Tag: Book-notes

How Will You Measure Your Life?

I mentioned Clayton Christensen's new book How Will You Measure Your Life? on my summer reading list.

Here is an excerpt:

Clayton Christensen How Will You Measure Your Life

The Trap of Marginal Thinking
In the late 1990s, Blockbuster dominated the movie rental industry in the United States. It had stores all over the country, a significant size advantage, and what appeared to be a stranglehold on the market. Blockbuster had made huge investments in its inventory for all its stores. But, obviously, it didn't make money from movies sitting on the shelves; it was only when a customer rented a movie that Blockbuster made anything. It therefore needed to get the customer to watch the movie quickly, and then return it quickly, so that the clerk could rent the same DVD to different customers again and again. It wasn't long before Blockbuster realized that people didn't like returning movies quickly, so it increased late fees so much that analysts estimated that 70 percent of Blockbuster's profits were from these fees.

Set against this backdrop, a little upstart called Netflix emerged in the 1990s with a novel idea: rather than make people go to the video store, why don't we mail DVDs to them? Netflix's business model made profit in just the opposite way to Blockbuster's. Netflix customers paid a monthly fee-and the company made money when customers didn't watch the DVDs that they had ordered. As long as the DVDs sat unwatched at customers' homes, Netflix did not have to pay return postage-or send out the next batch of movies that the customer had already paid the monthly fee to get.

It was a bold move: Netflix was the quintessential David going up against the Goliath of the movie rental industry. Blockbuster had billions of dollars in assets, tens of thousands of employees, and 100 percent brand recognition. If Blockbuster decided it wanted to go after this nascent market, it would have the resources to make life very difficult for the little start-up.

But it didn't.

By 2002, the upstart was showing signs of potential. It had $150 million in revenues and a 36 percent profit margin. Blockbuster investors were starting to get nervous—there was clearly something to what Netflix was doing. Many pressured the incumbent to look more closely at the market. “Obviously, we pay attention to any way people are getting home entertainment. We always look at all those things,” is how a Blockbuster's responded in a 2002 press release. “We have not seen a business model that is financially viable in the long term in this arena. Online rental services are ‘serving a niche market.' ”

Netflix, on the other hand, thought this market was fantastic. It didn't need to compare it to an existing and profitable business: its baseline was no profit and no business at all. This “niche” market seemed just fine.

So, who was right?

By 2011, Netflix had almost 24 million customers. And Blockbuster? It declared bankruptcy the year before.

Blockbuster's mistake? To follow a principle that is taught in every fundamental course in finance and economics. That is, in evaluating alternative investments, we should ignore sunk and fixed costs, and instead base decisions on the marginal costs and revenues that each alternative entails. But it's a dangerous way of thinking. Almost always, such analysis shows that the marginal costs are lower, and marginal profits are higher, than the full cost.

This doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they'll need in the future. If we knew the future would be exactly the same as the past,that approach would be fine. But if the future's different—and it almost always is—then it's the wrong thing to do. As Blockbuster learned the hard way, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not.

You End Up Paying the Full Price Anyway
Case studies such as this one helped me resolve a paradox that has appeared repeatedly in my attempts to help established companies that are confronted by disruptive entrants—as was the case with Blockbuster. Once their executives understood the peril that the disruptive attackers posed, I would say, “Okay. Now the problem is that your sales force is not going to be able to sell these disruptive products. They need to be sold to different customers, for different purposes. You need to create a different sales force.” Inevitably they would respond, “Clay, you have no idea how much it costs to create a new sales force. We need to leverage our existing sales team.”

The language of the disruptive attackers was completely different: “It's time to create the sales force.” Hence, the paradox: Why is it that the big, established companies that have so much capital find these initiatives to be so costly? And why do the small entrants with much less capital find them to be straightforward?

The answer lies in their approach to marginal versus full costs. Every time an executive in an established company needs to make an investment decision, there are two alternatives on the menu. The first is the full cost of making something completely new. The second is to leverage what already exists.

Almost always, the marginal-cost argument overwhelms the full-cost. When there is competition, and this thinking causes established companies to continue to use what they already have in place, they pay far more than the full cost—because the company loses its competitiveness. As Henry Ford once put it, “If you need a machine and don't buy it, then you will ultimately find that you have paid for it and don't have it.” Thinking on a marginal basis can be very, very dangerous.

An Unending Stream of Extenuating Circumstances
This marginal-cost argument applies the same way in choosing right and wrong: it addresses a question I discuss with my students: how to live a life of integrity—and stay out of jail. The marginal cost of doing something “just this once” always seems to be negligible, but the full cost will typically be much higher. Yet unconsciously, we will naturally employ the marginal-cost doctrine in our personal lives. A voice in our head says, “Look, I know that as a general rule, most people shouldn't do this. But in this particular extenuating circumstance, just this once, it's okay.” And the voice in our head seems to be right; the price of doing something wrong “just this once” usually appears alluringly low. It suckers you in, and you don't see where that path is ultimately headed or the full cost that the choice entails.

Recent years have offered plenty of examples of people who were extremely well-respected by their colleagues and peers falling from grace because they made this mistake. Nick Leeson, the twenty-six-year-old trader who famously brought down British merchant bank Barings in 1995 after racking up $1.3 billion in trading losses before being detected, suffered exactly this fate and talks about how marginal thinking led him down an inconceivable path. In hindsight, it all started with one small step: a relatively small error. But he didn't want to admit to it. Instead, he covered it up by hiding the loss in a little-scrutinized trading account. It led him deeper and deeper down a path of deception.

He lied to cover lies; he forged documents, misled auditors, and made false statements to try to hide his mounting losses. Eventually, he arrived at his moment of reckoning. He was arrested at the airport in Germany, having fled his home in Singapore. As Barings realized the extent of Leeson's debt, it was forced to declare bankruptcy. The bank was sold to ING for just 1 pound. Twelve hundred employees lost their jobs, some of them his friends. And Leeson was sentenced to six and a half years in a Singaporean prison.

How could hiding one mistake from his bosses end up leading to the undoing of a 233-year-old merchant bank, a conviction and imprisonment for fraud, and ultimately the failure of his marriage? It's almost impossible to see where Leeson would end up from the vantage point of where he started—but that's the danger of marginal thinking.

As soon as he took that first step, there was no longer a boundary where it suddenly made sense to turn around. The next step is always a small one, and given what you've already done, why stop now? Leeson described the feeling of walking down this dark road in an interview with the BBC: “[I] wanted to shout from the rooftops … this is what the situation is, there are massive losses, I want it to stop. But for some reason you're unable to do it.”

100 Percent of the Time Is Easier Than 98 Percent of the Time
Many of us have convinced ourselves that we are able to break our own personal rules “just this once.” In our minds, we can justify these small choices. None of those things, when they first happen, feels like a life-changing decision. The marginal costs are almost always low. But each of those decisions can roll up into a much bigger picture, turning you into the kind of person you never wanted to be.

I came to understand the potential damage of “just this once” in my own life when I was in England, playing on my university's varsity basketball team. It was a fantastic experience; I became close friends with everyone on the team. We killed ourselves all season, and our hard work paid off-we made it all the way to the finals of the big tournament. But then I learned that the championship game was scheduled to be played on a Sunday. This was a problem. At age sixteen, I had made a personal commitment to God that I would never play ball on Sunday because it is our Sabbath.

So I went to the coach before the tournament finals and explained my situation. He was incredulous. “I don't know what you believe,” he said to me, “but I believe that God will understand.” Every one of the guys on the team came to me and said, “You've got to play. Can't you break the rule, just this one time?”

It was a difficult decision to make. The team would suffer without me. The guys on the team were my best friends. We'd been dreaming about this all year. I'm a deeply religious man, so I went away to pray about what I should do. As I knelt to pray, I got a very clear feeling that I needed to keep my commitment. So I told the coach that I wasn't able to play in the championship game.

In so many ways, that was a small decision—involving one of several thousand Sundays in my life. In theory, surely I could have crossed over the line just that one time and then not done it again. But looking back on it, I realize that resisting the temptation of “in this one extenuating circumstance, just this once, it's okay” has proved to be one of the most important decisions of my life. Why? Because life is just one unending stream of extenuating circumstances. Had I crossed the line that one time, I would have done it over and over and over in the years that followed.

And it turned out that my teammates didn't need me. They won the game anyway.

If you give in to “just this once,” based on a marginal-cost analysis, you'll regret where you end up. That's the lesson I learned: it's easier to hold to your principles 100 percent of the time than it is to hold to them 98 percent of the time. The boundary—your personal moral line—is powerful because you don't cross it; if you have justified doing it once, there's nothing to stop you doing it again.

Decide what you stand for. And then stand for it all the time.

Still curious? Buy How Will You Measure Your Life?

Source

Everything You Need to Know About Habits — The Science Of Habit Formation And Change

From The Power of Habit: Why We Do What We Do in Life and Business

Chunking — The Root of Habits

The process—in which the brain converts a sequence of actions into an automatic routine—is known as ‘chunking,' and it's at the root of how habits form.

Why do Habits Emerge?

Habits, scientists say, emerge because the brain is constantly looking for ways to save effort. Left to its own devices, the brain will try to make almost any routine into a habit, because habits allow our minds to ramp down more often. This effort-saving instinct is a huge advantage. An efficient brain requires less room, which makes for a smaller head, which makes childbirth easier and therefore causes fewer infant and mother deaths. An efficient brain also allows us to stop thinking constantly about basic behaviors …

The Three Step Loop of Habit Formation:

This process within our brains is a three-step loop. First, there is a cue, a trigger that tells your brain to go into automatic mode and which habit to use. Then there is the routine, which can be physical or mental or emotional. Finally, there is a reward, which helps your brain figure out if this particular loop is worth remembering for the future: Over time, this loop—cue, routine, reward; cue, routine, reward—becomes more and more automatic. The cue and reward become intertwined until a powerful sense of anticipation and crav­ing emerges. Eventually… a habit is born.

Does the Brain Stop Working?

When a habit emerges, the brain stops fully participating in decision making. It stops working so hard, or diverts focus to other tasks. So unless you deliberately fight a habit—unless you find new routines—the pattern will unfold automatically.

How To Change A Habit:

We know that a habit cannot be eradicated—it must, instead, be replaced. And we know that habits are most malleable when the Golden Rule of habit change is applied: If we keep the same cue and the same reward, a new routine can be inserted. But that’s not enough. For a habit to stay changed, people must believe change is possible. And most often, that belief only emerges with the help of a group.

Does a Habit Disappear?

Habits never really disappear. They’re encoded into the structures of our brain, and that’s a huge advantage for us, because it would be awful if we had to relearn how to drive after every vacation. The problem is that your brain can’t tell the difference between bad and good habits, and so if you have a bad one, it’s always lurking there, waiting for the right cues and rewards.”

Still curious? Read The Power of Habit: Why We Do What We Do in Life and Business and check out this article further exploring habits.

An Incredible Offer — But Wait…There’s More

You'll never look at infomercials the same after reading this post.

Robert Cialdini calls But Wait…There's More “A wholly fascinating account of a wholly fascinating industry.” If you're interested in how late night TV infomercials use every psychology trick in the book, you need to read this.

Infomercials are powerful. A thirty-second commercial for Tide doesn't ask you to do anything. The goal is for you to think about Tide and to associate it with something happy and clean so you'll pick it up the next time you need washing detergent.

An infomercial, however, requires you take immediate action. One moment you're sitting on the couch eating potato chips, the next you've decided there is really nothing you'd rather have than an ab-machine. How does that happen?

Everything about an infomercial is tested — Whether it's the price, the number of freebies, the background music, or even the color of the model's hair — with the sole goal of selling more product. Nothing is left to chance.

Along the way infomercial marketers have picked up an amazing amount of knowledge about how we behave as shoppers and what motivates us to make a purchase.

What can you learn from Ron Popeil, the master infomercial seller?

All the time-tested strategies were on display: he offered bonuses or freebies as incentives, and heightened tensions by warning people that he only had a certain number of units on hand (“supplies are limited!”). He assigned numbers to his customers—”You’re number eight, you’re number nine,” and so on—which gave them the impression that you had to get in line to take advantage of the great deal he was offering up. He employed the classic countdown technique, where he systematically lowered the price as he neared the end of the pitch. and when he was at the very end and started accepting cash, he avoided selling the item to the last batch of eager customers, instead launching into a fresh pitch. To get new people to come over and watch a demonstration, it requires that other people be standing in rapt attention. “Wait, there’s something else i want to show you before you take this home with you,” he might say.

Why does that steak knife cut through a shoe?

Perceived value also comes into play when a demonstrator slices a knife through an old shoe or cement block or uses a pair of shears to cut through a penny. Why would you need your steak knife to cut through a hammer, you ask? You wouldn't. But in addition to proving to you that the knife is indestructible, it's raising the perceived value of the product. Somewhere in the recesses of your subconscious, your brain is telling you that if for whatever reason you wanted to cut through a boot, you can rest assured that you have the knife that's up to the task.

On marketing late at night

One of the early discoveries of infomercials was that they perform better when they were marketed late at night. “Airtime was cheaper, too,” but “viewers defenses started to topple as they grew sleepy.” Boredom also played a role. “When he placed sixty-second commercials during a hit show, the responses were unimpressive. When the programming was lousy, many more people purchased products.”

Reciprocation

“He threw in giveaway after giveaway. He suggested that he would only offer the Dehydrator at such a reasonable price point to people who promised to “tell a friend” about the incredible offer—a classic tactic designed to make the audience feel indebted to him for his act of generosity, which, naturally, they could reciprocate by making a purchase.”

What do infomercials sell?

…What all of these half-hour infomercials have in common, of course, is that they all offer some sort of cure. Late-night pitches aren't in the business of offering us dresses, trash cans, CD players,or cans of roach spray. They're in the business of presenting serious problems—and providing us with quick, easy, painless solutions. That blender isn't just designed to make smoothies. It's going to save you precious minutes everyday and give you more time with your loved ones. Don't you want to be a decent human being and spend more time with your family?

There's a good reason products advertised on infomercials are tied to our emotional well-being, our self-image, and our relationships with others. It gives us a powerful reason to pick up the phone and place an order.

Sex

One of the biggest problems with long-form shows is getting people to stop their channel changing long enough to tune in … A half-hour show requires you to bypass that episode of Cops, rerun of Seinfeld, … and actively watch someone try to sell you something you probably don't need. That's why many infomercials have some sort of hook, something that momentarily distracts views and gets them to move their finger off the up/down dial on their remote control.

Sex usually works. What buying real estate has to do with women with big boobs is unclear, but moneymaking products have long features cleavage-bearing babes.

Repetition

Research has demonstrated that subtle repetition is highly effective. In fact, studies have shown that because infomercials expose viewers to the sales message for an extended period of time and do not repeat the same message but go back and rehash the same material while making small changes to the script, the repetition is actually much more powerful.

On manufacturing pricing complexity

Infomercials thrive on complicating purchasing decisions for consumers by bundling items with free offers, bonuses, and rewards. A “but wait, there's more!” suddenly muddles our perceptions and makes it harder to judge the offer that's just been presented to us.

What about shipping and handling?

Cleverly, shipping and handling costs are often concealed from viewers until they call. … by the time you learn the amount, you've already made the mental decision to buy the toaster oven, you called the 800 number, and you've just spent five minutes on the phone placing your order. Are you going to hang up because the shipping was a few $ more than you anticipated?

What's the deal with the host?

What's most important is that the host communicates authority. It doesn't have to be real authority, mind you. Just as TV doctors are used to pitch health-related products, it's merely the perception of authority that matters most. Clothes matter. … A host with an accent isn't accidental: Americans perceive English accents as more authoritative … Once you find a host for a show, the time-tested formula often requires the presence of a lackey, someone to play off against the pitchman. This is yet another form of social proof.

Wording matters

And every word counts: Greg Renker pointed out that his infomercials always say “when you call,” not “if you call.” The nuance matters. It suggests the viewer will call—it's merely a matter of time. … Ever hear the line “if the lines are busy, please call back?” … the mere suggestion of a rush of callers sends people scurrying to the phone.

When you think about it, every element of an infomercial is designed to manipulate you into taking action.

But Wait… There's More. Much More. For the next 15 minutes, Amazon.com is offering an irresistible special price on But Wait … There's More!. Buy it. Read it.

Read what you've been missing. Subscribe to Farnam Street via Email, RSS, or Twitter.

Still curious? Try How Infomercials Persuade.

 

Poaching Stars is a Terrible Idea to Improve Performance

In an effort to improve performance we often turn to the simple answer of trying to hire a star from another organization. This sounds like a great idea, is hard to argue with, and offers the promise of an instant performance boost.

In practice, most of the benefits turn out to be illusory.

The question is why?

One reason is that we think of the person as an isolated system when in reality they are not. The surrounding team, culture, and environment can amplify their success.

In his wonderful book,  Think Twice: Harnessing the Power of Counterintuition, Michael Mauboussin explains:

A star’s performance relied to some degress on the people, structure, and norms around him—the system. Analyzing results requires sorting the relative contributions of the individual versus the system, something we are not particularly good at. When we err, we tend to overstate the role of the individual.

This mistake is consequential because organizations routinely pay big bucks to lure high performers, only to be sorely disappointed. In one study, a trio of professors from Harvard Business School tracked more than one thousand acclaimed equity analysts over a decade and monitored how their performance changes as they switched firms. Their dour conclusion, “When a company hires a star, the star’s performance plunges, there is a sharp decline in the functioning of the group or team the person works with, and the company’s market value falls.” The hiring organization is let down because it failed to consider systems-based advantages that the prior employer supplied, including firm reputation and resources. Employers also underestimate the relationships that supported previous success, the quality of the other employees, and a familiarity with past processes.

What's happening a common mistake — we're focusing on an isolated part of a complex adaptive system without understanding how that part contributes to the overall system dynamics.

hat's For more information read the Harvard Business Review article: The Risky Business of Hiring Stars and check out The right number of stars for a team.

Unintended Consequences

An excerpt from Think Twice on unintended consequences:

When you are dealing with a system that has lots of interconnected parts, tweaking one part can have unforeseen consequences for the whole. Take the example of Yellowstone National Park. In retrospect, it looks like the park’s woes started when explorers in the mid-1800’s couldn’t find enough food in large areas of its 2.2 million acres. Formally designated in 1872, Yellowstone had seen much of its game—elk, bison, antelope, deer—disappear at the hands of hunters and poachers in the preceding decades. So in 1886, the United States cavalry was called in to run the park. One of its first order of business was to resuscitate the park’s game population.

After a few years of special feeding and favorable treatment, the elk population swelled rapidly. Indeed, the animals became so abundant they started overgrazing, depleting essential flora and causing soil erosion. From there, events cascaded: The decline in aspen trees, consumed by the hungry elk, shrunk the beaver population. The dams the beavers built were important to the ecosystem because they slowed the spring runoff from streams, discouraged erosion, and kept the water clean so that trout could spawn. Without the beavers, the ecosystem deteriorated rapidly.

Yet the managers of the park were oblivious to the fact that the elk population explosion was responsible for the trouble. Indeed, after roughly 60 percent of the elk population starved to death or succumbed to disease in the winter of 1919-1920, the National Park Service overlooked the lack of food and falsely blamed the deaths on another group of Yellowstone residents: the predators.

Taking the situation into their own hands, they killed (often illegally and illicitly) wolves, mountain lions, and coyotes. Yet the more they killed, the worse the situation grew. The population of game animals began to experience erratic booms and busts. This only encouraged the managers to redouble their efforts, triggering a morbid feedback loop. By the mid-1900s, they had all but eliminated the predators. For example, the National Park Service shot the last of the wolves in 1926, only to reintroduce them roughly seventy years later.

And so it went. The bungling supervision of Yellowstone illustrates a second mistake that surrounds complex systems: how addressing one component of the system can have unintended consequences for the whole. Alston Chase wrote about the National Park Service, “They had been playing God for ninety-five years and everything they did seemed to make the park worse. In their attempts to manage this beautiful wild area, they seemed caught in a terrible ratchet, where each mistake made the park worse off and no mistake could be corrected.”

That unintended system-level consequences arise from even the best-intentioned individual-level actions has long been recognized. But the decision-making challenge remains for a couple of reasons. First, our modern world has more interconnected systems than before. So we encounter these systems with greater frequency and, most likely, with greater consequence. Second, we still attempt to cure problems in complex systems with a naive understanding of cause and effect.

Still curious? Michael Mauboussin is the author of More More Than You Know: Finding Financial Wisdom in Unconventional Places and more recently, Think Twice: Harnessing the Power of Counterintuition.

Seneca on Clemency, Blood, Happiness and Anger

Susanna Braund‘s translation of Seneca's De Clementia, is well worth the read. Seneca addresses De Clementia to the young roman emperor Nero, with the aim of depicting the ideal ruler. Braund goes to great lengths to establish the literary, philosophical, and political traditions that influenced the work but I'll spare those details.

Here are some of the notes that interested me. 

On when to spill blood, Seneca advises:

I am extremely sparing of even the cheapest blood.

On wearing a mask, Seneca offers:

No one, after all, can wear a mask for long. Pretence quickly lapses into its true nature.

On the two sides of happiness, Seneca writes:

It is a fact that an excess of happiness makes people greedy and that longings are never so well controlled that they fade away at the point of attainment. The ascent is made from great things to greater and once people have got the unhoped-for, they embrace the most extravagant hopes.

On clemency, Seneca advises:

Just as medicine is of use among the sick, yet is also prized among people who are well, so clemency, while it is invoked by people who deserve punishment, is also respected by the guiltless.

On the perpetual need to distinguish between the bad and the good, Seneca writes:

[W]hen the distinction between the bad and good is removed, the result is confusion and an outbreak of bad behaviour.

It's easy to kill … sometimes it's better to preserver a life.

To kill in defiance of the law is open to anyone. To preserve life is open to no one except for me.

Never do anything in anger.

Savage, implacable anger does not suit a king because he does not maintain much superiority over the person with whom he levels himself by getting angry.

And some timeless advice for those of us seeking petty avenges.

The person who renounces revenge when he can easily take it wins unqualified praise for his mercy.

On reputation, Seneca writes:

The actions and words of your and those like you are seized upon by rumour. For that reason, no group should take more care over their reputation than people who, whatever they actually deserve, are going to have an important reputation.

On Kings and Tyrants, Seneca advises:

Why does it happen that kings get to grow old and to hand on their kingdoms to their children and grandchildren, but that the power of tyrants is accursed and short-lived? When difference is there between a tyrant and a king—after all, the appearance of their position and the extent of their power are the same—except that tyrants are ferocious in accordance with their whims, but kings only for a reason and when they have no choice.

It's not your title that matters, it's how you behave.

What distinguishes a tyrant from a king is his behaviour, not his name.

On retribution

Retribution normally brings two outcomes: it either provides compensation to the injured party or it provides immunity for the future. In the case of an emperor, his standing is too great for him to require compensation and his strength is too palpable for him to look for confirmation of his powers through hurting someone else.

On whether to tell the truth or to flatter, Seneca writes:

I would rather offend you with the truth than please you with flattery.

If you haven't read De Clementia, Braund's copy is a great place to start.