Daniel's blog

I have just read an interesting paper on three basic decision making models explained using an example of the Cuban Missiles Crisis. In October 1962 the USSR placed offensive nuclear weapons in Cuba prompting the US for a reaction. The paper looks at how the US arrived to a decision for naval blockade as opposed to e.g. an air attack. In doing so, the author describes three basic decision making models which I believe can be applied in any organization. Knowing them can help you as a decision maker to make better decisions or to influence others in making their decisions more effectively.

Model I: Rational Policy Model

This model assumes organizations have a unified set of preferences and they make choices that would maximise their benefits. If you want to influence decisions being made under this model, try changing the costs associated with certain alternatives. The higher the cost (and consequently the lower the net benefit) of executing a certain alternative, the less likely it is to be chosen.

Model II: Organizational Process Model

This model views organizations as entities with codified operational practises and standard patterns of behaviour. Decisions made are therefore not deliberate choices of leaders but rather outputs of pre-established systems. If you want to influence decisions being made under this model, you have to change organizational practises in advance.

Model III: Bureaucratic Politics Model

This model views outcomes as emerging from ‘perceptions, motivations, positions, power, and manoeuvres of principal players’ (p. 630) within an organization. If you want to influence decisions being made under this model, understand internal politics of the organization. Who are the key decision makers? What do they really care about/what are they key concerns/what are their real agendas? Who has biggest influence over them? How can you form a powerful internal coalition to support your idea?

None of the models is perfect. The first one for example assumes that agents are rational which we know they are not and that organizations have only one set of objectives. The second one assumes absence of active decision making when unexpected situations occur and relies only on standard situations. The third one assumes decision making is all about politics and not about maximizing real benefits for an organization (here it is perhaps closest to the reality).

These models do however provide three distinct perspectives on decision making processes. I think it is beneficial to apply all of them in turn to a problem at hand as interesting insights about how to solve it/influence it might emerge.

The full paper can be found here.

This post is about one of the best books I read in 2012 – The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg.

Habits are present everywhere – in our private lives, in businesses as well as in whole societies. They are an integral part of our everyday life and often supersede our rational decision making. This is beneficial because it shortens the time we need to make decisions (such as how to tie a shoe lace or the sequence of actions when we brush our teeth) thus allowing our brain to dedicate its processing power to other activities but it can be also detrimental to us (bad habits such as smoking or eating too many sweet things). Habits develop over time and once ingrained, different part of our brain controls them than the part responsible for our conscious decision making. Once triggered, they just unfold and guide our behaviour automatically. So the question is how to make the best use of this double edged sword.

The author argues we can put our beneficial habits to use and change our negative ones and he proposes a following solution. Firstly, we need to understand what habits consist of in general. Secondly we need to understand how our habits function and finally how we can alter them most effectively.

The habit loop

Every habit consists of three parts, together forming a loop. There is a cue, a certain trigger which makes us execute our routine, the routine itself and a reward we get from executing the habit and which incentivizes us do it next time we are exposed to the cue again. The author argues that it is very difficult to change the cue and the reward but relatively easy to change the routine if we keep the former two unchanged and gives a following example.

He would eat a chocolate cookie every day which he wants to stop doing as he is putting on weight. His routine is to stand up from his desk, go to a cafeteria to buy the cookie, chat with friends for a while and then get back to his work. So this is his routine; the next step to identify the reward.

Here he suggests we should experiment and try doing something else than our usual routine whenever we feel like executing it and then ask ourselves fifteen minutes later if we still feel the urge to do it or not. He tried going for a walk to a park, eating an apple or chatting with colleagues sitting nearby and then seeing if he still feels like eating a cookie. He realised is that what he really wants is not a cookie but a break to socialise with friends.

In order to change our habits completely however, we need to be aware of our cues as well. There are five main categories: location, time, emotional state, other people, and immediately preceding action. In order to identify the cue, answer the following questions whenever you do your habit. Where am I? What time is it? What is my emotional state? Who else is around? What action preceded the urge? After couple days, you should see a clear pattern emerging.

So the final step is consciously executing your new routine whenever the cue you identified happens and after some time the new habit will override the old one. After making himself go talk to a colleague for ten minutes at 3:30pm every day for couple weeks, the author stopped eating cookies at work all together.

How kebabs can trigger riots

Alternatively, you can try getting rid of a habit by inhibiting occurrence of the cue. When the US Army was still in Iraq, they had to intervene in several riots every day and for a long time could not figure out how to prevent them. Then one officer noticed by analyzing video tapes  that most riots are preceded by a small small crowd gathering on a plaza, gradually growing in size. At that point food vendors would show up to cater to the crowd, attracting in turn even more people. It is then enough if somebody throws a rock and a riot would begin.

Reaction of the officer was to ask the local mayor to keep food vendors out of plazas. The next time a small crowd gathered and started growing in size, signs of a riot were starting to emerge again. The only difference this time was that there were no food vendors and so after couple hours the people got hungry, dispirited and went home. The occurrence of riots decreased substantially.

Can you think of any ways you can change your habits or habits of your workplace/community for the better by a simple cost-effective intervention?

One friend has just recommended me this article – 10 things extraordinary people say every day.

It contains 10 simple lines which can have a far reaching effect on your interactions with people around you. I would not take it however as something you should start saying. Far from that.  It is more of an invitation to think about what impact those lines can have and if you can associate yourself with such behaviour. Only if you genuinely feel that way, use them!

Here is the article:  10 things extraordinary people say every day

Have you ever spent hours or even days trying to solve a problem even though the solution was eventually simple and seemingly at hand? It has just happened to me. It’s two in a morning and I am writing a report for my statistical course at LSE. I am doing a regression model to predict birth weight of babies based on several factors. I did a few models but could not decide which one is the best one and have been stuck with it for the last hour and half.

At that point my girlfriend messaged me that she had a bad dream and cannot sleep. So we talked about it for some time and then she asked me how is my work going. When I told her I am stuck, she wanted to help so I had to explain the problem to her. And here goes the first lesson. Force yourself to be able to explain your problem simply and succinctly to somebody, who knows nothing about it. Try putting it in a text message! Mine was:

It’s very technical but basically there is a model that works very well only for some cases and so so for other and then there is one that works reasonably well for all cases. Which one to pick…

It forced me to strip the problem off all the technicalities and get to the point.

Then she asked if I cannot pick two models? A very simple question but a very powerful one at the same time. I’ve spent all my time before trying to improve or compare the two models mathematically but have not considered this one. And it is what I am going to do. For certain cases I am going to suggest the first model and for all other cases the second one.

The takeaway? If you are stuck, write down your problem in only few words and in a way so that anybody would understand what it is about. Then ask yourself some extremely simple questions about how you can solve it and give them proper thought. Great insights might emerge!

Another interesting person who recently spoke at the LSE was Stelios, the founder of Easyjet (and an LSE graduate). Here are some of the notes I took during his speech.

They revolve, albeit perhaps unintentionally, around the concept of Antifragility as developed by Prof. Thaleb and as outlined in my previous post. The world we live in is inherently volatile and unpredictable and therefore we need to structure our businesses in a way which would allow them to withstand this volatility.

Stelios does not believe in research, he prefers to learn by trial and error. Invest a (relatively) small sum, see how it goes and learn from it. Closely related to this is his second piece of advice – do not bet your farm. Learning by doing is all good but do not make a bet you cannot afford to loose.

Antifragility pertains also to his choice of industries to get into – the best markets are those benefiting from volatility. If the economy slows down, people start trading down and will fly Easyjet as opposed to legacy carries. If the market goes up, more people will be able to afford to travel and Easyjet will benefit as well. He was in a shipping business before which is very commoditised and when the market went down, everybody suffered.

The founder of Living Spaces, a room letting agency in London, spoke recently about a similar idea. It is best to focus either on the bottom segment of the market because if your product is relevant, the worst thing that can happen is that people will trade down, or on the other hand on the top segment where margins are fatter and better insulated from day to day volatility.

Finally, Stelios said that hard work breeds luck, a bit of cliche but a true one and that a good age to start a business is 28. By that time, one would have completed his/her studies, have worked for a couple of years and therefore would have identified what he/she is passionate about and are his/her strengths to build on.

Prof. Nassim Taleb gave a talk last week at the LSE on his new book – Antifragile. It is essentially about how to live a volatile world as defined by him in his earlier book – The Black Swan. I read most of The Black Swan and went to the talk so here is my take on it.

Our inability to forecast

Let me start by telling you a story Prof. Taleb presents in The Black Swan. Imagine you are a turkey. Every day a man comes to feed you and over time, you really get to like him. He gives you food and looks after you and therefore you conclude he must be a nice guy. One day however, he kills you and eats you for his thanksgiving dinner. How come you were so fatally wrong?

It is because you, same as most other ordinary people as well as experts, based your judgement on retrospective analysis. Things always appear to be orderly and seemingly logical when looked at retrospectively – we start suffering from an illusion of understanding. This is because we base our thinking only on what we know which are only things that happened in the past and equally importantly, things that somebody was able to/took the effort to note down. The problem comes with trying to predict what has not happened yet.

Prof. Taleb concludes that it is virtually impossible to do so and that if we attempt it, we can experience phenomena of Black Swans. People thought for centuries that swans can only be white as all swans around them had been until somebody found black ones on a remote island. A modern day equivalent would be for example the 2008 global financial crisis which nobody was expecting and therefore did not prepare for it and which had severe consequences. So if we cannot predict the future, what should decision makers do?

What does not kill you makes you stronger

This is where his book on antifragility comes in. We can image the world as consisting of two basic systems – fragile and antifragile ones. A glass is an example of a fragile system. If exposed to volatility, it cannot become any better, it will remain being a glass, and if exposed to significant volatility or stress it will break.

Our body on the other hand, is an antifragile system. If exposed to stress up to a certain point such as in a gym or by application of a live vaccine, it becomes stronger and therefore more able to cope with such situation in the future.

We should therefore attempt to build systems which can benefit from volatility. Such systems can gain strengths from fragility of its components as is the case e.g. with the aviation industry. Whenever a plane crashes, others learn from the mistakes and prevent them from happening again. Such systems also often rely on trial and (small) error for learning rather than on predictions. Stelios, the founder of Easyjet, who spoke at the LSE couple days later said that he does not believe in research – he claims to learn by trial and error as well. See my next article for some more relevant ideas by Stelios.

Prof. Taleb also thinks that some volatility in our world is necessary, just as our body needs to stretch every now and then and cannot lay in a bed all the time. He extends this to policy makers and argues that it is a mistake to smooth things beyond the necessary. Perhaps Europe’s labour and welfare systems can take a lesson here.

So what is the takeaway this time? I guess it would be something along the lines of:
Do not spend too many resources on trying to exactly anticipate the future and rather invest them in building systems robust enough to withstand volatility, to learn from it and capable of utilising those leanings.

PS: A joke I heard some time ago relevant to antifragility came to my mind. How did Goldman Sachs react to the global Occupy movement? By setting up a new fund investing in companies making protective clothing, tear gas and rubber bullets

Let me ask you a question at the beginning (do not scroll down to the picture yet). What is the best way of preventing students from eating in a library?

I would imagine there is a range of possible approaches. A simple polite notice saying ‘Please do not eat in the library’ might be one of them. If that one fails, one might add a statement that a £30 fine will be levied on anyone breaching the rule. They can also ban offending students from entering the library for a period of time or kick them out of the school all together. Or they can do a night-club style security check upon entering the library, confiscating any food found in bags.

While some of these are ineffective (such as the first one), others are too strict or too expensive to implement given the relatively low risk/increase in costs resulting from this undesirable behaviour to the LSE community.

So how about creating an environment in which the students would police themselves? Firstly, one needs to come up with a reason why would anyone bother telling somebody next to them to stop eating here. Things like increase in cleaning costs/increased noise levels/making books dirty are not on their own strong enough to spring people into action. We need something that resonates deep into all of us. Well, even if it only gets half of us going, it would be enough. What are girls really afraid of? Mice!! There you go!

Let’s tell the girls that food dramatically increases the number of MICE in the library and nudge them towards not only not eating food themselves while there but also towards telling all their male friends to bloody stop eating here as there are going to be lots of mice otherwise.

Somebody is yet to carry out a study if the poster worked or not but it is a great example of using behavioural science to influences people’s daily actions in a cost effective way.

The only thing on my mind now is, if it will not backfire and boys will not start leaving lots of food around the library in order to support the mice and therefore keep girls out of the space so that consequently they can easily find a free table to study…

With smart phones being virtually ubiquitous nowadays, an escape from the reality of right now is often only a swipe away. You surely have some friends who are constantly checking their email, facebook and twitter accounts on their phones or using WhatsApp, blackberry messenger and many other applications while being out with their peers. I believe these habits have a negative effect on how much we enjoy the presence.

I got a new iphone recently after having my old one pick pocketed while travelling in Mongolia several months ago. It has reminded me that we do not need to be in connection with everybody else all the time and that it is much better to devote 100% of our attention to whatever we are doing at the moment. I do not use facebook on my iphone and check emails only when absolutely necessary. Instead of seeking an escape or a distraction from here and now, I focus fully on the person I am talking to at the moment, the food I am eating or the class I am sitting in. It makes me enjoy those moments much more (and by consequence the people I am with have a better time as well), learn more from them and be happier in general.

Coincidentally, I saw a TED talk on the topic just yesterday, where Matt Killingsworth presented his research into tracking happiness concluding that ‘people are often happiest when they are lost in the moment… and that the more our mind wanders, the less happy we can be.’ You can watch it here.

We can extend this concept even further. I for example always used to read if I was eating alone. I have stopped doing that couple months back and just enjoy the food now and let my mind process all information it has been getting whole day and relax a bit instead. If at all possible, I also do not like checking my watch when I am out with somebody as that again only takes me out of the moment and gets my mind spinning in different directions.

So ask yourself a simple question. Am I genuinely present in my moments? When I am talking to my friends, working, watching a movie etc.? If the answer is sometimes no, I would encourage you to try devoting all your attention to whatever you are doing at a moment. You should see you will have a lot better time!

Professor Ralph Keeney, world’s leading authority on behavioural sciences from the Duke University, gave a lecture at LSE some time ago, offering couple interesting views on the topic.

In addition to his summary slide bellow, his other main thoughts were following:

There are reactive decisions, which come to us and we are forced to make them, and there are proactive decisions which we generate and therefore we can exert more influence over them.

According to Prof. Keeney’s research, 56% of deaths in the US in 2000 were consequences of people’s personal decisions such as to drink and drive or to smoke cigarettes and get terminal lung cancer. He estimates the figure to be 20% and 5% in 1950 and 1900 respectively.

When making decisions, we are often guided by our objectives. It is therefore important to be aware of what our objectives are and to formulate them well. There are means objectives which’s accomplishment takes us to fundamental objectives.  In business, getting a product to market first, gaining competitive edge or increasing sales are all means objectives to the fundamental one of increasing profits. In personal life, being healthy or rich are means objectives to fundamental ones such as living meaningful or enjoyable life.

I have recently seen a very interesting TED talk by Amy Cuddy on how by consciously working with your body language we can shape who we are and how we come across.

I think it is very true, watch it till the end!