Daniel's blog

People in the West, be it general public or politicians, have huge expectations from future economic development. Our living standards in the West have hugely increased over the past five decades due to unprecedented economic growth. People think this trend will continue – they take on more and more debt and have expectations of ever increasing living standards. Stephen King, HSBC’s group chief economist, gave a talk at the LSE about his new book this week – When the Money Runs Out: The End of Western Affluence. This blog post is about why we had it so good over the last 50 years and why the future might be different to what we think.

Stephen pointed out at the beginning that growth in the West is slowing. In each of the previous five decades, the UK grew at approximately 30%, 13% (this was the 70’s oil crisis), 27%, over 30% and only 4% respectively, 4% being the growth in the last decade from 2003 to 2013. Yes there was the 2008 financial crisis, but for example the 70’s had their fair share of crises as well. Chinese and Indian economy grew at 130% and 80% respectively over the same last decade.

He identifies three main drivers of why the West grew so much from the 1960’s to 2000’s and why the growth is slowing now. One thing to note about the drivers is that they are unlikely to happen again.

The first one was opening of world trade driven by OECD agreements. This was trade mainly between western countries and also Japan. Growth in trade has slowed down considerably in the last decade and any further global growth comes mainly from South-South trade between emerging countries. The only European country which was able to capitalise on the growth of China in a meaningful way is Germany, the others did not really see any major increases in exports. There do not seem to any similar markets about to open up as we saw 50 years ago.

The second one was integration of woman into the workforce. Huge new pool of educated workers became suddenly available and was a big impulse for the economy. Quite obviously, there is no third gender to integrate.

The third reason was the growth in consumer credit. It allowed many families in the West to smooth their consumption patterns over time by getting access to credit to buy fridges, washing machines, TVs or homes. The household are unlikely to be able to take on much more debt.

Some might say that growth is not so important. Stephen argued that it is important indeed, because if new wealth is not created but destroyed, our economy becomes in fact a zero sum game. One has to lose out if other is to gain. With the rise of technology and globalization, it is ever easier for smart people to engage with the economy and to benefit from trading in it while the need to employ unskilled workforce in the process is lower and lower. It is therefore the very people who tend to disagree with the need to grow the most that should be its most vocal supporters.

This was just a brief introduction to the book which covers a lot more. I bought it so I will write another post once I have read it. The main takeaway at this point is that the West should realise how fortunate it was in the 50 years preceding this millennium when living standards of 99% of people dramatically increased. This is however not something everybody should take for granted moving forward. People and governments alike should understand that some of them are living beyond their means by relying on debt too much. They need to readjust their expectations from the future and became more realistic in terms of how much their living standards are likely to increase and how much debt they will be able to service. Another interesting point is that most of the developing countries still have the three dividends mentioned above ahead of them.

Some people tell me I plan too much and others that I plan too little. I think this is either because people have differing attitudes towards planning or because they understand meaning of the word differently. The fact is however, we all think about the future sometimes. This blog post is about how I like to think about it.

Why we do not like to plan

A lot of people do not like to plan. Some are afraid that they will make great plans which the reality might not live up to and that they will be disappointed afterwards. So in order to avoid this disappointment, a negative gap between their expectations and the reality, they choose not to make any plans in the first place. Others are afraid that once they make a plan, they will be restricted by it and will feel obliged to execute it at all costs. So in order to not lose this perceived flexibility, they do not make any plans as well. There are also some people who simply do not care about their future even though I would like to believe this is just a minority.

The first two reasons why people do not like to plan make sense and are very close to human nature. None of us want to regret, be disappointed or feel restricted. And all these feelings are indeed bound to occur if we understand planning as a prescriptive activity and plans as a clear statement of what has to happen in the future. Plans then became a form of commitment we have either internally with ourselves or, if we share our plans publicly, with others. There are certainly benefits to making commitments in this way – our increased motivation to work hard or extra predictability for others. But there are also two crucial limitations which make prescriptive planning a lot less attractive proposition at least when it comes to our personal lives.

The first limitation is that for the reasons mentioned above, people often end up not making any plans at all. They then get trapped in their status quo even though they could have improved their situation had they acted with a bit of foresight. The second limitation is that most of the issues we are faced with are complex and unpredictable ones. It is therefore not the best idea to make a fixed plan of what has to happen over the next year or so using only our past knowledge. The circumstances are likely to change, we are likely to learn new things and figure out better ways of getting to where we want to be or realize that we actually want to do something else all together. I therefore like to think about planning only as of a guide to action and a platform to explore what can happen in the future.

Planning as a road trip

A good metaphor would be a road trip. Let’s say we want to explore the Europe by car over the next three weeks. One can approach planning such trip in three ways. A prescriptive planner would do a precise itinerary of where we should go each day, how long we can stay there for and what we should do there. If we get to like some place a lot and would like to stay there couple extra days, it is not possible because it would mess up the whole plan. If one road would be closed down and we would have to take a long detour, we might not get to see our final destination because we will simply run out of time.

People who do not plan at all would just start driving, see places along the way and decide every morning where they want to go. While this sounds attractive, they might miss out on most of the sites they wanted to see because they will not know how to get there. Once their holiday is over and they have to fly back home, they might realise they spent the whole time driving around one country as opposed to seeing Europe as they originally wanted to do. They might not even go for the trip at all as they might be afraid they would get lost and will therefore stay at home. I have seen both of these approaches to planning before and they unfortunately leave people disappointed at the end of the day usually.

This is why I propose a third approach. Sticking with the road trip example, we explore what all there is to do in Europe and compile a basic list of things we would like to see and do. We accept the fact that this list is incomplete because we can learn about Europe only so much before we actually get there. We know we will come across some extra place as we go along. We also look at driving distances between the places and for how long we would like to stay at each place so we get an idea of how much we can realistically manage to see.

The objectives of planning are not to make a fixed plan. They are rather to give us comfort that we know what we can do, should we decide to do it and to inform our future decision making. If we get to like one place and want to stay there longer, we will know that we can do so but that we will not be able to see another place in that case – it allows us to make educated trade-offs.

The very fact that we make a plan, gives us a level of comfort and self confidence that we can manage the trip and allows to set into action (e.g. book the plane tickets). This is very important as a lot of people never get to make the first step towards achieving something. Once we land, we can start executing the plan but we also know we can change it any time should we find a shorter way of getting to where we want to go or should decide to go somewhere else.

Planning in this sense is therefore not a prescriptive exercise but rather an exploration of what all can happen in the future. Since the future is uncertain, we can also make various scenarios (e.g. what to do on a sunny day or on a rainy day). At Shell, where scenario planning was pioneered nearly half a decade ago, they view scenarios as ‘tools which help leaders prepare for futures that might happen, rather than the future they would like to create’ (Living in the Futures, HBR, May 2013).

Once we start thinking this way, we often realise that in order to achieve something in the future, we need to do something today or within the next couple of weeks (e.g. to apply for visa on time before our departure date so that we can board the plane). A lot of people have to compromise on their dreams because they realise only too late that they missed out on something. By setting ourselves into action today, we also get better prepared to capitalise on opportunities we might come across in the future. Our plan is often unlikely to work out as intended but because we had a goal and we were working towards it before, that work might pay off now to achieve something even better that what was our original goal.

The point of this blog post was to change people’s perceptions towards planning and to understand it not as a restrictive but a liberating activity. Planning as an exploration gives us the confidence to get moving, makes us appreciate what needs to be done to get where we want to go and allows us to change our plans for the better as we go along because we are able to evaluate consequences of our decisions and therefore make good trade-offs.

One my friend asked me couple weeks ago how free I think I am. In the discussion that followed, I realised that there are many ways of understanding freedom and that I was not able to give a simple answer. She thinks that I sometimes constrain myself too much in what I do and that I should plan a bit less. I think that it is important to view freedom not only in terms of what I can do today but also in terms of what I will be able to do in the future. This blog post is about how our actions today determine what we can do tomorrow and how we should make robust decisions to maximise our freedom. The next post will be on planning.

I mentioned in one of my previous posts the importance of planning and deferred consumption. The post was in the context of why some societies are more developed that others. One of my points was that people living in cold climates were forced to learn to plan (I have to build a house and collect wood in the summer otherwise I will freeze to death during the winter) and to get used to the concept of deferred consumption (I cannot eat all my grain during the winter even though I am really hungry because otherwise I will have nothing to sow in the spring). Having applied these concepts also to other parts of life was an element that allowed some societies to develop faster than others. I think we should apply these concepts to our thinking about freedom as well.

Let me give you a simple example. All young people essentially face a choice of (at least sometimes) studying hard for school or spending most of their time just hanging out with friends and enjoying themselves. The latter is what some would call freedom. The problem is however, that without good education, their options of what they can do in the future will be severely limited. A lawyer can go work as a waiter but a waiter cannot work as a lawyer. A decision to work hard at school gives us more freedom of choice in the future than exercising our freedom not to work hard when young. This is an example of deferred consumption applied to freedom and we can call such decision a robust one.

Keeping your options open

Robustness is a very interesting concept. Most of our decisions are consequential. This means we do not have to decide our whole life at one time but rather more slowly step by step. But the decisions we make now will determine what we can do in the future. Assuming we can decide between options A, B, C and D robustness is an expression of what percentage of total possible desirable future options (desirable future options resulting from A, B, C and D combined, not counting the undesirable options which will inevitably also emerge) will decision X give us. The higher the percentage the better, the more robust the decision.

I did not really know what exactly I want to do when I was 18. I therefore decided to pass my A-levels from mathematics in addition to literature which would give me the option of doing quantitative as well as qualitative degrees at the university. Still undecided but already a bit more focused, I afterwards applied to BSc. Management at one of the best universities in the UK which has really allowed me to do almost anything afterwards. This was a robust decision I am glad I made. Had I decided not to go to university at all or to study something like medieval history, my options would be much more restricted now.

There are two main takeaways from this post. The first one that is it a good idea to occasionally restrict our immediate freedom for the benefit of our future freedom. The second one is that when making decisions, we should choose an alternative which would give us the highest number of favourable future options as opposed to picking just the easiest one. This might sound obvious, but I never stop being surprised at how often people prefer immediate satisfaction to future freedom.

An important point to keep in mind here is of course that we should not go to the other extreme as well. That is to give up on all our immediate freedom for future benefit. Sticking with the example of storing grain, one cannot store all the grain otherwise we would die of hunger; one has to eat well to be strong to be able to sow the field that much better when the spring comes. The same applies to just taking it easy and having fun sometimes.

Our thoughts can be either complex or complicated or both. One can speak in a really clear way or in a very complicated way. In either mode, one can be saying very simple things or very complex things. It is therefore important to distinguish between  these two adjectives. This blog post is on speaking about complex things in simple terms and how we often get it wrong.

If we know only a little about some topic, we speak about it in simple terms if at all, using our everyday language. This is because we do not know what we do not know, so we by default have to keep it simple. It is worth noting however, that simplicity does not always equal to brevity for some people can take a really long time to convey a simple thought they do not even know much about.

When we dig deeper into a topic and we learn more about it, we start understanding parts of it. But we also realize that there is so much more to learn about it – we know what we do not know. This is the most tricky phase. Because we are eager to use all our new knowledge, we are no longer able to speak in simple terms only. Additionally, by trying to acknowledge and compensate for the known unknowns, we start speaking in a really complicated way. Our message becomes a lot less comprehensible.

It is only when we become really familiar with the topic that we are able to speak about it with clarity again. We know what we do know. We are able to pick only aspects most relevant to our audience and convey a complex thought in simple terms. This is the ideal phase. I always enjoy coming up to somebody with deep knowledge of an unusual field and asking that person to tell me in couple sentences about what they do. If they really understand their stuff, they are usually able to do so.

It is important to be aware which phase we are in. If we are in the first one, we should be careful not to be making any big claims about our knowledge of the topic. We should acknowledge we do not know much about it, speak briefly about it, and ask questions or learn more about it. If we are in the second phase, imagine how lost the poor guy on the other side of the table must be. We are now in a position to synthesise and to ask better, more targeted questions about the topic so we should do that rather than start rambling for ages. Finally in the third phase, we can share with others our gift of understanding complex topics in beautiful simple terms. I think this makes much better impression than using complicated terms just to show off we know them.

And always remember what Albert Einstein said:

“If you can’t explain it to a six year old, you don’t understand it yourself.”

Randomness is one of the key concepts the nature rests on. The very fact you exist, the fact you are reading this blog post or the fact you (might) know me is random in essence. Some people call it fate however. I have been hearing this word a lot lately. It happened because it was meant to happen. Or, if it is meant to happen, it will happen. While I sometimes very much enjoy this romanticised perspective on the world as well, I have always been struggling to fully buy into it. Things do not just happen because they are meant to happen; there must be something more to it. This blog tries to uncover this topic using concepts of randomness, exposure and ability to spot and to capitalise on opportunities.

Imagine a hypothetical example of you meeting an old friend you have not seen for ages at a party you were not intending to attend and he ends up getting you a job in his friend’s company. You take it, you really like it, your new boss loves you and in fifteen years you assume his/her job. At that point, your grandmother might say something like ‘you were always meant to become the boss of this pharmaceutical company, it was your fate and I am so happy you are doing it now!’ Was it really? Let’s look at this example more closely.

Firstly we have to accept that lot of things in the world happen on a random basis. The fact that your friend you have not met for years was at that party was random as was the fact he knew a person who was looking to hire somebody like you at a time when you were job hunting. So try getting comfortable with the fact that life throws a lot of stuff in your direction and that it does so on a very random basis. This is the bit we cannot control.

Where fate originates

The other two elements – exposure and ability to spot and to capitalise on opportunities we however can control. Since things happen on a random basis, some bad and some good, the amount of good opportunities you came across becomes a game of numbers. The bigger exposure you have, the more opportunities come your way, a portion of them being good. By eventually coming to the party as opposed to staying at home, you increased your exposure.

Finally you can control also the third element which I call ability to spot and to capitalise on opportunities. Because even if you had a massive exposure and were therefore getting lot of opportunities but you were not able to distinguish good ones from the bad ones and to pro-actively pursue the good ones, you would still not get anywhere. Once your old friend mentioned to you he knows somebody who is hiring, you called him up the next day, took a number on that guy, got in touch with him and persuaded him to hire you.

This is what truly makes a difference and is at the root of why you are where you are. Calling your life fate is suffering from a retrospective illusion of predetermination even though what actually happened was just a combination of random events and (lack of) your conscious effort.

The main takeaway therefore is that while we cannot completely control what random opportunities come our way, we can actively control how much randomness we expose ourselves to and where we do so. Then it is up to us to recognize the good opportunities passing by and to grab them. This is where I believe fate originates.

Note: If you have a mathematical mind, you can imagine fate as a product of a function with a random element in it and two variables. You can control the result you get by increasing/decreasing those two variables.

Just came across a great commentary in the FT – Smile if you’re European.

“Europe is having a terrible time – except compared with probably every other continent and any time in history…”

I wrote a blog post along similar lines over a year ago, when I spent some time in Europe right after getting back from my placements in Colombia and India. You can read it here: Ennui and effete European society

The word ‘rationality’ often conveys sense of maturity, responsibility and diligence. Gut feeling, heart or instinct are on the other hand associated with being daring, unreasonable or outright foolish. I would like to argue in this blog post that rationality is a very elusive concept which has many limitations and should not be applied to all problems. Relying on rationality in decision making can at times lead only to formalization of our instinctive errors and an illusion of control which is more dangerous than accepting from the start that the decision we are making is based on our gut feeling and treating it therefore as such; that is with extra alertness.

Limitations of rationality

Rational decision making is basically designing a mental model of what can happen in the future on the basis of which we subsequently make a decision. There are however in my opinion three main flaws of rationality. Firstly it is bounded by our own experiences, secondly we can never fully de-bias ourselves when estimating probabilities of future states of the world and possible consequences (most decision problems are unique and we therefore lack any objective reference point) and thirdly we are limited by our own cognitive abilities to process complex problems.

As for the first limitation, rationality is making the best decision under a certain set of assumptions. And here lies the problem – our assumptions are inherently imperfect because we can never know everything. We are basing them only on what we know yet there is so much more what we do not know and what we are not including in our model. Since everybody is unique, rationality is also individual and thus not universal. All the claim rational decision can therefore really mean is the most sensible thing to do given my very limited conscious knowledge of the problem.

The second problem is that rationality, despite its name, is hardly ever objective. Most decisions we face in life are one-off decisions (either because the decision itself is new or the context has changed). Since we have no objective reference points any probabilities we assign to the possible future scenarios in our model are therefore purely subjective. This means they are likely to be biased in just the same way as our instinctive decision making. Even though the fact we assess every probability individually can make us assess them better by devoting it more time, it is not sure this actually leads to better estimations. What it does lead to however is formalisation of our biases which can lead to wrong decisions looking as the rational ones.

Finally there are limitations given by the ability of our brain to consciously process large amounts of information. When facing messy problems we are likely to omit some important factors in our model which can again lead to a wrong outcome posing as a rational one.

So what should we do?

You might be asking at this point so what is the alternative. I believe that when facing complicated non linear and hard to define problems our brain works better in the sub-conscious mode than in the rational one. This is how animals think and how humans have been thinking for a long time as well.

It is only recently that we have started to formalise our thinking and while this has lead to great developments in our society, most of these developments happened either by chance or in an expert mode. That is by people who were experts in their fields and therefore had an in depth specific knowledge which they could utilise for rational decision making – they had a good set of assumptions. Most decisions are however not restricted only to one or two fields in which we posses expertise and so there is no point in pretending we consciously understand the problem.

We should therefore accept that our assumptions are imperfect, that we are biased when building the model and that we are unable to fully consider even the limited set of assumptions we have and not take the outcome of our rational decision making as the only possible solution. Letting our brain process all the information itself and trusting our gut feeling might be just as effective. I would like to conclude with an excerpt from Steve Job’s commencement speech at Stanford University in 2005:

‘And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.’

Note: There are many problem structuring techniques to help overcome some of these disadvantages, in fact it is what I am doing my masters at LSE in right now, but they are often impractical to use in real life becuase of their complexity hence this post!

One of the key skills of a facilitator or a manager working with a group is to make the people understand what they are doing and why they are doing it – in other words – to make them feel comfortable about the process even though it might not immediately appear like the group is moving towards the intended outcome. One can apply this to his/her life as well to better understand where he/she is right now. While we can group these processes along many dimensions, the one I have found most useful divides processes into divergent and convergent ones.

The whole idea is that first we go wide, we diverge into many options, and then we go narrow again, we converge towards a solution. To illustrate this on a simple example, we can look at a process of trying to achieve a certain aim. Such process usually goes through several stages. A very basic divide would be:

1. We have a rough idea of what we want to achieve
2. We come up with many options of how we can achieve it
3. We select the best ones by applying various filters to all the options we came up with before
4. We execute those options

If we were to draw what is happening, it would look something like this:

Divergent processes

Firstly we diverge – we are creative, we brainstorm and generate as many alternatives as possible. This is very important because even if we would have very good criteria for choosing the best alternatives afterwards, we can end up with a bad outcome if we did not have any good alternatives to start with.

The problem is however that some people do not feel comfortable with this part of the process. After some time, they can either feel like they are losing time because they think sufficient number of alternatives has already been generated and they want to move towards choosing the best one or they feel uneasy and stressed about the sheer number of options, thinking that it might be impossible to ever come up with a simple solution. This is where the facilitator needs to step in and make sure that everybody understands that we are exactly where we should be at, in the divergent phase, and that we will converge in order to come up with a solution a bit later on. This makes people more comfortable with the process and allows them to focus on the problem more and to ultimately come up with a better outcome. Which is where the convergent phase comes in.

Convergent processes

The task is to narrow down the number of option to only a few best ones  in the convergent phase. There are multiple ways of doing so such as applying certain filters (having cut-off points) or if they are mutually exclusive comparing trade-offs between the options .

It is worth keeping in mind that these processes can often be found within each other as well. For example when starting with only a basic idea of what we want to achieve, we might diverge in terms of our objectives only to converge to the most important ones later on and to subsequently start the whole process again with diverging into possible ways of achieving those.

I have used this concept many times during discussions with teams I lead to make sure we consider all relevant options and choose the best one. I have also been thinking about my life over the last couple years in this way. I have been travelling to many countries, trying various things and meeting lot of people in order to experience what all is out there in the world and to see what I really want to care about in the future.

So next time you feel a bit lost or feel like your chosen alternatives are not really that good, think about what part of the process you are in and decide if you should stay there a bit longer or if you should go one step forward or backward.

I have been coming across the word context a lot lately. So much so, that it really forced me to think about it and to appreciate how vital it is to our ability to make good decisions as well as to understand decisions of others and the world around us as such. Is £1000 a lot of money? When your friend was angry some time ago, was she being unreasonable? Is 15 degrees a warm weather?

Well, we cannot answer any of those questions without knowing their context. Extra £1000 is a lot to a student living off couple hundred pounds a month but not to a company for which if might represent only a 0.1% increase on profits of one million. Your friend might have been unreasonable if the cause of her anger was having to work overtime on a one off basis but not if her boss shouted on her for no apparent reason. 15 degrees is pretty cold in summer but unusually hot in winter. This might all seem obvious but I would bet we don’t always take the time to understand the context before making or perhaps even more importantly, interpreting one’s decision.

Making a decision…

When making a decision, we need to realise what are the options we have realistically have, what consequences would they have, what is the likelihood of them working out and how would they be perceived – we need to know the context of the problem. If we come up with a model solution but we cannot implement it because of a specific organizational constraint, it’s a useless one. In a similar fashion, if we do not understand how the final decision maker will perceive our recommendation and if we would not be able to secure her buy-in, even the ‘best’ solution in the world would be useless in that context.

Organizational models (see for example my previous post here) or personality models, heuristics and preferences (e.g. if the final decision maker is risk averse, if she prefers quantitative or qualitative analysis, what are her key concerns etc.) are usually good starting points for gaining deeper understanding of our context.

…& interpreting a decision

Being aware of the context becomes even more crucial when we are interpreting someone else’s decision. What is an overreaction in some situations is an appropriate response in other situations and vice versa. Big risks can go unchecked and relationships built over a long time can go sour if we wrongly evaluate somebody’s decision. This can be because we were too lazy to dig deeper and understand the context in which that decision was made before we start judging it or because we misunderstood what message the other person was really trying to put across.

So remember, although it might sound obvious, context matters and it often matters more than you think!

I have recently been thinking about to what extend we can influence what is happening to us, if we should do so and how we should react if things don’t go as planned. Here is what I came up with.

Let me start more generally. When making a decision, we either do what we feel is right or we think of our objectives, generate some alternatives, assess how likely they are to help us in achieving those objectives and decide accordingly. From there on, things can go either well or not so well. It is however very important to separate the decision making process and the decision itself from outcomes of that decision for we can directly influence the former but not the latter. It follows therefore, that if we took the best decision possible at the time when we had to make it, we should never regret having taken it regardless on the outcome of that decision.

Influence what you can and don’t worry about the rest

With this in mind we can see that there are certain things we can influence by the decisions we make and our actions resulting from those and certain things we cannot influence – they just happen. You can call it fate, good or bad luck or whatever is appropriate in your culture. The first important point here is that you have to accept that there are things you cannot influence and therefore you should not worry about them. You should just accept them. The trick then lies in where we draw the line.

And here comes the second point – always do the best you can. That is the the best we can with the resources available such as time, intellectual capacity, money or influence at the time. You will have to make some trade offs but if they appear to be the most sensible actions to take at the time when things are happening, then that’s exactly what they are. If things go well, perfect. If they don’t, we should learn from the past but never regret having done what we did. The dots might connect just a little bit later on.

Here is a recent example from my life. I got to a final round of interviews with BCG, a leading strategy consultancy, and I really wanted that job. I spent almost all my time in the three weeks preceding that interview preparing for it and when I was entering their offices, I felt I have prepared the best I could have. Eventually, I did not end up getting an offer from them. I could have been regretting the fact I did not get it or that I spent all that time in preparation for nothing but that would defeat the whole point. I did the best I could have done and what made most sense at the time. I had nothing to regret and was able to look forward to other opportunities. I now have two other great consulting offers and most importantly, a clear mind.

So to summarise, the key to never regretting is acting in a way so that we never have to. That is doing the best we can right now to maximise the sphere of our influence and accept that from there on, things will just happen and there is nothing we can do about it.