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

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

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

Requirements and commonalities of the mental models

I recommend you to build your own latticework of mental models. It doesn´t matter whether you are talking about a general latticework or a latticework related in your area of expertise, or you are combining them. No matter who you are, you don´t use all the same models than others. You are an individual and you have your own needs and wants. You have to figure out yourself the models that have the greatest importance. Everyone should use most of the models I have introduced in their own general latticework, but not all of them. There are some requirements or commonalities about the models that should be used.

Models are evergreen

All the models have to withstand the test of time. Most of them were true thousands or billions of years ago, like psychological tendencies and compounding. Scientific principles behind them may have been proven in the last few hundred years, but people have known their existence much longer. When you are building your latticework of mental models, you should focus on the models that haven´t changed for a long time. Basic principles of all the major disciplines like mathematics, physics, biology, and chemistry are a good starting point. These principles have been true for a long time and will be true in the future.

You have to understand that some of the models I have introduced and some models you think are important can change in the future. The biggest changes come from artificial intelligence. Many models of human behavior will become less useful. When you will have a smaller role in decision making, many psychological tendencies have smaller influence on your behavior. To be honest, I have no idea if or when this happens. It is beyond my expertise.

Models are versatile

Single purpose for a single model is not enough. All your models have to have many useful applications and have various uses. For example, inertia can be seen as a habit, status quo preservation, or it can be used for forecasting a movement of objects, etc. All the models you have in your latticework should have many purposes. Instead of looking out for a model that is a solution for a single problem, it should be possible to use it as a solution or part of it for many problems. There are thousands or even millions of different models. By using versatile models, you can minimize the amount of models you need to understand. Deep understanding of a smaller amount of models is more important than knowing many single models.

Models have to be interconnected with many other models. For example, when inertia, the path of least resistance, critical mass, and some other models are combined, you understand habits and their formation better than you would undertand by thinking only about inertia. Most things in the world are interconnected somehow. You limit your understanding by using models with no interconnections with other models. With this understanding you understand all disciplines better. For example, by using models only from economics, you don´t understand economics as well as by understanding how they are connected with models from other disciplines like psychology, or even physics.

Models are simple

You have to make your models in the latticework as simple as possible, but no more simpler. The definition of the model has to be simple. It cannot be many sentences long. Most adults have to understand it by reading it once. Even though simple models are important, deep understanding of them can take years. Simple models and how they can be used are hard to understand. Most people cannot understand complex models. And less people understand how many simple models are interconnected. Understanding interconnections of many complex models is close to impossible. This is the reason why all the models have to be simple. Basic principles in the most important scientific disciplines are a starting point. They are the most profound and simplest models. By understanding them, you can understand more about the world and people in it than most of the other people. The amount of models you have to understand becomes smaller. And you have a restricted bandwith. You cannot understand hundreds of profound models. You can understand only tens of them.

These are the most important requirements or commonalities of the most useful mental models. By using them, you can create your latticework. You can have other requirements too. These are just mine.

-TT