Insights #7: December 2018

Distilled lessons, ideas and wisdom from the past month

Content summary
1: When to trust intuition
2: Key insights from Berkeley’s Science of Happiness course
3: Why being a ‘strategic giver’ is better than being a ‘taker’ at work
4: A framework for addressing human error
5: Lessons for small companies when working with big ones
6: Why business decisions cannot be based solely on reason
7: An approach to communicating ideas more effectively
8: How to make queuing (and society) fair and acceptable
9: A strategy for splitting company ownership between founders and employees
10: How Singapore built the world’s best education system

 

1 – Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Speaking at the World Business Forum, Nobel Prize-winning behavioural economist Daniel Kahneman outlines an approach to assessing whether to trust intuition.

He notes that intuition, which is defined as ‘knowing without knowing how you know‘, would be better thought of as ‘thinking that you know without knowing why you do‘, as this reflects the possibility that intuition can be (and often is) wrong. Moreover, the degree of confidence that people have in their intuition is a poor guide to accuracy.

Research has shown that intuition tends to be accurate for certain situations and Kahneman points to three conditions that are necessary for this to happen:

1- Regularity: a common set of conditions must arise repeatedly, allowing people to identify when they are present and learn from them.

2- Practice: accurate intuition is a side-effect of significant practice in dealing with a given situation.

3- Feedback: In order to develop accurate links between situation and meaning, immediate feedback on whether the intuition was right or wrong must be available.

So, for instance, intuition relating to investing in the stock market is likely to be misleading, given that exactly the same conditions do not regularly (if ever) occur. On the other hand, the intuition of master chess players and married couples is often accurate.

 

2 – Blissed out: the 13 steps to becoming happy

Writing in the Guardian, Brad Rassler outlines the most important lessons he learned from taking the University of California, Berkeley’s online course ‘The Science of Happiness’:

  • A lot of research into happiness is simply wrong, while there are many different definitions of ‘happiness’. What happiness is, and how it can be best attained, is specific to the individual.
  • There is a difference between happiness and meaningfulness. Studies have shown that the latter is linked to being a ‘giver’ and is likely to involve higher levels of worry, stress and anxiety, while the former is associated with ‘taking’ and an absence of negative emotions.
  • Social connection (ranging from cooperation to making love) is normally an important factor in happiness, triggering the release of the endogenous ‘love drug’ oxytocin.  Childhood experiences influence the ability to form and sustain relationships and social connections, but negative cycles may be broken.
  • Money typically makes people happier only up to a point (Nobel Prize-winning economist Daniel Kahneman suggests the cut-off is around $75k / £60k per year). People generally revert to a base level of happiness after getting used to sudden positive or negative changes in their lives, a process referred to as ‘hedonic adaptation’.
  • People are generally bad at predicting what will make them happy, particularly in the mid-to-long term, and often focus on ineffective strategies, including working towards accumulation of material possessions rather than spending time with friends and family.
  • Within the scientific community, there is significant support for the ‘set point theory’, which suggests that happiness levels are to a large extent genetically predetermined. Some studies suggest that genetics, individual initiative and circumstances account for 50%, 40% and 10% of happiness levels respectively. Happiness may thus be best approached as a lifelong practice.
  • Studies have shown that acknowledging the positive aspects of life, perhaps through periodically making a note of three points of gratitude, can be a simple and effective way of boosting happiness. As with most such practices, this should be conducted in moderation to prevent it from becoming shallow or showing diminishing returns.
  • Achieving happiness does not generally involve the suppression of negative feelings, but rather the acceptance and recognition that these are a fundamental part of the human condition and (mostly) have a useful purpose.
  • While mindfulness has been much-hyped of late, it does appear to deliver several benefits including improved attention and stress reduction. However, a number of recent meta-studies have found little evidence that it influences positive emotions.
  • Interaction with nature may boost happiness, perhaps through introducing perspective to day-to-day worries.
  • Physical state and condition can affect happiness. For instance, the vagus nerve, which affects a number of bodily functions such as breathing and oxytocin generation, has been shown to influence empathy and compassion (and hence the ability to form social connections). This may be strengthened through exercise, mindfulness and random acts of kindness.

 

3 – Book Review: Give and Take

Give and Take is a book authored by Wharton School professor Adam Grant. First published in 2013, it articulates a novel theory on the optimal approach to managing professional relationships.

The central thesis of the book is that that the workforce can be split into three categories: givers, takers and matchers. Givers selflessly place the needs of others above themselves, while takers put their own success above all else. Matchers adopt a reciprocal approach, helping others only in direct response to help that they have themselves received.

Contrary to common perception, however, the book argues that it is a subset of the givers that are best placed to achieve personal success: those that do well by doing good, by pursuing balanced outcomes that benefit themselves as well as others. The book provides numerous examples of people that have reached the top of their profession through adopting this approach, and pulls out some general reasons behind its effectiveness.

For instance, personal networks are often central to accessing important information or new opportunities, and it is often those at the periphery of a network (whose knowledge, contacts and viewpoint differs most significantly from our own) that are the most valuable source of these. Strategic givers are inherently better placed to take advantage of such extended networks.

Moreover, negotiation and bargaining are important elements in any career. However, through ruthless pursuit of self-interest, such discussions often end in resentment or an impasse, while placing too much emphasis on the needs of the other party can lead to poor results for the negotiator. Pursuit of a win-win outcome through consideration of the requirements of all parties is therefore generally the best approach.

 

4 – To Err is Human

Blue Skies Mag takes a look at an approach, outlined in Don Norman’s ‘The Design of Everyday Things’, to analysing human error.

Norman observes that while people always seek to understand why something has gone wrong, they are often content with the explanation of ‘human error’, meaning the actual root cause goes undiagnosed and effective steps cannot be taken to avoid recurrence.

As a better approach, Norman suggests using the ‘five whys’ method, developed by Japanese car manufacturer Toyota, in which explanations are continually questioned until the root cause is identified. In addition, as a framework for truly understanding why something has gone wrong, Norman outlines two categories of error:

1 – Mistakes: these occur where an inappropriate goal or plan is adopted, and may be one of three types:

  • Rule-based: where the problem or situation is correctly assessed but the wrong rule / course of action followed.
  • Knowledge-based: where the problem is incorrectly diagnosed because of erroneous or incomplete knowledge.
  • Memory-lapse: where something is forgotten at the evaluation stage.

2 – Slips: these occur where the correct action is known but not executed, and may be of two types:

  • Action-based: where the wrong action is performed.
  • Memory-lapse: where the intended action is not completed.

Slips tend to stem from complacency, making them more likely to happen to experienced or knowledgable people who may perform a task subconsciously.

Reflecting the framework, the article authors suggest a useful checklist for avoiding errors in any activity: ‘When you’re performing an activity in which you don’t have complete mastery, ask yourself: is there anything about this situation that’s different from the usual? Might I be applying a rule from another situation onto this one inappropriately? Is there any knowledge I might be lacking? Is there anything I’ve forgotten when I’m making my plan or choosing my goal? Asking a trusted and more experienced peer can be a good way to identify mistakes. Then, when you’re more experienced and realize that you’re starting to feel comfortable, check yourself again. Realize that your experience is opening you up to a whole new kind of error. Bring a little more consciousness and deliberation back into your process in order to avoid slips.’

 

5 – Startups should read this checklist before they go ‘whale hunting’ for big partners

David Frankel, managing partner at Founder Collective, looks at some of the risks involved when very early stage companies consider entering into partnerships with large companies. While such partnerships may potentially bring significant rewards, he offers a number of questions and consideration that should be assessed before proceeding:

  • Assess how the project contributes to the core business, the chances of revenue generation beyond the initial engagement and the opportunity cost, in particular if it prevents pursuit of any other opportunities, or represents a diversion from the existing business plan. Startups should also consider whether the project will result in the development of something with wider appeal. He writes:

These projects more often end up as bespoke development engagements where, despite the initial intention, the startup is producing a custom application for the big company. Founders will rationalize the deviations from their product road map, but ultimately sell out their future for a long-shot opportunity to integrate with a worldwide leader…My advice is to not think magically about product/market fit, and instead, to try pre-selling it to other customers as a form of market development. If you can sell the product, great! If not, you’re probably using venture capital to subsidize the R&D budget of a company worth hundreds of billions of dollars.

  • It is easy to visualise a successful outcome, but there is a good chance that the partnership will not go to plan. As a result, assessment of the opportunity should apply a large discount rate to reflect the low chances of it working out. Moreover, startups should consider how, in such a scenario, they will reassure employees and raise more money with no revenue following a failed engagement with the best possible customer, and then reorient to focus on generating revenue from others.
  • Consider how well understood the large company is.
    • Relative to a startup, the time horizons are much longer, and decision making processes much slower, in large companies.
    • Similarly, a financial contribution that is meaningful from the perspective of a startup may be irrelevant in the context of a large organisation, so can relatively easily be written-off and should not be taken as a sign of long-term commitment.
    • Verify any claims that the project is critical (not simply a proof of concept) to a person / department with real decision-making power, perhaps through referencing. One risk is that large companies run pilot programmes to reassure investors that are worried about disruption (e.g. retailers building e-commerce capabilities) but in reality such efforts are designed to generate positive PR rather than reorient the business.
    • There is a risk that internal champions move and so it is wise to engage with multiple high-level people. Be wary if the project does not involve being paid a fair market rate or strategic investment.
  • Be especially wary of situations where multiple companies are vying for the same opportunity.
  • Consider whether it is possible to hire a large number of good candidates extremely quickly, in order to be able to deliver the project. If not, company culture can be placed at risk, while the uncertainty inherent in the arrangement creates additional risk.

 

6 – It Isn’t a Replication Crisis. It’s a Replication Opportunity

Ogilvy vice chairman and author Rory Sutherland looks at the influence of context on human behaviour and perception. This can be so strong that the same thing can take on opposite meanings in different scenarios or from different perspectives. For instance, returning a gift may be seen as a personally insulting, but economically generous.

As as a result, unlike science, which is based on universal laws, in business few rules hold in all conditions and there are often multiple correct answers. For instance, it is not always possible to transfer a successful idea into a different application. Where rules are not universally applicable, reason alone cannot be relied upon to make decisions, as demonstrated by numerous unexpected failures and unlikely successes in the business world, and assumptions should always be questioned.

So, whereas the opposite of a good scientific idea is a bad one, the opposite of a good business idea may be another good one. Moreover, good business decisions do not need to be universally correct, but rather appropriate for the situation in question, which may mean being ‘right enough’, right with sufficient frequency or simply less wrong than the competition.  

Ogilvy points out that business leaders often fail to address and reflect such anomalies, creating numerous opportunities for others to exploit.

 

7 – The Pyramid Principle 

Barbara Minto’s ‘The Pyramid Principle’ outlines an approach to effectively structuring business communications such as reports and presentations. Rather than taking an audience through a journey of  discovery, addressing a multitude of relevant issues and considerations to arrive at a final conclusion / recommendation, the approach advocates providing a top-down summary, highlighting the key points upfront before broadening-out to provide logically-structured supporting arguments.

Minto advises that any communication should begin by outlining:

  • Situation: setting the wider context of the discussion, establishing relevance to the audience.
  • Complications: highlight the problem that has arisen.
  • Question: state the pressing question that the complication poses.
  • Answer: provide a summary of the proposed solution to this question.

This ‘top of the pyramid’ should be supported by the three most important arguments / recommendations, each of which is itself supported by further sub-groups. All groupings should be assigned and ordered logically.

The approach takes into account the observation that people can hold only around seven items within short term memory at any one time. Grouping arguments and structuring them logically prevents overload and facilitates consumption. Furthermore, adopting a ‘top-down’ structure enables the key points to be made when audience attention is at its greatest, and then allows for as much evidence as is required to justify this to be consumed thereafter. The approach also helps to avoid the risk of an audience reaching its own, possibly conflicting, views based on the evidence provided.


8 – What the psychology of queues tells us about inequality

Writing in the Financial Times, Gillian Tett looks at the field of queue psychology. This has generated a number of interesting insights that underpin the approach of transportation / consumer-focused companies towards queuing and may have broader implications.

  • Customers view the presence of several short queues as indicative of good planning, while a single long queue is seen as daunting and a sign of system stress. However, this can be misleading, as service rate also influences queuing time.
  • In fact, many companies have realised that providing multiple queuing points for individual services is inefficient, as a single point can easily become jammed, while the choice this affords creates ‘uncertainty, stress and competitive anger’, particularly when people observe others getting ahead undeservedly.
  • In contrast, a larger single queue distributes any delays across the system, gives the illusion of constant progress, allows for the provision of signs indicating waiting time and, in some cases, enables companies to provide distractions or entertainment to those waiting.
  • Systems created to enable people to pay for privileged access (e.g. speedy boarding at airports) are usually considered fair as long as they are transparent and consistent.

While we often assume that consumers desire as much choice as possible, Tett writes that ‘people find it reassuring when there is a sense of fairness, a feeling of progress (however tiny), clear signposts and even a collective spirit of suffering. To put it another way, when it comes to queueing, a sense of centrally managed order often seems preferable to unfettered choice and competition. We might accept the idea that paying a higher price might produce some privilege but we want this done in a transparent way. Options that produce deeply unequal results for reasons that are unclear — but supposedly place the responsibility for “choice” on our shoulders — are stressful.’


9 – How to allocate equity among founders and employees

Joel Spolsky, CEO of Stack Overflow and Trello co-founder,  sets out a guideline for allocating equity in a startup company. While acknowledging that there is no single approach that will work for all companies, he points out that any steps that can be taken to make the arrangement simple, transparent and, most importantly, fair, will be likely to improve the chances of company success. He notes that ‘fairness, and the perception of fairness, is much more valuable than owning a large stake‘, with conflicts among founders one of the most damaging of issues that a startup will encounter.

Spolsky’s approach recognises that companies add people in layers, starting with the founders and followed by employees that join at different stages of company growth. Typically, each successive layer is larger and lower risk, while there will be around one year between each. Successful companies will normally be on their sixth layer or so by the time exit opportunities arise.

He suggests that founders should aim to end up with around 50% of the company, and allocate 10% to each of the next five layers, split equally among the people within these. The fifth layer is likely to involve many more people than the first, translating to a smaller equity allocation to each person, but this reflects the lower risk and higher value of the company when they join. An alternative approach is to allocate equity by layers of seniority, but in any case clarity and simplicity should be guiding principles.

Other suggestions include:

  • Raising investment should result in the consistent, pro-rated dilution of each pool. So if an investor takes a 25% stake, both the founder pool and the employee pool should fall from 50% to 37.5%. 
  • Vesting (i.e. the gradual transfer of an allocation) is vital and should occur over 4-5 years, otherwise people can leave a company after a short stay, contributing very little but still benefiting from its success.
  • In the early stages, some founders may require a salary and others may not, while others may contribute resources. In such cases, it is better to simply pay an equivalent amount to all founders when money is available, rather than try to harmonise through reallocation of shares, which creates inequality and results in arguments. 
  • Equity should not be allocated in return for an idea alone as ‘ideas are pretty much worthless…working on the company is what causes value, not thinking up some crazy invention in the shower.‘ 
  • Anyone not working full time does not count as a founder, and should receive a salary or IOU rather than equity. If they leave their jobs to join at a later stage, they should receive equity along with the first layer of employees, reflecting the lower levels of risk that they have assumed. 


10 – What other countries can learn from Singapore’s schools

An article in the Economist looked at how Singapore developed into a leading global centre of trade and finance by focusing on the development of its education system, which today is considered among the world’s best. Key features of the approach include: 

  • Singapore favours the traditional approach of teacher-led classes, as opposed to more ‘progressive’ methods designed to allow children to pursue self-directed learning. Contrary to criticism, studies show such approaches to be an effective way of conveying knowledge, while the happiness levels and creative problem solving abilities of students in Singapore are among the highest in the world.
  • Education reform is tested and monitored before undergoing a coordinated, system-wide rollout. The provision of carefully developed resources, such as text books and worksheets, helps to align teaching styles, assessment and accountability.
  • Relative to other countries, Singapore ’emphasises a narrower but deeper curriculum, and seeks to ensure that a whole class progresses through the syllabus. Struggling pupils get compulsory extra sessions to help them keep up; even the less-able do comparatively well.’
  • Singapore focuses on developing excellent teachers, by:
    • Paying them well, at a similar level to those in the private sector
    • Providing 100 hours of training annually, covering the latest educational techniques
    • Enabling ambitious teachers to become ‘master teachers’, which involves responsibilities such as training peers but not the administrative burden of running a school
    • Rigorous annual performance assessments
    • Rewarding the best teachers with large bonuses and postings in the ministry of education

This results in larger class sizes, but that is deemed to be a sensible tradeoff.

Nevertheless, the system is not perfect. For instance, children are split into high ability and low ability schools from the age of 12, while the centralised model may be difficult to replicate at a larger scale.

 

Other interesting things

The inspection paradox: this is a common phenomenon that occurs when the observation of a system subset gives a misleading picture of the system as a whole, by overweighing the subsets that are experienced by most people. For instance, if a school provides 10 classes, nine of which are attended by five people with one attracting 55 students, 55% of attendees will report experiencing crowded conditions, when in reality 90% of classes were half empty. Similarly, by definition, people are more likely to be in a busy plane or arrive at a bus stop during a long interval between busses. Commonly held perceptions are therefore often inaccurate.

A summary of Farnam StreetRyan Reeves provides an overview of the key ideas, frameworks and quotes from more than four years of the excellent Farnam Street blog.

 

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