We saw it. Yet, we din’t see..

This is so true!. It happens to everyone of us. Sometimes, the world around us would have changed so much that we realize and wake up to this fact after a long time. One of the reasons for this is that – our beliefs, goals etc act as blinders and keep us moving in a particular direction without paying much attention to what is happening elsewhere. The other reason is because of the information overload. We can not spot and identify these patterns in this huge amount of data. Or, the trend may be too small a thing to get noticed and we ignore it as irrelevant.
The same thing happens to businesses also. They need to spot the trends early and capitalize on it. Many times they are so much obsessed with their strategies, tactics and new technologies that they don’t realize the change in current trends. There is little point in sharpening your saw, when your opponent is possessing a gun!. These kinds of surprises are seen many times in the history of wars, businesses( the Iridium project for e.g) etc. It is not easy to spot changes in the trends either. It requires an open mind and willingness to abandon the current path and pursue a new strategy. This is easier said than done. Businesses are so emotionally attached to their strategies, technologies that they don’t ’see it coming’!. Another reason could be because of the sunk cost and loss aversion biases. By the time they realize, it is too late. So, they must be ready to renunciate before it becomes too late.

Many times we do recognize that it is coming. However, we wish it may not really come. This is kind of wishful thinking. The kind of thinking that suits our needs, wishes rather than accepting the reality which is uncomfortable. We tend to search for, collect more information and interpret information that conforms to our beliefs and tend to avoid information that contradicts our beliefs. This is called – conformation bias. Psychologists say that this kind of thinking is hardwired in our brain!. So, it is very hard to escape from these biases. All we can do is to be on alert, always!!.

(I have taken the heading line from Robert Pirsig’s “Zen and the Art of Motorcycle Maintenence”. There is a similar shloka by Sankaracharya in ‘Bhajagovindam’ which says – “Pashyannapi na cha pashyati mudho..” which means- fools see, but don’t see!. However, Sankaracharya wrote this in a different context!).

Gaming Industry comes full circle…

Nintendo is back at no 1 again. According to this article in CNN Money, which analyzes why Sony lost -

“There are a number of lessons we can glean from this — not just for the future of videogame consoles, but the future of consumer electronics. Decades from now, PS3 vs. Wii will be remembered as a cautionary business tale: how pride, politics, and an overabundance of technology can blind you to the simple truth of what consumers want.”

While Sony chose to make its Play Station more powerful and more feature rich, Nintendo concentrated on usability and cost. As the article says -

“Why change something that is already installed in 200 million homes worldwide? Answer: because there are more people in those homes that don’t play games, and hundreds of millions more homes to win over”.

The article further comments on Sony’s and Microsoft’s strategy of adding more and more technology-

“You buy them for the games, but once inside your home, they take over your life. They become the brains of your TV, your entertainment center, even your main communications device with IP telephony and chat functions. They converge all your technological needs in one box. (Microsoft, at least, didn’t assume that we would only want to use its technology in this converged device; it allowed you to plug in your iPod to the Xbox 360.)”

While Nintendo’s strategy was -

“…. When you buy a videogame console, the company says, you want to play games. Period. A console is not a Swiss Army knife. It makes sense to squeeze more functionality into your cell phone because you carry that device around everywhere. When it comes to the interactive fun box in your living room, however, it makes sense to simply make that more fun. If you want a DVD player, you’ll buy a DVD player. “

While Sony and Microsoft sell their gaming consoles at a loss, Nintendo actually makes profit on the sales. Sony is paying for forgetting what the customer wants.

This is how it typically works. Initially, when products come onto the market, they all look alike. In order to differentiate their products, manufacturers add more features. It is these features that differentiates the products in the market and help gain market share. However, if you take this strategy too far, it back fires. But, the question is – ‘how to decide when to stop?’. It is not easy to decide when to stop. Sony, apparently, did not know where to stop.

In his book “Design of Everyday Things”, Donald Norman talks about “technology paradox”. He says products follow a ‘U’ shaped curve. When things are complex, a new technology helps to bring it down. However, once the complexity is brought down, more and more features are added which makes it complex again and the cycle repeats!..

The Risk and Uncertainty debate…

There is a lot of discussion about the differences between risk and uncertainty. There is no universal agreement on the differences between two terms and the debate is still on!

Quoting Frank Knight – “It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We … accordingly restrict the term “uncertainty” to cases of the non-quantitative type..”. This essentially means that risk can be quantified in terms of probabilities where as uncertainty is not. According to Knight, there are two types of probabilities – objective and subjective. A probability is called objective probability if any of the following conditions are true -

• When there is symmetry in the information ( for eg: tossing a coin )
• Statistical analysis of experimental data is possible

He considered other probability assessments subjective( or as ‘personal probability’ as some authors prefer to call it). He considered subjective probabilities as uncertainties and not as risks. As some critics noted, there may exist more than one symmetry in a given situation and hence the probabilities might differ from person to person. And, hence the first condition is really subjective. In the real world scenario, we rarely get enough experimental data to carry out statistical analysis on them and deduce probabilities from them. Hence, the the second condition is also very difficult to achieve in practice. Even if we have enough data on a given situation how are we sure that we have complete data and not ignored relevant data. So, we can say most of the times we only have subjective probabilities. So, we can not really make a distinction between risk and uncertainty. Other authors have the view point that calculation of probabilities is inherently subjective and advise that expert opinions should be considered while calculating probabilities. So, this process is more like a Bayesian than a frequentest approach.

Even though there are other theories to distinguish between the two, no theory is able to explain the differences between the two terms convincingly. So, most people use them interchangingly. Many people use the risk in a negative sense( i.e as a threat) and treat uncertainty as both positive ( i.e opportunity ) and negative. PMBOK, for example, uses the term risk in both the positive and negative sense. Design For Six Sigma (DFSS) considers risk in the negative sense. It uses Risk Priority Numbers(RPNs) to quantify risks. System Safety Engineering carries out Hazard analysis to identify risks within the system to be built so that they can be managed safely. Some authors advise using options theory to deal with uncertainties. They advise building flexible systems so that favorable events can be exploited when they arise and the impact of unfavorable events are minimized.

Traveler’s Dilemma and Behavioral Economics

Kaushik Basu has devised an interesting game called Traveler’s Dilemma. The problem is stated as below:

Lucy and Pete, returning from a remote Pacific island, find that the airline has damaged the
identical antiques that each had purchased. An airline manager says that he is happy to
compensate them but is handicapped by being clueless about the value of these strange
objects. Simply asking the travelers for the price is hopeless, he figures, for they will inflate it.
Instead he devises a more complicated scheme. He asks each of them to write down the price
of the antique as any dollar integer between 2 and 100 without conferring together. If both
write the same number, he will take that to be the true price, and he will pay each of them that
amount. But if they write different numbers, he will assume that the lower one is the actual
price and that the person writing the higher number is cheating. In that case, he will pay both
of them the lower number along with a bonus and a penalty–the person who wrote the lower
number will get $2 more as a reward for honesty and the one who wrote the higher number
will get $2 less as a punishment. For instance, if Lucy writes 46 and Pete writes 100, Lucy will
get $48 and Pete will get $44.
What numbers will Lucy and Pete write? What number would you write?

According to the game theory – the payoffs for both Lucy and Pete is – ( 2,2). And this is the Nash equilibrium for the problem at hand. Equilibrium happens at (2,2) if you go by the assumptions of classical economics assumptions – people act rationally and people are selfish and act to maximize their gains irrespective of others. Assume Lucy thinks she can make $100 by telling the price as 100. Soon she realizes she can make $101 by telling the price as 99. Realizing the Pete might play the same trick, she decides she will say 98 etc so on so forth till they reach $2 where the equilibrium happens.

Basu says the – the Nash Equilibrium is reached if the game is played rationally and questions the rationality of players in the real-world.

I agree with him in that people get maximum pay off in this game if they acted irrationally. That is how it works in the real-world!. Often(if not always!), people behave irrationally. That is the question behavioral economics tends to question. It has recognized that there are various cognitive biases that are at play when people make choices. And, most often than not these choices are irrational. If you ask me, if the price of the item in question is $42, then in the real-world you will at least get $42 ( or 40?) or more if people are loss averse. However, by applying the second principle, they can maximize their payoff by quoting a value near 100.

Scott Adams, the creator of Dilbert says that people are irrational. They make choices first and then try to rationalize it by giving various reasons. Even psychologists say humans are irrational. Behavioral economics is trying to explain the economic behavior of people in this light…

Presentations..

I don’t know if this has happened to you, it has certainly happened to me.You are attending a presentation. The speaker is giving you information on a new product or a new technology, or on some system or some marketing information. The presentation is great with lots of charts, tables, pictures etc. The presenter has nicely divided the presentation under various headings each explaining different aspects of the subject. If you are already familiar with the subject, you do not have much problem following it. If the topic is new, you start paying more attention. After few slides, you start feeling little uneasy. You look at others – everyone seems to follow the subject without any problem. So, you hold back yourself from asking questions thinking that others might think you are stupid. As the presenter moves from one aspect to another, you have difficulty in linking them. You try to use your imagination and try to create the linkages between various entities being explained. Then, suddenly, one brave soul starts asking questions to the presenter. Ah..!, you suddenly realize that others are also sailing in the same boat as you. After few more questions, some of the aspects become clear. As you start asking more and more questions, the presenter starts feeling little uneasy because he is running out of time. So, he tells you that he does not have much time left and skims through rest of the presentation. You use your extra-ordinary imagination and try to make sense of the entire presentation. You assume many things that are not explicitly spelled out by the presenter. There is a high probability that your assumptions are wrong!. As one of my managers said, assume means – ASS-U-ME!.

Assume for a moment that you have not seen a car in your entire life. And the presenter is explaining about various parts of the car – the steering, wheels, brakes, accelerator etc. He gives detailed specifications for each of these parts. So, what happens after the presentation is, even though you have understood various parts of the car, you are not sure how the action of the steering is ultimately connected to wheels. How the engine is connected to other parts of the car etc. What is missing from the presentation is – interconnections( i,e relationships ) between different entities.

I should admit here that I have done the same mistake before. We tend to get into details when it is not needed and pay little attention to linking the concepts together.This is especially true if the audience is new to the subject being explained. If you are presenting to management for funding, you need to present detailed data. But, for a general audience these details are unnecessary. I think the key is to remember – find out who the target audience is and present the concept keeping them in mind.

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Transactive Memory

The
term coined by Daniel Wegner simply means – individuals can act as
extended memory to one another. That simply means that you need not
know something that you know that your wife or father knows. This is
described in detail in Malcom Gladwell’s “The tipping point”. A closely
knit team is more efficient in remembering things than individual team
members. This has a positive effect on how the team performs. May be
this explains the efficiency of Agile teams who rely heavily on communication among the team members. Gladwell also talks about effect
the magic number 150 has on organizations. He cites the case of
Gore Associates and their high efficiency. He also talks about how “peer
pressure” ( rather than dead-line pressures or pressure from
supervisors) pushes people perform better.

This also brings
forth the Japanese working style. Kenichi Ohmae describes in his book -
“The mind of the strategist”, about how the Japanese organizations are
structured. He talks about the how people work closely within/across
teams. According to him, in Japan, children are taught how to mix with others
and work in a group at school. This is the first lesson they learn at
school before anything else!. Does this explain Japanese efficiency?

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Fallacy of Success

Is success predictable? There are many business books that tell you how to achieve success. They give you a list of things you can do to achieve success. According to Phil Rosenzweig, things are not so simple. He says, the situation is more complicated than that. The dynamics of the business environment is very complex. He tells you that business gurus who have built formula for success have based their theories on skewed data. They are basing their theories only on the companies that have succeeded. The data suffers from survivorship bias.
Even if you have a very good strategy future is uncertain. What you think is a very smart strategy might fail miserably. And, an ordinary strategy might make you highly successful. According to Nassim Taleb,it is easy to give explanations for the success after you have succeeded. If you have failed, no one will even listen to you in the first place. Mind you many of these explanations suffer from Texas sharpshooter fallacy. According to him, you can achieve moderate success with a good strategy and hard work. If you have achieved may be there is a high probability that some other subtle forces are at play. Since, people can not understand the entire situation they tend to attribute their success to some of their strategies, values etc. Many times the relationship between the cause and effect is very subtle. There may be a time lag, or other forces at play. This is called ‘dynamic complexity’. This leads to many of the erroneous explanations.

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Fallacy of expertise

Expertise is all about knowledge and skill in a particular field. So, what is the fallacy of expertise? Psychologists say that we over estimate our own capabilities. There was a study conducted by researchers to analyze how experienced surgeons diagnose diseases. The researchers had also developed a simple statistical model for the diagnosis. It was found that the statistical model was more accurate than the expert diagnosis. There may be many reasons why the expert diagnosis is not correct. Our brain uses lots of short cuts during thinking, watching etc. Since the expert believes that he knows the field thoroughly( which is an over estimation by the way!), he may be a little lazy to analyze the facts in detail and arrives at a decision hastily. Or, it is also possible that his ‘mental model’ about the conditions that are associated with the disease may be wrong!. There may also be many other cognitive biases at play.( Hopefully, more on these in a later blog!)

It is generally found that a group of people make better judgment than individuals. This is called the ‘crowd wisdom’. Remember an old saying – ‘ Two heads are better than one’?. This has been proven by research. So, what does this mean to us? We can make better decisions in life situations, in work etc, by consulting more people about the situation. Remember though that the people you consult should have genuine interest either in you or the problem at hand.

Software teams for example can come up with better architecture, estimation or features for a product by brainstorming rather than working in silos. This leads to better products, better architectures, better estimations etc.This circumvents some of the errors made by experts in the team.

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