Tuesday, January 15, 2019

Thinking in probabilities

One way of understanding the world or your future is thinking in probabilities. Sometimes you do it without knowing it. For example, you go for a lunch and choose from different options. You choose the option that you think has the highest probability of being the best one. If you have a habit to make the choice, it is your unconscious mind that does the decision. You did the probabilistic thinking before you established the habit or someone else did it for you, for example, your parents. You live in an uncertain world. You can make better decisions in it by assigning probabilities for different outcomes, and deciding which outcome to aim for.

The quality of your thinking and luck defines the outcome of your decisions

You can divide the probabilistic thinking in two different categories. The certain and uncertain environments. In the certain environments the exact probabilities are known and the best usually wins. In an uncertain environment, the exact probabilities are unknown and the worse player can win. You can put games like lottery, professional chess, and many games in the casino, like roulette or slot machines into the first category. In lottery, and in the aforementioned games in the casinos, you have fixed probabilities and professional chess is very close to it. In theory, you can always find the right next moves. In practice, you cannot find them when there are enough pieces left in the chessboard. Most of the time, better player doesn´t lose in chess. And novice practically never wins the expert. Luck doesn´t have a role in the outcomes, casinos do not lose money in these games.

There are always hidden and incomplete information in the uncertain environments. You cannot calculate precise probabilities. When you make decisions in these environments, the quality of your thinking and randomness define the outcomes. Some people call randomness luck. It is easy to believe that you made an excellent decision, when you were lucky. In these environments, even the best decisions can have undesirable consequences. In the short run, the quality of your thinking matters less in the outcomes than randomness. In the long run, vice versa. Time is the enemy of the bad quality thinking and the friend of the good quality thinking. In these environments, you always have to think about the probability of being lucky.

Think about the probabilities of different outcomes

Thinking about the probabilities of different outcomes increase your probability of being right and making the best possible choice for further action. The simplest situations have only two different outcomes. For example, getting a job after a job interview has only two possible outcomes. You either get it or not. You can think about what is the probability of getting this job and make a decision about spending some time to apply for another job. If you think that the probability of getting a job is high, you can postpone the other application. If you have a low probability of getting that job, you should apply for another job as soon as possible. In reality, things are normally not that simple. You can have multiple outcomes. These multiple outcomes can have different outcomes which have different probabilities. These secondary outcomes can be more important than primary outcomes.

Thinking about the probability of understanding what you are doing

In an uncertain world, you have to live with hidden or incomplete information. You also have to think about the probability of having the right information and about the probability of understanding what the information you have means. These probabilities are never hundred percent. Certainty doesn´t exist in these environments. You have to add this to your thinking. Depending on the sources, you have different probabilities of having the right information. Official statistics and academic research have a higher probability of being right than getting the information from sources that ”quote” them. Sometimes these people don´t offer possibilities to check the information. To be honest, I have done this sometimes by pure laziness. Be careful of what you read.

You can find ways to verify if the information you have is right. The bigger problems is that you can misunderstand or misinterpet the things you read or hear. Reading text with a foreign language increases the probability of misunderstanding. Your psychological tendencies are even worse enemies. You can read only texts that confirm your beliefs. And you can have many other psychological things that can move you into a wrong conclusion. As you can see, you have to take many factors into consideration, when you are making a decision. The more important the decision is, the more factors you need to worry about the probabilities of being right.

Sources:


Have a nice week!

-TT

Tuesday, January 8, 2019

Latticework of mental models and Apple

Latticeworks of-mental models can be created and used for many purposes. For example, creating decision making systems, designing strategies, and analysing businesses. In this text, I will show you how you can analyse Apple as a business. I will mostly go through intangible assets of the business. I will not analyse any numbers, only products, services, and how they are sold or how people perceive them.

Apple is one of the most successful companies in the world. You can use the latticework of mental models to understand the past, the present and the future of the business. I am not going through all the mental models that have an effect on Apple. In reality, the amount of models is bigger than what I will represent. You cannot have a business of that magnitude without many models working into the same direction. Many psychological tendencies have an effect on Apple´s brand. Some of the tendencies have a bigger effect on the brand than others. Apple sells most of its products for consumers. Their perceptions of Apple and its products are the most important factors in its success. Technical superiority is not required. Only the perception of the technical superiority consumers have about the products and services matters. The moment when technical superiority mattered was after it launched the touch display for an iPhone and the next few years after. The next important moment comes when the next disruption in its devices becomes real.

About the products, name and the logo of the company

Apple has a simple range of products. It has only few product groups. The most important ones are theiPhones, iPads and the MACs. Small capital letter ”i” in the product names is for the internet. When it is used in the spoken language, it has an ego enhancing effect. People love the word ”I”. They might not be happy that other people use it, but they love it when it comes to them. It is hard to find a better word in a product name. All the names should be as simple and short as possible. Product name has an ideal length which is not more than seven letters or two syllables. Apple´s product groups have shorter lengths. They are also easily understandable and don´t have many meanings. This is true especially for the iPhones and iPads.

Apple´s product prices are high. Customers need to have the perceptions about the products and services that are equal to the prices. The product design and their packaging need to look better than their competitors´ products. All the products need to look expensive. One way to have a better perception about the price is to sell products with metallic colors. The image of the components used in the products need to be excellent. Higher prices are highlighting the association between the high quality and the products. People have a better perception about the expensive products, because they value the increased effort they needed to have to afford it. High price also helps people to highlight their status among their peers. Luxury image improves the pricing power of the company. Sales margins become higher.

Many other psychological tendencies have an effect on the perception about Apple´s products. Steve Jobs is one of the heroes of the creative people. Many of them see him as an ultimate hero of the beautiful product design and great advertising campaigns. He used his authority by introducing new products himself. Some authorities are worth more when they are dead. It is hard to say whether this is true about him or not. The most popular products have higher sales figures, because they have created an enormous amount of social proof. When the social proof is created, it sells more because it creates a self-reinforcing feedback loop, in which new customers have an effect on their social circle and this circle gets bigger and bigger and more customers will join this movement. It also creates more customer satisfaction, because people see their improving status among their social circles.

Jobs gave the name ”Apple” for his company. It is simple with five letters and one syllable. The less syllables and letters you have, the simpler the name. Big groups of people associate the name ”Apple” for a forbidden fruit. This associates the name with scarcity. The company´s logo, in which somebody has bitten a part of the Apple reinforces this association. The product line is simple. They have three main lines. Many other companies have much more. Power laws, especially Pareto´s law have an effect on it. Profits and turnover are distributed unevenly. For example, iPhones produce more than 50% of the sales and profits. Apple also has an app store, in which it uses the leverage of other people´s efforts. App developers can sell their products only through the app store and the company takes some of their profits by only upkeeping the app store.

Inversion, what Apple shouldn´t do

Apple´s success is unbelievable. Most of the time, it doesn´t have to do anything to sell its products and services. It has inertia. It moves to the same direction without any extra push needed. To continue this kind of success, they have to be careful in doing something. By using inversion, Apple have to think what it shouldn´t do in the future. Apple´s brand is based on the luxury image. It cannot start selling cheap, ugly and/or cheap-looking products. Their designs need to stay beautiful, so does their packaging. The techical level of the products cannot be too far behind the competitors´ products. All the product names, their user interfaces, and designs need to stay simple. It cannot let its competitors copy its product names and technology patents. It has to protect them with war-like efforts. It has to protect everything that makes the company unique.

Remember that you have to use figures to analyse a company. And you need some specialized mental models like the economies of scale.

Until next week,

-TT

Tuesday, December 11, 2018

The Most Important Task, MIT

This is the last text for this year. I will be back in the second week next year.

The Most Important task is not an important mental model, but it helps you to simplify your life. As you can see from the title, the Most Important Task is in a singular form, not plural. Zero is the simplest number, but you have to think the next simplest figure, one. One way to separate yourself from others is to have a perfect focus on the most important task. To say ”yes” to this task, you have to say ”no” to tens of others. This task has to be your top priority. The most important task can have different timescales. Your daily choices can be done for achieving your most important long-term task or goal.

Whatever you think is your Most Important Task, you need define it some way. And you need to understand why you have to do it. No task can be the most important without the reason. The reason can be something like, ”Without doing a task x, nothing else gets done” or ”By doing a task y everything else will be easier or unnecessary” Sometimes this task has to be put into separate tasks. Then, you have to define the priorities of these smaller tasks. You have your most productive hours of the day. Different people have different hours. Normally, these hours are from two to four hours after you wake up. You need some time to recover from your sleep in order to be productive. My most productive hours are somewhere from three to five hours after I wake up. You can do small experiments to figure out your own.

Be ruthless in focusing on the most important task. Do not let anything or anyone interfere with doing it. Close your e-mail notifications, put your smartphone on silent mode and educate everyone around you to leave you alone during this task. This is probably easier said than done. And it will take some time. Showing the improved results of your working days is maybe the only smart way to do it. Forget everything else until you get this task done. I recommend to put a deadline to it, because you cannot be productive the whole day every day for a long time. Other hours you can use for less important things like governance. You can define the most important task for a longer time frame than one day. If you do this, add these moments into your calendar. Future is hard to forecast. Therefore, I don´t recommend this. Timeframe have to specific in order to get things done.

To get the most important task done, you have to define the first physical microtask. It is harder to begin without defining it. For example, you have a toothache that makes your life miserable. Then, the most important task for you is to reserve an appointment with a dentist. The first physical task is to find a phone number for the dentist or find a good dentist from the internet. The definition of the right result is filling the cavity and the getting rid off the toothache. You can also define all the other physical and mental microtasks if you think it is necessary. You can also create a system or systems for getting this task done.

If you have originally thought something different for the most important task, change it when something else changes your priorities. In an ideal situation, the most important task is the same task every day. For example, most often, the most important task for me is to learn new things about the most useful mental models. It can be hard to believe, because I write and publish texts once a week. My priority is to understand the models and how to build a latticework around them. Writing more is not important now. Priorities can change in the future.

I want to wish everybody happy holidays! Remember to take some time to recover!

-TT

Tuesday, December 4, 2018

Confirmation bias

Last week I wrote about one type of excessive self regard, loss aversion. This week I continue with a different theme related to excessive self-regard, confirmation bias. When you start looking for information that matches your former beliefs and reject the information that doesn´t confirm it, you can suffer from confirmation bias. This happens, when this leads you to a wrong conclusion. For example, you can start looking for evidence against climate change, instead of looking for evidence for it. The more ego, time or effort you have invested in your prior beliefs, the more likely you will suffer from confirmation bias. It doesn´t mean you are always wrong, but the likelihood will increase.

Ideology is the worst source of confirmation bias

Ideology is the worst source of confirmation bias. It creates the worst kind of mistakes. Any ”ism” is bad for you with large doses. It doesn´t matter whether you have a blind faith in capitalism, socialism, environmentalism, or any other ism, you probably suffer from confirmation bias. When you suffer from ideology, you create a self-reinforcing feedback loop in which all the information you seek, all the people you meet, and all the decisions you take, strengthen your beliefs. After this goes for a while, you have created a bubble for yourself where you cannot see any good in anything that is against your beliefs. After this feedback loop has worked for years, you become delusional. If this goes too far, it happens to anyone. No matter what you believe in.

Track records, and trying to destroy your best ideas are best antidotes

Lets face it. Any track record that is long enough is a better way to see how things are than any belief you can have about your skills and abilities. For example, if you are a bad investor and have a track record of losses in the last ten years, you shouldn´t believe you are a great in investing. Also 90 per cent of Swedish drives believed that they were better than average drivers. It is easy to understand that some of them are wrong. Instead of believing it, they should focus on how many accidents or near misses they have had. Poor performance leaves clues. No matter whether they are losses in financial markets or accidents while driving, long term results are the best predictor of future success. Do not believe in short term results. They don´t tell enough to you.

Peer reviews are used in many scientific disciplines to evaluate the quality of research. However, it creates possibilities of confirmation biases effecting on the results. Reviewers are people who are likely to suffer the confirmation bias of their own if they are wrong. They have probably done the same research in a bit different way and are getting the same results. If peer reviews do not align with track records of reality, believing in the latter option is the best option. For example, efficient market theory has affected on financial market research for decades. But mathematical results of the reality of the markets do not confirm it. Still, many business schools teach students efficient market theory for their students. Without going into details, the probabilities that efficient market theory gives to extreme daily fluctuations of the markets are much smaller than what has happened in the markets.

Try to create a habit for destroying your best and most important ideas. It helps you to focus on the right ideas. For you to do this, search for the smartest possible people who don´t believe you are right. This is quite easy in modern world. Then figure out why they believe in their own conclusions. You can also stay close to people who are willing to give you contrarian opinions, when they think you are wrong. People who are more willing to get to the truth than being right. You can also share your best and most important ideas to your enemies. When they are willing to explain what you did wrong or why they disagree, you can understand your ideas much better. Today, it is easy to tell the public what you think. I recommend you to do that.

This is all for now. Until next week,

-TT

Wednesday, November 28, 2018

Loss aversion

Loss aversion is a form of an excessive self-regard. It is a tendency to prefer avoiding losses compared to getting equivalent gains. Nobel laureate Daniel Kahneman has developed this concept with Amos Tversky. Like many other psychological heuristics and biases, loss aversion can be misunderstood and used for your own good or bad.

Two forms of loss aversion

First case goes like this: Imagine a situation that you are offered a bet in which you have 50 per cent chance of winning 110$ or 50 per cent of losing 100$. Would you take this bet? According to Kahneman, most people wouldn´t take the bet. Imagine another bet in which you have a 100 per cent chance of losing 90$ or 90 per cent chance of losing 100$? Would you take the first or second bet? According to Kahneman and other researchers, most people would take the last bet. As you can see from these bets, first situation has the same probability of winning 55$ and losing 50$ and in the second situation, both bets have an expected value of losing 90$.

What this means is that in the first situation people were loss averse. They didn´t want to risk their 100$, even though they had a better chance of winning 110$. In the second situation people were willing to risk more money to get even. This can be seen as irrational behavior, at least according to Kahneman. But it is not that simple. As with everything in life, in reality, it depends on the situation. The behavior in the first situation is irrational only if your 100$ is not needed by you. It comes to path dependence. If you lose your money you won´t get a chance to get them back. You have lost your money and you cannot buy bread and butter. Path dependence is the same fact whatever the sum of money. You just cannot afford to have a chance to lose money you will need later. This doesn´t mean you shouldn´t take 100 bets that are similar to the first situation if you can afford to lose the money.

Second situation is different. You take more risks for not to lose, instead of accepting losses, you are more likely to risk more capital to gain what you have already lost. This makes you more vulnerable to get hurt in the long run in many ways. For example, you lose some of your money in investing a stock x, when it announces bad financial report. You are more likely to invest more money for this stock to gain your losses back than putting your money to stock y that has risen in the same time after a good financial report to get them back. Throwing good money after bad money will more likely to be a bad decision. This doesn´t mean it is always a bad decision. It is only a more probable effect. When you do this kind of mistake, you are more likely to lie to yourself about it. Instead of admitting failure by taking responsibility about your mistake, you might explain it with bad luck, or mistakes from other people, etc.

Loss protecting products and services

The providers of financial products and services use loss aversion for their advantage. Insurance is one type of products that takes loss aversion for service provider´s advantage. When you insure your fortune to protect yourself against losses, you pay the price for it. Insurance selling companies have large databases of their customers and the likelihood of getting into accidents. They know the probabilities of these accidents. And they price their insurances in a way that the value of your expected loss is smaller than the price of their expected gain from the insurance. As with the first type of loss aversion, you have to buy the insurance if you cannot afford the cost of the accident. Financial industry is also willing to sell you products that have capital protection. There is always price to pay. It can be something like a decreasing possibility for gaining capital or a bigger commission for buying the product. Whatever it is, it is not a free lunch. You have to pay for it. Be aware of anyone you tells gives you a guarantee that you cannot lose without having costs. He is not telling the whole truth about the product.

Until next week!

-TT

Tuesday, November 20, 2018

Upholders, Questioners, Obligers and Rebels

When I introduced a mental model of motivation, I wrote about three sources of motivation, intrinsic, extrinsic and altruistic motivation. This time I will get introduce four different tendencies concerning on the intrinsic and extrinsic sources of motivation. Gretchen Rubin has introduced four different personalities that react differently for two different sources of motivation:

  • Upholders meet outer and inner expectations
  • Questioners resist outer expectations and meet inner expectations
  • Obligers meet outer expectations and resist inner expectations
  • Rebels resist both inner and outer expectations

According to Rubin, these personalities don´t change during lifetime, unless something really devastating happens. For example, a loss of a loved one, or a near-death experience. It doesn´t mean that all the behavior is the same as the personality describes. Everyone has a basic personality and similarities with two other ones. For example, Upholders have similarities with Questioners and Obligers. Usually, similarities are stronger with one personality. For example, Upholders have more similarities with either Questioners or Obligers. In this text, I provide a short description of these four personalities

Upholders

Upholders can be described as law abiding citizens and self-targeting missiles. They want to meet both the outer and inner expectations alike. They tend to love rules, to-do lists, minute-by-minute schedules, repetitive tasks, and deadlines. When they make a decision, they will follow through. All the expectations make them feel free and motivated. They may feel hurt or impatient when others reject expectations, cannot determine rules for themselves or question their expectations. They do not adapt well with sudden changes. They need clarity to meet their inner expectations. Upholders are eager to understand and meet expectations thorough, reliable, can seem humorless, and are demanding.

Dealing with Upholders is many ways easy. They do what they say, do it on time, they don´t need any extra requests to do something, and they are self-motivated. They get energized when they get things done. They manage their own businesses and customer relations well. They tend to thrive with situations that have clear rules, routines, changes are small and slow, and take initiatives without supervision. They have problems with delegation, because they think others are not dependable enough.

Questioners

Questioners can be described as exhaustive researchers and justification-seekers. They focus on inner expectations. They question everything They need to find reasons why something is done. If they are good enough, outer expectations transform to inner expectations. They want to be logical and efficient. They prefer gathering their own facts and make their own decisions based on them. They can suffer from analysis-paralysis. They are paradoxical, because they don´t like to answer questions from others about their judgments. They think it is not necessary to explain anything they have thought through, because they have done it with care. They are interested in creating more efficient systems, inner-directed, impatient with others´ complacency, and have a crackpot potential.

Dealing with a questioner requires patience for their endless questions. They can add value by finding reasons for doing or not doing something that others find justified without thinking. You may think they are difficult with all their questions. You have to remember that they do it because they want efficient actions and smart decisions. You have to put them deadlines and restrictions for their research. Do not put them on a situation where there is a possibility of doing endless research when it isn´t needed. Put them on environment that rewards and encourages research. And don´t let them work with people who have low tolerance for questions.

Obligers

Obligers can be described as people-pleasers. They focus on outer expectations. Real issue is that they need external accountability. They cannot meet their inner expectations without external accountability. They work well in an environment with external accountability. If the environment changes in a way that external accountability disappears, they become clueless and paralyzed. When they can match their own inner expectations with their outer expectations, they get the life they want. They are great leaders, family and community members, and friends. They have a tendency for overworking and burnout and they have trouble saying no.

You can team up them with a coach, accountability partner, personal organizer and any other professional. Face-to-face interactions work best with them. Accountability works better when they get positive feedback. Sometimes negative feedback, taking them for granted, too ambitious demands for them, nagging, or exploiting them can initiate a rebellion. This can happen fast and without warning. They excel at meeting other people´s deadlines and like monitoring and supervision from others when they feel they are treated fairly.

Rebels

There is no better word to describe a Rebel. They focus on resisting inner and outer expectations alike. They care about freedom and self-expression. They resist all types of control, even self-control. The harder you push them, the harder the resistance. Ability to choose is the most important thing. They enjoy meeting challenges in their own way. They can do almost anything they want to if the choice is theirs. When they are on a mission, they have no need for checklists, routines or supervision. But they don´t work well with requests. Even reasonable requests can have a negative reaction. Rebels are independent-minded, can think outside the box, spontaneous, sometimes inconsiderate, and struggle with routines.

When you deal with a Rebel, remember that you get their best response by using information-consequences-choice sequence. You have to give them all the information they need, tell them the consequences of actions, and allow their decision without lecturing. Do not let them out of trouble, when they make a wrong decision. If they don´t suffer the consequences, you give them no reason to act. Rebels are quite easily manipulated by using their contrarian nature against them. They also respond better when you use words like choice, freedom, and self-expression, instead of using words like responsibility, necessity, or rules.

I am not sure how scientific this division of four personality types Rubin has created, but it makes sense to me. I am a questioner with a tendency to rebel against rules. At least, that is what I think of myself.

Until next week,

-TT

Tuesday, November 13, 2018

Strategy

Definitions

Strategy has so many definitions you could write a book about them. Here are couple of them: ”A plan of action designed to achieve a long term or overall aim.” or ”A general plan or set of plans intended to achieve something over a long period of time.”

Strategy for individuals

I focus on strategy for individuals in this text. Strategy is applied in many organisations. Military strategy, business strategy, and corporate strategy are the most common applications. You can create a strategy for life or for some aspect of life. For example, you can create an investment strategy or a strategy for being the best you can be. You can create a set of principles that you use to guide your actions, thought processes, and decision-making to achieve a long term aim. These principles are your framework. Do not confuse strategy and tactics. Strategy is a common framework for achieving what you want. Tactics are the individual tools you use to make strategy happen.

Past and present

Even though strategy focuses on the future, your past has an effect on it. The knowledge, skills and talents you have today were created in the past. You also have to understand where you are now and to understand how you can get in a position in which you want to be in the future. You cannot create a strategy to get there without understanding your past and your present situation. You depend on them when you are defining the position you want to be in.

First, you need to know where you are right now. You need to know your knowledge, skills and talents and other assets you have like your relationships and finances. You have to understand what is unique about them. You also need to know what you don´t know, what you cannot do, and what is hard or impossible for you to accomplish. You have to find out brutal facts and separate them from your beliefs. You cannot figure all these things yourself. You need help. Ask your unbiased friends or have yourself tested. Consult professionals. When you know where you are, you can find the best opportunities to get where you want to be. And you can also see obstacles to get there.

If your strategy has an effect on other people, consult them about it. There are some things that you can figure out only by yourself. For example, what things make you feel great? What things make you feel weak? For example, I feel great when I can figure out how things are connected and feel weak when I have to communicate with the people I don´t like or know well. Nobody can tell you these things.

Remember that some of these things change. You are not the same person five years from now. Be prepared for changes. After you have figured out all the facts about things mentioned before, you can start designing a strategy for the future. You start with strategic vision and compress it to your strategic intent. Then you figure out your strategic objectives to accomplish your intent. Finally, you start executing your strategy.

Future

Your strategic vision tells you about where you want to be and when. You have to think what you can accomplish in the future, is it worth the effort, and it tells you what you want to accomplish and why you want to do it. It also tells you when you when you want all these things to happen. You make a vision for future that is many years from the date you finish it. Your strategic vision have to answer three sets of questions. First, what is the valuable and unique position you want to be in and what this position means to you and all the people it has an effect on. Second, what are the benefits you can offer them? What is the difference between these benefits and benefits your competitors offer to them? Third, what are your guiding values for achieving your unique position?

When you are done with your strategic vision, you have to compress it to strategic intent. Your stratetic intent has to be short and concise compared to your strategic vision. All the people who has to deal with it has to be behind it. It doesn´t matter whether they are your colleagues at work or your family. The best time span for it is from three to five years. It has to be challenging and visionary. A simple example of strategic intent is ”I want to be number one in X in region Y five years from now!”

After you have done your assessment of the present situation, where you want to be in the future and defined your strategic vision and intent, you have to figure out strategic objectives. They are initiatives to lead you from present to the future. These objectives are building blocks of the strategic intent. But they are for shorter period of time than the intent. Objectives need to be:

  • Interconnected with the strategic vision and strategic intent;
  • Large enough to get the desired result;
  • Clear, compact, and desired;
  • Specific about what you are trying to accomplish; and
  • Quantitatively measurable

Finally, when you have put all these things together, you can define the action plan to get where you want to be and you can have your measurable strategic objectives ready for executing the plan. Be aware that in war no plan survives the first encounter with the enemy. The same happens to your strategy while you are executing it. You will probably have to change your plan and its objectives. You may even have to change your strategic intent.

To be fair, my knowledge and skills about strategy are very limited. Please be free to correct any mistakes in the text. I doubt it is complete enough for this mental model. I will get back to this theme when I understand and learn more about it.

-TT