Understanding behavioral economics is a key element in helping us to make good decisions – so this is a short blog to let people know about the free course that is about to begin:
A beginners guide to irrational behavior by Dan Ariely.
I have read a few of his books and seen a number of his lectures. Not only does he know a lot about behavior economics and why we act and decide the way we do – he also conveys it in an entertaining and amusing fashion. I am really looking forward to the course.
The course is hosted by Coursera, an organisation offering free courses who have linked up with 33 other institutions – pretty impressive ones at that …. the likes of Stanford, Princeton, IE and Michigan.
I cannot vouch for he quality of all the courses, but have done one course on systems modelling (Michigan) and can only say it is excellent. You do not need to pay a cent or even buy the professors book. Content is delivered in videos between 5 and 15 minutes long – so it is easy to fit the occasional study period between tasks. It also only takes about 8 hours a week that even the busiest people should be able to manage, given you can listen to the videos whenever you feel like it.
The course starts on the 25th March, so sign up now! Click on the link to find out more and sign up at:
Saras Sarasvathy, a professor at Darden School (University of West Virginia), undertook some research to see if entrepreneurs thought, acted and decided differently. Her conclusion was that this is the case. At its most basic level, she says that rather than set a goal and work out how to get there, entrepreneurs start with the means at their disposal, collaborate with others and go on a journey to see where they end up. Her work has attracted much attention and is taught in many entrepreneurial courses the world over. The process is portrayed below (you may need to click on the picture for a clear view):
I have read her research papers and various other materials, but the best explanation of her process I have come across is displayed in this video from the University of Gallen:
The 10 myths of entrepreneurship
So, through trial and error, together with discussion with stakeholders and customers, and a clear understanding of the means at your disposal, you develop a new product or business even if your original goals need to shift substantially in the process.
At Genesis we have a view on Saras thinking – although it may go a little against the crowd at the moment. Although I am not certain how academically robust was her research, intuitively there are some great ideas embedded in the theory. Base your business on your own means (including competences), spend more time experimenting and market testing (than in-office analysis), share your ideas and get inputs, … these are all good. They also dovetail nicely with other entrepreneurial thinking such as that of Alex Osterwalder (Business Model Generation) and Steve Blank (The Start-Up Owners Manual). These concepts are particularly useful when dealing with “fuzzy” markets where you have really new products or are developing a new market or market niche.
Where do we think this could be dangerous? Taken to its extreme, we believe the process could lead to laziness and sloppy thinking if it is used totally outside causal thinking. We accept that a new start-up is not the same as a microcosm of a large enterprise, but there are some excellent analytical tools and strategic thinking that can play an important role in the entrepreneurial process. From the humble SWOT through Porters competitive strategy and on to Christensen’s disruptive technology – all could guide the process (depending on the venture) and could also help to reduce risks of ending up in the wrong place and/or with the wrong product.
Furthermore, one of the things that we believe is a characteristic of great entrepreneurs is to persevere and continue far beyond the point when other more “sensible” people have thrown in the towel. That attitude does not sit well alongside the idea that goals can be changed whenever things seem to be going against them.
Our conclusion, Saras has begun an interesting “movement” and there are many important principles that should be used in the “0 to 60mph” phase of the start-up. But do not throw the baby out with the bathwater – recognize that causal thinking, modelling and other scientific business principals can enhance the effectuation process.
We are about to launch a new company: Mashauri Limited aimed at helping entrepreneurs through the process from start-up to stable business where we have cobbled together a mixture of the types of thinking discussed above. We have produced a process that we believe will really enhance the entrepreneurial journey and greatly increase the chances of success. If you are an entrepreneur in the early stages of start-up and would be interested in trialling the product, contact me at email@example.com to discuss it.
The next post will cover this subject in more detail, but meanwhile here is a hint of what is to come. The idea that entrepreneurs manage risk and uncertainty; and make decisions differently has been researched by Saras Sarasvathy. Successful entrepreneurs were studied to detect these patterns – and the results are insightful, but also feel intuitively correct. It is called “effectuation”. And all you corporate people – note it is also valid and important for large organisations too!
So .. how do entrepreneurs handle risk and uncertainty? What do the successful ones do differently? How do you plan when you are dealing with new and unknown markets?
Attached is a visually attractive depiction of the study and the results.
This week the World Economic Forum kicked off in Davos – and as always, we will be following it with interest and alerting our clients and readers to interesting forums and discussions.
Not coincidentally, this is also the week that we are launching our new “Brave New World” initiative. The tough economic times continue to a greater or lesser extent depending on your perspective (country, industry, region, …) and we believe the green shoots are showing or about to show. The biggest challenge many organisations face is that the business environment has changed fundamentally but many are still looking in the rear-view mirror to plan the road ahead. Coupled with that is that many are also in survival mode – with a strong internal focus on cost containment.
Resources tend to be stretched especially at executive level and although we know we should be considering the broader trends and fundamental changes that have been happened, we seldom give ourselves the opportunity to read and absorb some of the material out there (such as is coming out of the World economic Forum) – to say nothing of sitting down as an executive team to discuss the implications and opportunities for the organisation.
The BraveNewWorld challenge is to change this mindset in your organisations (if it exists) and proactively look at the new “world” you will be facing, with a perspective of seeking opportunities and growth. Taking the time out to assess the future NOT through the perspective of the rear-view mirror, but from the perspective of what the future might look like. Contact me at BraveNewWorld@GenesisMC.co.uk to discuss how we might be able to offer assistance in this process.
Back to Davos, the theme of this years conference can best be described using Professor Klaus Schwab’s words: “Today, we live in the most complex, interdependent and interconnected era in human history. We are increasingly confronted by major adaptive challenges as well as profound transformational opportunities. This new leadership context requires successful organizations to master strategic agility and to build risk resilience.”
Later posts will discuss specific debates at Davos, but for this first post I should like to bring to your attention the WEF TV channel at http://www.weforum.org/events/world-economic-forum-annual-meeting-2013 . As I write this, I am watching a discussion called “De-risking Africa” with discussions from Clayton Christensen (disruptive technologies) and Global Risks due in the next few hours. Incredible stuff and whether or not you agree with the opinions expressed, it should certainly stimulate your thinking.
And finally, congratulations Charlize on your Crystal Award. Beauty, brains and empathy ….. an exceptional and rare combination.
A number of blogs, ideas and headlines have come together to write this article stimulated by some thoughts around “biomimicry” (creating solutions designed by nature), a topic that has been around for a while but is now being taken more seriously by business thought-leaders.
The first article came from a blog called The Nature of Business and was titled: “Super organisations – learning from nature’s networks” which applies aspects of complexity theory, particular the analysis of networks, to the state of the economy and business today. That sounds like a tough read, but it is surprisingly easy-going and a fascinating article showing how nature organises itself and how there are lessons for business.
That led me to a second article about risk and resilience from a web-site called “Business Inspired by Nature”. It shows how natures uses 3 strategies for building resilience: decentralisation, redundancy and diversity. This is really important. Genesis, along with one of our partner organisations: Consileo (specialists in building resilience through insight and foresight), are convinced that with the increasingly uncertain environment, resilience must be one of the prime requirements for all organisations. The increased possibility of unexpected exogenous shocks, together with coping strategies that are unlikely to be based on past experiences, demands that organisations must build in resilience and the ability to act at the front-line independently and spontaneously. It is clear that nature can provide us with lessons and metaphors that could help us to survive and thrive in these environments.
You are probably wondering where the “billionaires” (from the title) comes into this thinking. That came from a recent Forbes article in August putting Amancia Ortega ahead of Warren Buffet on the billionaires list and in third place overall. To me, Amancia’a organisation Inditex (owner of Zara and other brands), is a great example of a company that (perhaps deliberately or perhaps intuitively) uses nature-type strategies in their own strategies. A detailed description of the Inditex strategy would lengthen this article too much (and it is easy to Google it), but they manage their entire business more as an ecosystem than a traditional business with boundaries. Built-in flexibility and speed to react are key survival mechanisms that provide its competitive advantage. Latest results of 12% profit increases and 10% revenue, the third consecutive year of growth in an impossibly-tough economic climate, combined with an increase in head-count demonstrates that their strategy is working.
The quality of decision making within an organisation is key to its success, survival or failure. I believe the three resilience building mechanisms adopted by nature hold lessons for how we make decisions in our business to build our own resilience:
Decentralisation (performing a function or responding to a disturbance in many distributed locations throughout an organism or system
rather than in a single or centralized location). For example: encourage decentralised decision-making so decisions are made where they are best-informed and which can result in rapid response
Redundancy (performing a function or responding to a disturbance in more than
one way. For example: when forced to decide what to do about a specific challenge (such as shrinking revenues), consider a number of different alternatives and allow those options to be explored and applied differently in different areas (locations, divisions, units).
Diversity (constantly seeking new and different ways of performing functions or responding to disturbances.) For example: find different ways of reacting to challenges and ensure that your decisions are are not based on “how we did it before” heuristics.
How might you go about putting this thinking into practice? It really will require some time and courage. Time to move out of fire-fighting operational mode and give yourself and your team some time to consider your current position and levels of resilience. Courage to move from tried and tested responses and explore some more innovative actions that may help you move from survival-thinking to a thriving-mentality.
Genesis Management Consulting would be delighted to facilitate a workshop with you and your selected team (not necessarily your Executive Committee!) to investigate these options.
Initially developed and validated at the Max Planck Institute for Human Development, the Berlin Numeracy Test provides a fast and psychometrically sound instrument for assessment of statistical numeracy and risk literacy. The Berlin Numeracy Test was created to help increase public awareness and to improve research conducted with commonly used samples from diverse cultures and backgrounds (e.g., computer literate adults; educated people from the US, Europe, and Asia; highly educated medical, legal, and financial professionals).
Take this short test to see how capable you are to assess risk and optimally use the available date. It is short (about 4 minutes) and anonymous and you receive your own score, compared to others, immediately.
By now, every executive in business recognises the term “Black Swans” as representing low probability, high impact events. However, many do not know how to handle them in ther management of risk. There is an HBR article by Taleb, Goldstein and Spitznagel discusses the 6 most common mistakes made by executives in this regard. Summarising the article ….
We think we can manage risk by predicting extreme events.
The advice is NOT to try and predict these Black Swan events (which by definition is impossible), but rather try and identify your vulnerabilities and focus on the consequences of these events and how to withstand them. What my colleagues in Consileo call “building resilience”.
We think by studying the past we will be better able to manage risk.
You cannot use hindsight as foresight as paste events do not bear much resemblance to future shocks. I do not think the article is saying that nothing can be learned from the past; but rather that Black Swan events cannot be predicted using past trends and happenings.
We don’t listen to advice about what we shouldn’t do. We tend to like positive advice far more than negative (loss prevention) advice and so give greater weight to the positive advice. A dollar not lost is economically equivalent to a dollar earned, but risk managers don’t treat them equally.
We assume that business risk can be measured by standard deviation.
Although statistical techniques are useful in concepts like investment risk, they are dangerous in real life where events do not follow a normal distribution. The article also claims that even many quants analysts do not really understand the concept of standard deviation and so what is the chance that non-experts are going to get it right.
We don’t appreciate that what’s mathematically equivalent isn’t psychologically so.
Here the authors demonstrate that how the same risk is presented can significantly impact on how we react to it. They are basically discussing the concept of framing and our heuristic-driven response to different descriptions of the same thing.
We are taught that efficiency and maximising shareholder value don’t tolerate redundancy.
Basically here the paper highlights how too much optimisation can increase an organisation’s vulnerability. To demonstrate this, a “lean” human being would only have one lung and one kidney!
The article ends discussing the risk of incentivisation if structured incorrectly. I really like their conclusion here which is so appropriate in light of the financial-system driven crash we are trying to recover from; and even the news of the last week where JP Morgan have announced a $2bn trading loss (which I suspect may only be part of the true picture, but we will see …): “Moreover, we shouldn’t offer bonuses to those who manage risky establishments such as nuclear plants and banks. The chances are that they will cut corners in order to maximise profits.”
The full article may be found at the Harvard Business Review web-site at The 6 mistakes article
although you may have to register to download it
A while ago we wrote an article called: Taking strategic decisions in the face of “unknown unknowns” which complements this risk article nicely and gives some advice about what you could actually do to address some of the challenges put forward by Taleb.
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A Boardroom Fable How Gail saves the company and Brad saves his reputation
Taking strategic decisions in complex environments is one of the toughest, and most important jobs, of any Executive in both the public and private sectors. Taking good decisions can result in massive value creation, but getting it wrong can equally destroy value – or even destroy a company.
View this entertaining slide show that tells the story of the company: Marcon, and its CEO, Brad and simultaneously offers excellent advice on taking strategic decisions.
Leadership and decision-making meet technology, collaboration and crowds.
When I publish an article (or in this case a broadcast), I normally try and summarise it so that my too-busy readers are able to get the gist of what is being said without reading the original article; or at least are able to make a judgement on whether or not they want to read the original article.
In this case, I am not going to do that as this video has too much excellent content to allow me to summarise it. I will only say two things:
It includes excellent input on decision making, the use of technology, the new leadership paradigm, group intelligence and the fact that you must have women in a team to increase the level of this intelligence (that should provoke a few of you to watch it at least).
I personally believe that the discussion here holds the kernels of the future of leadership and management; and so strongly recommend anyone who has an interest in better understanding this topic and wanting to get more out of their organisation – be it public sector or private sector – takes the necessary 40 minutes to watch this IBM Think Forum video.
Thanks to my colleagues at THOUGHTstream who brought it to our attention. Jamie at Ts bravely did attempt to make a summary – please visit “Jeopardy, women and chocolate” to view their take on the video. Thanks also to IBM for putting this, and other great work , into the public realm.
If you would like to know more about embedding science within your leadership and decision making processes, contact me at firstname.lastname@example.org for a no-obligation discussion.