From reducing to absorbing complexity

This reminded me of the work we sometimes did as consultants with frameworks, strategy models and elaborate templates. I felt that we didn’t really capture the complexity, we reduced and simplified it in a way which didn’t really work. I don’t think we really saw and allowed for an open system which constantly emerges dynamically, but aimed more for a controlled setting with plans and execution:

“Boisot felt that a fundamental premise underlying bureaucracies was a belief that knowledge is something that can be simplified, and then easily transferred between parties – an orientation towards reducing complexity. (…)

Boisot recognised that shifting the way companies worked with knowledge presented significant cultural and organisational challenges. He felt that the ability to make the shift from reducing to absorbing complexity would be one of the key determining factors about which companies survive the transition to a knowledge economy and which would become the dinosaurs of a former era.”

The fewer assumptions a model has, the more flexible we are and the less obstructed in our observations. The higher our capacity for learning. And the swifter we can act and change course when needed.

Quote from article: Strategy as Hypothesis

 

Ideas for improvement – Google Translate

 

I wonder at what point Google Translate will offer the option of a hyperlink to the original text with the translation.

Sometimes the translation doesn’t make sense and getting back to the original can help – and also help one understand the other language better, maybe even learn…

By effects:
1. free advertising when linked to Google Translate page…
2. some learning on when people want to check the translation which may be an indicator of the quality…

Future of work – Law

Automation is also taking over parts of the legal world – automating previously unstructured tasks into structured tasks, such as ““search-and-find type tasks” in electronic discovery, due diligence and contract review”, leaving the tasks not easily automated to humans:

putting all new legal technology in place immediately would result in an estimated 13 percent decline in lawyers’ hours. (source: CAN ROBOTS BE LAWYERS? COMPUTERS, LAWYERS, AND THE PRACTICE OF LAW)

James Yoon, a lawyer in Palo Alto, Calif., recalls 1999 as the peak of the old way of lawyering. A big patent case then, he said, might have needed the labor of three partners, five associates and four paralegals. Today, a comparable case would take one partner, two associates and one paralegal. (VL: this is a reduction of 75%)

As a lot of the legal work can not yet be easily automated as it is based on complex decision making or just plain “showing up (in court proceedings, talking to clients etc.), the algorithms need to be trained by humans to achieve adequate results. This is a time consuming process, but when it’s done it is quite robust and systematic.

Similar to the master craftsman in the automobile industry, lawyers will have to specialize and let semi-skilled workers and machines do the rest of the work. Routine tasks will be commoditized and cheap, largely done by algorithms and assisted labor:

The data-driven analysis technology is assisting human work rather than replacing it. Indeed, the work that consumes most of Mr. Yoon’s time involves strategy, creativity, judgment and empathy — and those efforts cannot yet be automated. Mr. Yoon, who is 49, stands as proof. In 1999, his billing rate was $400 an hour. Today, he bills at $1,100 an hour. “For the time being, experience like mine is something people are willing to pay for,” Mr. Yoon said. “What clients don’t want to pay for is any routine work.” But, he added, “the trouble is that technology makes more and more work routine.”

A.I. Is Doing Legal Work. But It Won’t Replace Lawyers, Yet.

“Where the technology is going to be in three to five years is the really interesting question,” said Ben Allgrove, a partner at Baker McKenzie, a firm with 4,600 lawyers. “And the honest answer is we don’t know.”

Future of Work – Banking – AI and investing at BlackRock

Apart from the Mergers and Acquisition process and other parts of banking (see previous posts), stock picking is becoming driven by A.I: and human stock pickers are being laid off at Black Rock, one of the largest investment firms globally.

Now, after years of deliberations, Laurence D. Fink, a founder and chief executive of BlackRock, has cast his lot with the machines. On Tuesday, BlackRock laid out an ambitious plan to consolidate a large number of actively managed mutual funds with peers that rely more on algorithms and models to pick stocks.

This has been part of a larger trend for years, showing that most fund managers do not outcompete indices after cost:

Last year, for example, $423 billion left actively managed stock funds and $390 billion poured into index funds, according to Morningstar.

At BlackRock, Machines Are Rising Over Managers to Pick Stocks

Some $30 billion in assets (about 11 percent of active equity funds) will be targeted, with $6 billion rebranded BlackRock Advantage funds. These funds focus on quantitative and other strategies that adopt a more rules-based approach to investing. “The democratization of information has made it much harder for active management,” Mr. Fink said in an interview.

 

Future of Work – Banking – Automation at JP Morgan

JPMorgan Software Does in Seconds What Took Lawyers 360,000 Hours

At JPMorgan Chase & Co., a learning machine is parsing financial deals that once kept legal teams busy for thousands of hours. The program, called COIN, for Contract Intelligence, does the mind-numbing job of interpreting commercial-loan agreements that, until the project went online in June, consumed 360,000 hours of work each year by lawyers and loan officers.

Management miscellania – Common misunderstanding # 1 – good – cheap – fast

Statement: you can’t have good quality, fast and cheap at the same time.

Only:
Good and fast, not cheap.
Good and cheap, not fast.
Cheap and fast, not good.

This is a common misunderstanding: it can be all 3.

Why?

The better your processes, the less waste you have.
The less waste you have, the faster you can produce.
The less waste you have, the higher quality you can produce.
The less waste you have, the less resources you need.

So this then leads to higher value per unit of cost/time.

If you want to improve, focus on value added activities / cost.
If you focus on cost, it invariably leads to worse quality by higher cost.

This is the reason why so many cost cutting operations go wrong…

Future of Work – Banking – Automation at Goldman Sachs

Goldman Sachs is busy automating banking – basically substituting classic banking jobs with engineers. This makes sense as banks mainly process information which often can be done at a lower cost with less mistakes by automated systems.
Original article plus synopsis with examples and questions below:

 

Traders are out, computer engineers are in, as Goldman Sachs goes digital

At its height back in 2000, the U.S. cash equities trading desk at Goldman Sachs’s New York headquarters employed 600 traders, buying and selling stock on the orders of the investment bank’s large clients. Today there are just two equity traders left. Automated trading programs have taken over the rest of the work, supported by 200 computer engineers.

Here the examples for trading:
At its height back in 2000, the U.S. cash equities trading desk at Goldman Sachs’s New York headquarters employed 600 traders, buying and selling stock on the orders of the investment bank’s large clients. Today there are just two equity traders left. (…) Goldman Sachs has already begun to automate currency trading, and has found consistently that four traders can be replaced by one computer engineer, Chavez said at the Harvard conference. Some 9,000 people, about one-third of Goldman’s staff, are computer engineers.
Investment banking:
Next, Chavez said, will be the automation of investment banking tasks, work that traditionally has been focused on human skills like salesmanship and building relationships. Though those “rainmakers” won’t be replaced entirely, Goldman has already mapped 146 distinct steps taken in any initial public offering of stock, and many are “begging to be automated,” he said.
Consumer lending:
Goldman’s new consumer lending platform, Marcus, aimed at consolidation of credit card balances, is entirely run by software, with no human intervention, Chavez said. It was nurtured like a small startup within the firm and launched in just 12 months, he said. It’s a model Goldman is continuing, housing groups in “bubbles,” some on the now-empty trading spaces in Goldman’s New York headquarters: “Those 600 traders, there is a lot of space where they used to sit,” he said.
Revenue per employee has gone up, meaning that Goldman can share the pie with a smaller number of people. One third of them are now engineers (average salary at Goldman is 500.000 USD).
Interesting questions might be here:
What exactly is the value created by these people for their customers and wider stakeholders?
And looking at market rates for employment, what part of the salary might be a proper reflection of the skillset of these people and what part is more related to quasi-oligopolic market power like network effects or regulatory protections?

Bertrand Russell’s message for future generations

Bertrand Russell’s advice:

1. Intellectual: look solely at the facts and the truth derived from those facts.
2. Moral: love by means of tolerance, as we’re so interconnected.

Bertrand Russell – Message To Future Generations

In 1959, Bertrand Russell, the Nobel Prize-winning philosopher, mathematician and peace activist was just short of his 87th birthday, when he gave wide-ranging interviews to the BBC and the CBC. In this capture Russell giving life lessons – lessons about critical thinking, love and tolerance – to a generation living 1,000 years in the future.

Changing behavior – when, how and how much? Comments on an article on the Gates Foundation-Blog (2013)

 

 

This sounds like an interesting example. If I understand correctly, the idea is to stimulate farmers to “pay it forward” by giving some of their proceeds to other farmers. My question here is: why? Why not stick to giving them beans, help them to grow them successfully and spread the program?

It seems that the underlying assumption is that since they have received help, they should also help others. They should reciprocate. And the assumption is that it is not enough to redistribute this newly earned wealth within their own social environment. But reciprocation is only valid when some of the beans (assumption: they got beans, they give beans to others) should be redistributed among the other farmers.

Some problems – do you really want them?

1. Redistribution of wealth:
As they may all not be very rich (and even then people underreport…), it seems very natural to want to save something for themselves. Let’s not even start hypothesizing what social and other factors may come into play when you effectively are redistributing wealth to these other farmers (who might be friends, enemies, competitors etc.). Because it seems that this is exactly what you are doing here.

2. Linking proceeds with “paying forward” incentivizes cheating:
The amount of what they donate is linked to the proceeds they generate. And of course they underreport. In a way, the whole idea incentivizes cheating as a behavior.

3. Compliance costs resources:
There is a “compliance problem”, because you have to spend money on resources to control the adequate reporting of the farmers proceeds. So in a next step you could try and look for a simple metric which is independent of the individual success of the harvest, but more general and easily computed. So people don’t have to cheat. But then you still have the problem of administering etc. So essentially the problem doesn’t go away.

A simple heuristic could be “Give back the beans you received”. In bad years that might be too much, in good years too little. The question is more: does the amount of beans they give back really matter that much?

4. “Nudging” makes it more complicated:
What to do then? HarvestPlus then looks for a way to “nudge” them into doing this. In order to “motivate” them to donate one way of doing this is by means of a lottery in advance and a ceremony. So in essence you make a very “simple” thing (donating beans to farmers) more and more complicated. As much as I like behavioral change strategies, is this really the best option?

So starting from simple “linked” assumptions (“paying forward” with “with beans” & “to other farmers”) we end up with something which gets more and more complicated.

Let’s get back to the starting question:

Why wouldn’t we want the farmers to decide themselves what they want to do with their crop? So they can “pay forward” to their own best interest. We might even encourage them to save, so they have some resources when times get rough. There wouldn’t be any compliance issues. No cheating.

If we apply this to ourselves – and walk a mile in their shoes – how would we feel?

Imagine having received a “free” job training (or just your education) in the US, which asks you to donate to others after you have succesfully reentered the job market (depending on your selfreported income). How does that sound?

That puts you into a rather difficult position. Wouldn’t you rather be taxed directly, so the state does the redistribution? Or would you prefer to be asked to contribute in another way? Maybe educate others, so they can make more “educated choices” and modulate the behavior of their most successful peers? Might that not be a more important goal than being “forced” to pay forward to people you didn’t choose?

What do you think? Am I missing something here? What mistakes did I make? I look forward to the discussion!

(This comment was partly inspired by a conversation with Gerd Gigerenzer at TEDx Zurich about educating people to make informed choices. Any mistakes are all mine.)

Hugo Mercier et al. – Explaining the cultural success of bloodletting – alternative factors?

bloodletting-16th-century-granger
I came across an interesting article on bloodletting trying to explain its success and wondered if there might be alternative factors:

  1. the availability effect
  2. the recency effect
  3. the post hoc ergo propter hoc-fallacy
  4. incentives
  5. activity vs. passivity (sense of agency)
  6. the placebo effect

1. Availability – Frequency:
If one asks in which instances do we see blood, it seems there are a quite few occasions. Maybe even more so in the past than in the present. (Assumption: I don’t have historical data on the prevalence of bleeding as percentage in occurence in illnesses. I assume one might be able to find it).

Bleeding is quite common (in women even more so), observable and often non-lethal. People get better. (Edit: The same with f.e. the common flu, after a lot of sneezing, coughing up phlegm and blowing one’s nose (relieving oneself of unwanted substances in more or less liquid form)) Inversely, death itself and many illnesses do not involve any bleeding…

2 and 3. Recency and Post hoc, ergo propter hoc:
Especially in common cases of inflammation by an object/sting etc., the cure often seems to open the wound and push the puss/splinter etc. out. The marker that seems to say: “you’re good” is, apart from relieved pressure etc., no more puss comes out of the wound, instead of it we push blood out of it. If the inflammation is not contained by the immune reaction of the body, it can lead to a lethal sepsis (blood poisoning). (Edit: I wonder if this was sometimes called “bad blood”?)

dilbert-post hoc ergo propter hoc

So if we now assume, that this “blood comes out of the body” was the last thing which happened, is interpreted as a sign for “you’re going to be ok”, then this fits well into Hugo Mercier’s et al. attractor/reasoning/relevance argument. It also fits well with availability bias, recency bias and post hoc, ergo propter hoc fallacy.

The symptom becomes a cause, since we just seem to know from experience that after blood letting the person gets better (pattern recognition = then and then and then), but we don’t have a better model to explain the phenomenon for it (theory of mind). To a man with a hammer, everything looks like a nail.

4, 5 and 6. Incentives, activity and placebo:
If a little bloodletting would normally not kill a patient, it was a rather safe way of generating revenue. The equivalent of that today might be the prescription of some drugs or treatments.

It also seems that many common diseases in the past were not very well treatable: Dysentery (the “bloody flux”), Ergotism (“St. Anthony’s fire,” “holy fire,” “evil fire,” “devil’s fire,” “saints’ fire”),  Gonorrhea, Influenza, Leprosy (“lepry”), Malaria (“the ague”), Measles, Plague, Puerperal fever (“childbed fever”), Smallpox (the “red plague”), Typhoid fever… (http://www.labelle.org/top_diseases.html)

Treating patients with bloodletting was also a safe way of actually doing something, whereas in many cases the patient could not really be helped. The treatment of bloodletting might even help the placebo-effect.

Hypothesis:
A. I expect people, who from personal experience had seen many people “bleed to death”, to be less inclined to the practice of bloodletting (patients refusing bloodletting). In this way we might be able to factor out the reputational investment of the doctor.

I guess one can come up with more testable hypotheses to falsify the 6 factors.

The original article is:
Miton, H., et al., Universal cognitive mechanisms explain the cultural success of bloodletting, Evolution and Human Behavior (2015), http://dx.doi.org/10.1016/j.evolhumbehav.2015.01.003)

The abstract:
“Bloodletting—the practice of letting blood out to cure a patient—was for centuries one of the main therapies in the west. We lay out three potential explanations for bloodletting’s cultural success: that it was efficient, that it was defended by prestigious sources—in particular ancient physicians—, and that cognitive mechanisms made it a particularly attractive practice.

To test these explanations, we first review the anthropological data available in eHRAF. These data reveal that bloodletting is practiced by many unrelated cultures worldwide, where it is performed for different indications and in different ways. This suggests that the success of bloodletting cannot only be explained by its medical efficiency or by the prestige of western physicians. Instead, some universal cognitive mechanisms likely make bloodletting an attractive form of therapy.

We further test this hypothesis using the technique of transmission chains. Three experiments are conducted in the U.S., a culture that does not practice bloodletting. Studies 1 and 2 reveal that stories involving bloodletting survive longer than some other common therapies, and that the most successful variants in the experiments are also the most successful variants worldwide. Study 3 shows how a story about a mundane event—an accidental cut—can turn into a story about bloodletting. This research demonstrates the potential of combining different methodologies—review of anthropological data, experiments, and modeling—to investigate cultural phenomena.”

Peter Drucker Forum 2014 – Interlocking goals, practices and metrics (Systems!)

Steve Denning summarizes it neatly:

It also came out that the goals, practices and metrics of this traditional way of running organizations fitted together as a kind of perfect marriage. That was because when you have a goal of making money for the shareholders and the executives, you cannot inspire people to pursue that goal with any commitment or passion. So you have no choice but to run the organizations with command-and-control. You had to have hierarchical bureaucracy to force the employees to pursue a goal that they didn’t really believe in. So shareholder value and hierarchical bureaucracy fit together in a perfect interlocking relationship, like a hand in a glove If you try to change one aspect, such as better team practices, the other aspects—the goals and metrics—undermine the change. So these organizations are stuck in a state of suboptimal equilibrium. When you throw in the phenomenon of exorbitant executive compensation that is linked to keeping up the stock price, it was hard to see how real change could be possible.

Viktor Frankls Search for Meaning

Viktor Frankl’s “Man’s search for meaning” has been one of the most influential books I’ve read. I try to live by it every day. Maria Popova has a wonderful article about the book:

Here the main message in my view:

Everything changes in life, so the best thing one can do, is choose one’s attitudes:

[E]verything can be taken from a man but one thing: the last of the human freedoms — to choose one’s attitude in any given set of circumstances, to choose one’s own way.

This attitude is the ultimate freedom:

Every day, every hour, offered the opportunity to make a decision, a decision which determined whether you would or would not submit to those powers which threatened to rob you of your very self, your inner freedom; which determined whether or not you would become the plaything of circumstance, renouncing freedom and dignity to become molded into the form of the typical inmate.

There is no meaning other than the meaning we experience while we live life:

Ultimately, man should not ask what the meaning of his life is, but rather he must recognize that it is he who is asked. In a word, each man is questioned by life; and he can only answer to life by answering for his own life; to life he can only respond by being responsible. (…)

This emphasis on responsibleness is reflected in the categorical imperative of logotherapy (Frankls school of thought, VL), which is: “Live as if you were living already for the second time and as if you had acted the first time as wrongly as you are about to act now!”

This idea is part of a wonderful movie “About time”, well worth watching:

Reinhold Sprenger – Veranstaltungen betriebswirtschaftlicher Rationalität

“Mal ganz persönlich an Sie gerichtet: Was ist der größte berufliche Irrtum, dem Sie je aufgesessen sind?”

SPRENGER: Ich habe lange geglaubt, Unternehmen seien Veranstaltungen betriebswirtschaftlicher Rationalität. Das sind sie nicht. Es sind vielmehr Theateraufführungen, in denen viele Spielelemente nur deshalb berechtigt erscheinen, weil sie der Organisation als Organisation geschuldet sind. Also ihrer Eigenlogik. Das Spiel mitzuspielen, ohne zynisch zu werden, das ist die Kunst.”

Aus: http://www.absatzwirtschaft.de/content/marketingstrategie/news/employer-branding-hat-keine-substanz;81281

Joseph Stiglitz – Corporate Welfare

“Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits.C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.

If it is not the inexorable laws of economics that have led to America’s great divide, what is it? The straightforward answer: our policies and our politics.”

“So corporate welfare increases as we curtail welfare for the poor. Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits. The banks that brought on the global financial crisis got billions while a pittance went to the homeowners and victims of the same banks’ predatory lending practices.”

Ray Dalio: Decision Rules – “Have we got this right?”

Admitted, I am not a big fan of the hedge fund industry and its remuneration. But what I found interesting is the way some of them work. A great article in The New Yorker about Ray Dalio’s Bridgewater Fund makes for a very interesting read – especially the part about the principle-based approach. Smarter thinking…

Some excerpts from the interview:

”Our greatest power is that we know that we don’t know and we are open to being wrong and learning.”

”I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one’s strengths and weaknesses are.”

One rule of radical transparency is that Bridgewater employees refrain from saying behind a person’s back anything that they wouldn’t say to his face.

(On Meditation) “It’s just a mental exercise in which you are clearing your mind,” he said. “Creativity comes from open-mindedness and centeredness—seeing things in a nonemotionally charged way.”

“They (Bridgewater, VL) are consistently innovating—constantly soul-searching and asking, ‘Have we got this right?’”

To guide its investments, Bridgewater has put together hundreds of “decision rules.” 

“The duty of a leader, first and foremost, is to be transparent.”

“the intention is to make people better. . . . I have never seen a C.E.O. spend as much time developing his people as Ray.”

Dalio has published his principles on his company’s site, Bridgewater.

In a letter Dalio and his wife described their reasoning for their philanthropy and joining the Gates-Buffett giving pledge. Happiness does not increase after a certain level of wealth with more wealth, but through meaningful relationships and work. And by charitably giving making a positive impact on other people’s lives:

Tom Rollins: the economist’s argument against shareholder first-strategy

This article by Steven Pearlstein is a good synopsis of management based on shareholder value. He describes the history, ecosystem and proponents, its critics and possible future:

What I found most interesting was the intellectual argument from an economist’s point of view against shareholder first-strategy, as formulated by Tom Rollins:

“at the foundation of all microeconomics are voluntary trades or exchanges that create “surplus” for both buyer and seller that in most cases exceed their minimum expectations. The same logic, he argues, ought to apply to the transactions between a company and its employees, customers, and owners/shareholders.

The problem with a shareholder-first strategy, Rollins argues, is that it ignores this basic tenet of economics. It views any surplus earned by employees and customers as both unnecessary and costly. After all, if the market would allow the firm to hire employees for 10 percent less, or charge customers 10 percent more, then by not driving the hardest possible bargain with employees and customers, shareholder profit is not maximized.

But behavioral research into the importance of “reciprocity” in social relationships strongly suggests that if employees and customers believe they are not getting any surplus from a transaction, they are unlikely to want to continue to engage in additional transactions with the firm. Other studies show that having highly satisfied customers and highly engaged employees leads directly to higher profits. As Rollins sees it, if firms provide above-market returns—surplus—to customers and employees, then customers and employees are likely to reciprocate and provide surplus value to firms and their owners.”

Or as Nick Hanauer says about that train of thought in a recent article on Politico:

The thing about us businesspeople is that we love our customers rich and our employees poor.”

Not coincidentally, several large companies have done extremely well who succeeded at becoming “platforms” which create larger surpluses for customers, employees, suppliers and partners, and owners.

For example Google (compared to traditional advertising and market research companies) provides a larger surplus for companies who advertise and at the same time for users, making it easier to find things, people, places, documents etc. Their business model is more inclusive, thereby fostering a larger ecosystem.

PS A slightly longer version of Pearlstein’s article was published in a Brookings Institute paper: