TFS Project

TFS: In choosing advisers, avoid certainty

In his chapter on the illusion of validity, Daniel Kahneman discredits all efforts to take the uncertainty out of the future. In fact, he finds the more confident an adviser becomes, the more likely they will miss the mark. This false confidence is often based on all the research and analysis the adviser has performed. Unfortunately you cannot work your way away from variance. Tq130705ac

When times are uncertain, we look for the emotional protection of a leader who is full of certainty, but it's actually the opposite of what we should do. We should find a leader who acknowledges the unknowable. A well-prepared adviser can share his or her observations and help you find a good range of reasonable next steps for the immediate future. I've always appreciated Peter Bishop's analogy of being prepared like a good tennis player. Be healthy, be alert, and be prepared to handle the ball wherever it goes.

TFS: You can't reap what you didn't sow--but no guarantees

In "The Illusion of Understanding," Kahneman observes, "A very generous estimate of the correlation between the success of the firm and the quality of its CEO might be as high as .30, ... [This] implies you would find the stronger CEO leading the stronger firm in about 60% of the pairs--an improvement of a mere 10 percentage points over random guessing... Improving the odds of success from 1:1 to 3:2 is a very signficant advantage, both at the racetrack and in business." 

Tq130626hdLast night I was watching a TV show about a man who had been victimized by having a bomb taped to his chest. His friend knew how to defuse it but he had 3 chances and 5 codes to try. So it was likely, but not guaranteed to work. 

That's the way management and marketing operate. You can do everything right, but circumstances often intervene to prevent your success. When I was the Marketing Director of The Guardian Plan at Service Corporation International we had a fabulous plan which was just starting to produce results when the corporation decided to shut down the division because they were unprepared for the finanical commitment. At CGI, we had finally figured out the formula for a successful seminar marketing program when the 'dot.bust' downturn devastated the entire information technology sector, and we were laid off.

All we can do is keep preparing for success.

TFS: Extreme events breed extreme predictions

As marketers, sometimes the best thing to do is hold our course and avoid reacting to extreme events. When something exciting happens we immediately start looking for causes and planning for new directions. Tq130624cjBut a single off-the-chart event does not improve our ability to make predictions. We should become observers at that point.

For me, I think the danger has been investing my time in the wrong area. I enjoy the excitement of chasing down a new opportunity. I love learning new things. I suspect that's why I have been more successful in really structured situations.

TFS: In direct marketing, don't forget to leave some behind

Tq130617lbYou would think that as much as I embrace the principles of direct marketing, that I would remember to create control groups in order to test my efforts. My time is so much more valuable than my money. So every effort I make must be carefully scrutinized for its value. If I don't split the sample I don't actually learn anything. 

In marketing you ALWAYS have less than perfect correlation. So you KNOW that any change you see, however positive, is influenced by factors beyond the marketer's control. If you aren't splitting the sample you aren't really doing direct marketing at all. 

TFS: Beware the lucky dog

In making decisions, we avoid variance. We want to bet on a sure thing. And yet, our desire to win often overcomes us. We pick a stock or a job candidate or a restaurant because it was recently successful. We pay less attention than we should to its track record. We think we have this crucial insight into its success, and we want to jump on the band wagon. But we are deluding ourselves, creating a causal story for the success in our mind but not testing that hypothesis. Tq130607ldWe ignore the enormous importance of luck in that recent success, and when we ignore the luck, "regression to the mean" almost guarantees disappointment.

The only solution I can suggest is to distrust sudden success. One of my favorite movies is Pulp Fiction, where the charachters who survive have a healthy respect for their own luck. When something goes their way, they do NOT assume they deserved it or created it. Samuel Jackson's character gives credit to God. Bruce Willis's character just assumes his luck will change FAST. But neither one of them gets cocky about their success the way the John Travolta character does. That doesn't work out for him.

TFS: Making up stories to remember the truth

Our brains are not wired to quickly grasp statistical realities. We crave cause and effect. Over the centuries some of our best thinkers have tried to help us grasp reality by inventing metaphors and stories that will stick in our mind, such as the "random walk." (Whether or not you believe that stock prices behave that way is not the point. The point is that this statistical hypothesis needed a memorable name to help people grasp it.)

"Black Swan" is another memorable story about statistical reality, this one invented by Nassim Nicholas Taleb.

What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of Tq130605shregular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme 'impact'. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

Another favorite story of mine is "It's not about you." We have a tendency to personalize everything that happens to us. When some poor victim of happenstance (like me) wants to share of tale of woe about how they (I) never get what they (I) want, just roll your eyes and say "maybe it's not about you."

Don't swallow the story

The latest trend in advertising is to tell more stories. Of course, great advertising has always relied on stories, but direct marketing has often been very mechanical. Storytelling classes are now being promoted, and story templates can be purchased.

Tq130528sfDaniel Kahneman points out that plausibility often trumps logic. Our System 1 mind craves coherence and will gladly subsititute something that sounds logical for the hard work of analyzing probability that System 2 could apply. Remenber that phrase, 'you could look it up'? Who bothers?

When it comes to making investments, you should bother. Future market conditions are impossible to predict in the short term, and only slightly less predictable in the long term. A pretty plausible story doesn't negate that. Diversifying your portfolio allows you to accept many outcomes.