and Confirming - A Fool's Errand

Read this story here.

Did you see the same pattern the author did? George P. Burdell, a man known for making significant patterns, didn't either. You are wise, too.

What you are witnessing in that article is a nationally distributed example of selection and confirmation bias, a fool's errand - looking for something that really is not there.

If you remove the outlier in each graph, the graphs pretty much no longer tell the story the columnist thought he was telling. This type of force-fit linear analysis does little for advancing critical insight. The first graph shows that there is no real favoritism being demonstrated. The columnist is just wrong. But so is Obama. No one (rich or poor) is really being helped significantly more than anyone else.

However, if you look at the last three graphs, the real story is that the stimulus is having little effect. There is virtually no response in unemployment and bankruptcy for stimulus dollars spent (at least up to the time this data is purported to represent); there is only a slight response to foreclosure rate.

So what happened? George and I can't judge the author's intention, but if I had to let my suspicions be made known, I would say the author went looking for a story, simplistically used linear analysis tools (which are highly sensitive to outliers), and found the story he wanted to tell. Unfortunately, he missed the real story that potentially demonstrates the greater policy implications.

We face a number of really important debates right now in this country. Obscuring clear thinking and true exploratory dialog will not be helped with this Fox correspondent's lack of rigor.

More Linear Thinking

I conducted a simple analysis about a week ago based on numbers published at Recovery.Gov. The site actually tells you how the Obama administration developed their forecast. (Editor's note: the links are apparently no longer available.) Essentially, they describe what amounts to a linear distribution based on the population of the states. I wanted to see if they were telling the truth and if there were any significant departures from it.

I scraped the jobs saved forecasts from the recovery website and divided them by state populations (rounded to nearest thousands) to develop the per capita forecast of jobs savings. Then I ordered the resultant per capita saving rate from lowest to highest.

The results show that, indeed, the stimulus money is being distributed (or at least, purported to be) proportionately to state population. The glaring exception is Washington DC, which is receiving funds at a rate 71% higher than the average and 76% higher than the median.

The thought behind the distribution of the stimulus funds is really no more sophisticated than a simple population pro rata.

The other interesting pattern that occurred is that the richest states are clustered among those receiving the higher rates of funds distribution, and the poorer states are clustered among those receiving the lowest (wealth being measured as reported at CNN). However, the clustering is not strong enough to warrant the claims of another recent article by Fox News that indeed richer states are being paid at a disproportionately higher rate.

Blue states are the poorest states, and red states are the richest.

This, combined with the USA Today article lead me to conclude the following. Except for DC, the Obama administration is following the pattern they described. (We might want to ask what kind of jobs are being saved or even created in DC. The answer is, of course, more bureaucrats.) Richer states are more industrialized states. Industrialized states are more urban. Urban populations disproportionately tend to vote for more interventionist/socialist policy makers. So what we’re seeing is not so much a direct nefarious attempt at political repayment as much as we’re see the self-selecting and compounding effects of interventionist policies securing interventionist representation. It represents the mechanism by which votes are bought on a large scale over time.

It also demonstrates that the poorer among us are not being lifted up at a higher rate by these direct interventionist activities. It has long been noted that interventionist/socialist programs do not benefit the people they claim to benefit. I wouldn’t use this analysis as proof to support that claim, but it does fit into the postulated pattern.

Finally, I have to say that I was really shocked at just how linear the distribution of funds is. I suspected that the description at Recovery for the rationale for disbursements was rough. I expected to see less correlation. Now, if the Obama administration had a econometric model that identified population as the key driving variable for stimulative effects related to employment, I could understand that. But they did not have any such empirically based model. Regardless, they forcefully asserted that their efforts would have the direct causal effects they sought. If we do believe that stimulus has causal effects, the effects were demonstrated to be embarrassingly strongly inverse, at least up this point; that is, if you believe the correlation is due to some underlying causal mechanism, even if it is the opposite of what the Obama administration postulated and forcefully advocated.

I don’t believe there is a causal relationship, direct or inverse, to the current stimulus efforts to recovery. I think the stimulus money has been absorbed more or less by state governments and dissipated in the oh so efficient way that governments work, and in parallel, the economic forces at work shed labor at a much higher rate than anyone anticipated would happen. In fact, the evidence is that the time rate at which the economy has produced unemployment is the fastest in this country’s recorded history.

Ultimately, the Recovery.Gov figures are less about jobs saved and more about the way money is redistributed (i.e., embarrassingly simplistic), nothing more.

Tuesday, June 09, 2009

Overcoming Barriers to Effective Decision-making

No one can ever eliminate mistakes or undesirable outcomes from the choices they make. But you can gain the skills necessary to help you and your colleagues consistently reduce the likelihood of being wrong with important decisions. "Overcoming Barriers to Effective Decision-making", reveals why decision-making in a business context is so difficult and what can be done about it, especially when it relates to Marketing & Business Development. It focuses on the aspects of human behavior and offers five practical steps to clarify ambiguous intentions, generate creative alternatives to achieve your goals, and create value by understanding risk and uncertainty.

Where: The Biltmore, 817 West Peachtree St. NW, Suite 915, Atlanta, Georgia 30308-1163
When: June 17th | 7:30-9:30 am
RSVP: by email mira@creativegrowthgroup.com no later than June 15th

Thursday, May 21, 2009

Are you ready for NXWRLD?

My friend Lucio just launched what I think is going to be among the next most important applications of social media - nxwrld.com.

nxwrld.com is a unique community networking website where people share world views and creative ideas for actionable change. It focuses on the key social, economic and political issues that form the fabric of people's lives, our communities and beyond.

nxwrld.com users contribute thoughts, engaging others, developing new ideas around key social, economic and political issues. The goal is to collaborate with other connectors, actively engage in global issues to help change the world and harness the collective wisdom and knowledge into the online dialog.

nxwrld.com empowers people by providing insightful and compelling content, resources, and rich information to discuss, develop and move forward ideas and issues that people are passionate about, especially when they get together and feel the collective power of their growing movement.

Whether you are one person, or a large organization nxwrld.com provides the ability to reach out to everyone or create your own private area that only you and your friends can access. Joining as an individual or linking your entire organization is easy and free.

I hope you find nxwrld.com an exciting place to spend time.

Tuesday, April 28, 2009

We can go home now

I wonder if the same robots will discover metamath?

Wednesday, April 08, 2009

A pox on both their houses?

Monday, April 06, 2009

Black Swans Fly Again

Nassim Taleb provides some very interesting interviews with Russ Roberts. I'm still thinking through what he said. Some ideas I agree with. Some I disagree with. Others I'm surprised by.

#1 Taleb on Black Swans

#2 Taleb on the Financial Crisis

Saturday, March 21, 2009

Inflation, the Silent Tax

Friend and fellow blogger, Rick at Economics for One, wrote this note on the taxing effects of inflation.

I note the following: The other interesting, if not chilling, effect of inflation is that inflation induces greater and greater dependence on government services and employment, which Rick alluded to by explaining the dilution of money as a function of distance from the government. Since people typically want more money rather than less (or more accurately, they want the benefits that more money can seemingly purchase as long as thy have more relative to the amount everyone else has), this dilution gradient likely steers people through this preference to less distance from government distributions of money. (In fact, in light of the Obama stimulus plan, numerous people have recently counseled me to seek government contract employment or seek ways to obtain stimulus money.) It seems to me that this then provides an opportunity for the political class to buy more power by linking access to money to votes for the political class that provides the money. The net effect is the strengthening of the power base of a political class…until the inflation get so unmanageable that the economic system collapses. The net effect of inflation, then, is not only a silent tax but an increase in power for the political class that induces the inflation.

A clarification on political class…Party affiliation may fluctuate as people obtain benefits or lose purchasing power as they perceive those effects being connected to a given party. But a class of people that seek political power will engage in these inflationary tactics regardless of party affiliation. As Friedman and Hayek pointed out, statism extends across political parties, leading to ambiguity and dilution in the real, pragmatic difference in the parties.

Monday, June 16, 2008

Sabotaged Minds

If you took your Father's Day to go trout fishing in the Chattahoochee River, and if you caught anything that you considered worth keeping and that won't make your toenails fall out once you have eaten it, you may have acquired a copy of the Sunday, June 15, 2008 edition of the Atlanta Journal Constitution to prepare your catch for the freezer. And if you paused long enough in the @issue section of the paper, you may have seen these two articles...

“Higher ed, lower bar”
(This article was reprinted from the June 2008 edition of The Atlantic under the title "In the Basement of the Ivory Tower".)

“You say sabotage, I say checklist for my job”

The first article seems to square with my experience of being a student in some post-baccalaureate classes I took from Georgia State University. I was taking a secondary education classes to obtain my professional educator's certification to teach in the state of Georgia (which I no longer do, by the way). One of my professors actually confided in me how depressed he was over the lack of ability of his students to engage in well structured thought. His complaints echoed in my mind as I read the editorial by Professor X. These students were heading out the door eventually to teach the students of the state of Georgia.

As I read the second article, I couldn’t help but think to myself that our culture has actually internalized these sabotage techniques as the way to business of any kind. And I finally realized the problem. It’s not that people don’t want to think, it’s that they CAN’T think. And we have taught them to be this way.

Dudes, we are toast.

Friday, June 13, 2008

Did they learn anything?

I noticed something funny in one of the latest issues (May 26, 2008) of Fortune magazine. It's an ad placed by the Air Force. I haven't seen it in other periodicals yet, but maybe I haven't been attentive enough. The ad begins on page 39. It shows a picture of some unseemly third world dictator waving his gun along with his entourage of other gun toters (by the way, I'm a gun toter, too, so my point is not to disparage the gun toting crowd). The caption on the picture says; "How do you discourage a rogue leader who wants to flex his muscles?" On the following page is a picture of a B-2 bomber with the caption: "Flex back."

The graphic answer provided by the Air Force to force initiated by rogue leaders is to respond with technological brute force. I wondered how John Boyd would respond to this. I can't speak for the Air Force as to what the organization's actual approach is to rogue leaders, but given Boyd's insistence on the priority of people over technology to solve the kind of complex problems posed by rogue leaders, I'd be inclined to think he would be disappointed with the ad. The reason rogue leaders are considered rogues is that they are, well, roguish, unpredictable, novelty generating agents. Those kinds of people eventually figure out how to subvert the best technology.

Don't misunderstand me...I'm not suggesting that Boyd was opposed to the use of technology nor am I suggesting that the Air Force should abandon its technology. But I think the ad might have reassured me more of the Air Force's capabilities if the ad featured people and intelligence over technology. But I guess the ad was designed to attract recruits, not reassure the citizenry.

Thursday, June 12, 2008

We don't need no stinking spreadsheets

My review of the modeling application Analytica 4.1 was published in INFORMS's periodical, "ORMS Today", today.

I don't think it will get the Pulitzer, but it might cure insomnia.

I think that should be Strategic PlanTing Tool

Click on the image and see the lower left corner if you don't get what I mean in the title.

Thursday, May 15, 2008

The Way of the Future in American Schooling

This is what I've been saying! Just avoid the voucher system. We need as little government intrusion in this as possible.

Thursday, April 10, 2008

The Land of the Giants

On Saturday, April 5, 2008, I decided to drive north from Bakersfield, CA to visit Sequoia National Park. It was one of the best sightseeing trips I have ever made.

I took this photo while driving up to see the Sherman sequoia, the biggest tree in the world. I probably should have put my car in park as I took the photo.

Friday, March 28, 2008

The Black Swan Giveth, and the Black Swan Taketh Away

On the 1000th day of its life, Bertrand Russell's turkey felt fat and happy. The next day, Thanksgiving, he was stuffed with bread and eaten to the great satisfaction of the Russell family. Russell's turkey met a black swan.[1]

A black swan was an idea put forward by the Enlightenment philosopher, David Hume, to represent the unexpected, the stuff you know you don't know or don’t know that you don't know. It was a play on the popular idea in the 17th century that the only color of swan found in nature was white. Hume argued that although no one had ever seen a black swan, their existence was not logically ruled out by their lack of being observed, at least by Europeans, as Europeans would soon find out. In fact, black swans do exist, but they weren't recorded in natural histories until Europeans (also) discovered Australia. As native Australians already knew, black swans are quite numerous indeed.[2]

Russell’s turkey met a black swan. We’ve all met black swans. Two good friends of mine met a familiar black swan this past Christmas, the one few of us ever anticipate. Both friends had enjoyed decades long careers at a single employer. Suddenly, they were let go, seemingly out of the blue. Sometimes black swans bear teeth.

But black swans sometimes bear gifts, too. Another friend of mine experienced a virtuous swan just after the new year. He was waiting for his privately held company to go through it’s quarterly valuation and release its updated stock price. If one followed the price history of the company’s stock and believed that past performance indicated future performance, one would reasonable expect an increase of $1 to $5. Imagine his surprise when he opened his email to learn that the company’s stock had jumped $17 per share, an increase of 107%! The value of the ownership he held in the company doubled in one day.

This beautiful bird is about to wreak havoc on those who fail to comprehend its predatory ambitions, or it may deliver a golden egg.

Now both sets of friends face more potential black swans. Will my former example set of friends continue to believe that employment always means stability, or will they take more proactive steps to manage their careers? Will my latter friend be honest enough to understand that his company’s stock price can go back down just as dramatically as it went up?

These surprises are the most general grist for consideration in Nassim Nicholas Taleb’s most recent book, The Black Swan: The Impact of the Highly Improbable,

a more thorough and extensive consideration than his previous book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.

Taleb, literary essayist, Dean’s Professor of Uncertainty at the University of Massachusetts, and mathematical options trader, lays out the foundation for his ideas from his experiences in the financial markets. These experiences lead him to discuss three interrelated themes that he ultimately broadens to an understanding of uncertainty in general.

The Ludic Fallacy: The word "ludic" comes from the Latin ludus, for “games.” Most of us were taught to think about systems that involve uncertainty and chance using structured, discrete symmetries like those found in games of chance, such as craps, card games, etc. Unfortunately, these analogies don’t frequently hold up into real world situations; but because it’s comfortable and expected to do so, we persist in their use. Use of binomial distributions are often a result of ludic framing, as is its continuous cousin, the bell curve (or Normal Gaussian for those more trained in quantitative analysis). These distributions have appropriate applications, but they do not apply to all cases of uncertainty.
Mediocristan/Extremistan: Most of us live in Mediocristan, a land not governed so much by mediocrity, but by a persistent belief in the applicability of a characteristic median to all types of uncertainty. When most of us think of uncertainty in some domain, we have been taught to think about that in terms of the bell curve. Taleb demonstrates that many types of uncertainty can be thought of in this way (Class I uncertainty), but not all of them. One characteristic of uncertainties described by a bell curve is that they do not scale, that is, the probability of occurrence of outcomes far from the mean (and median) fall exponentially fast. In this world, no one event outweighs the significance of all the other events. Many physical processes with natural physical constraints are accurately described by such distributions. Black swans can show up here, but they are extremely rare. Unfortunately, most black swans live in Extremistan, the land where uncertainty scales according to a power law (Class II uncertainty), where it is possible for a single event in a domain to outweigh the significance of all the others. Extremistan exists beyond the Platonic fold, where our typical representations of reality fail to apply. The processes that govern such distributions tend to be social, emergent, financial, maybe not entirely physical. This will have an important bearing on seeing the applicability to maneuver conflict.
Confirmation Bias: Oftentimes we become inebriated with hope, that outcomes will go the way we wish and hope. To convince ourselves that such is the case, we develop narratives from cherry-picked data and information that confirm our bias. Using these narratives as a guide to decision making, we are disabused of our fallacious reasoning in sometimes spectacular ways. Yet we still fail to learn if we are still alive to face the next black swan. “Beware the scalable,” Taleb enjoins.

The scandalous malpractice, as Taleb shouts, is that the rules that apply to Mediocristan are too often misappropriated to understand and manage systems that don’t obey such laws, often at the expense of lives and immense fortunes. The most pointed cases involve applications of options and modern portfolio theory in which billions of dollars of investors’ fortunes are lost by the malpractice of Nobel “intellectuals” who should know better (anyone remember the tragedy of the Amaranth fund or the trading company Long-Term Capital Management?); the poignant disaster of the unsinkable Titanic; the current woes of Bear Stearns and the sub-prime lending industry; and, in Taleb’s case, the decade and a half long civil war in his centuries-long peaceful Lebanon, a war that he and all too many others sadly believed would end soon after it started.

How does understanding the black swan inform our understanding of maneuver conflict? Consider the martial arts version of the Ludic Fallacy offered by Mark Spitznagel.

Organized competitive fighting trains the athlete to focus on the game and, in order not to dissipate his concentration, to ignore the possibility of what is not specifically allowed by the rules, such as kicks to the groin, a surprise knife, et cetera. So those who win the gold medal might be precisely those who will be most vulnerable in real life. (Black Swan, pg. 127)

John Boyd leads us to understand that conflict is often a non-cooperative contest for limited resources by novelty generating agents. Novelty is the black swan of conflict. When we become convinced that our side will win on the basis of strength or numbers, when we believe that the other side will follow our rules of engagement, we will be exposed to cruel novelty. This is precisely what Chet Richards describes as a disease of orientation called fixation: “...attachments to appearances, conclusions, institutional positions, dogmas, ideologies — pretty much anything that keeps the people inside the organization from recognizing that the world is changing or being changed by competitors.”

How do we escape the tyranny of the black swan? We have to learn to do at least two things. First, we have to learn how to really learn, always looking for disconfirming evidence to the self-justifying narratives we generate from the first cousins of confirmation & my-side bias, availability bias, and anchoring that keep us from considering a wide range of possible outcomes, their appropriate degrees of likelihood, and their consequences. We have to learn that images in the mirror tell us scant little about the road ahead. To do this, next, we have to learn how to properly discern systems governed by the laws of Mediocristan from those governed by the laws of Extremistan, and act accordingly.

Nassim Nicholas Taleb delivers what may be the only book on epistemology that I would describe as both a blustery and a rollicking good read. If only all the other text books in philosophy of knowledge I read in school had been so fun. If only all the others had been so honest. In that sense, Taleb's book is its own black swan.

[1] The reader should almost immediately recognize that Bertrand Russell was English and did not observe Thanksgiving. In fact, as Russell himself tells this story, he uses a chicken as the example of the doomed bird. Taleb acknowledges this, but adapts the story to an American audience. [back]

[2] I am reminded of an event in my 9th grade year in which my algebra teacher convinced a sizable portion of our class that the state of Nevada did not exist, that it was a ruse invented by the US Air Force to deter investigation into super secret military programs. His “proof” was a simple question: “Have you ever seen a car tag from Nevada?” For kids in rural mid-Georgia, his scam was based on a rather safe bet that Nevadans rarely drove to our sleepy little town. [back]

“A decision was wise, even though it lead to disastrous consequences, if the evidence at hand indicated that it was the best one to make; and a decision was foolish, even though it lead to the happiest possible consequences, if it was unreasonable to expect those consequences."

-Herodotus, ca. 500 BC.

"Apathy adores simplicity; compassion confronts complexity. When people don’t care, others suffer."

: Name: Robert D. Brown III; Location: Atlanta, Georgia, United States

I am a senior decision support advisor who provides guidance, deep insights, and valuable solutions for senior decision-makers facing complex, high-risk problems related to strategic planning, risk management, project valuation & planning, and project portfolio analysis & management. My goal is to help people ensure that the decisions they make are well framed (focused on the right problem and clearly defined) and that they understand the implications of uncertainty and risk on the likelihood of achieving their goals.

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