How ambivalent are you?

I'm not sure what to make of this.

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...

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

Anyway, here's my solution.

"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.

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.]

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.

1. 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. 
2. 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. 
3. 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.

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.

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?

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.

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.

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.

Small Business Decision Analysis: A View from the Trenches

Small Business Decision Analysis by Robert Brown

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.

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.

"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