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...

  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.

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.
  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.