Only slightly bent

I’ve long had the opinion that the financial markets are far from rational, and that the media, companies & market participants themselves dealing with them as rational – and, worse, rationalizing every strange market movement – is nothing short of insane. I haven’t had much fact-based research to back this opinion up, however, which is why I was interested in reading Justin Fox’s The Myth of the Rational Market: A history of risk, reward, and delusion on Wall Street.

The title tells quite succinctly what the book is about – it chronicles the creation and dismantling of the rational market theory from the very beginning. While reading up on the history of financial theories and how they were created was interesting and certainly useful per se it, to me personally, made for somewhat boring reading for the first 150 pages or so. Despite not exactly being a gripping page-turner, the first half of the book does provide a fascinating quick history of capitalism, the evolving view on profit & risk and, among other things, how the now-ubiquitous “shareholder value” came to mean anything.

One interesting aspect that I hadn’t fully digested earlier was that despite the view otherwise, one cannot really get paid for taking a risk, because risk is a measurable quantity that could be insured against; profit came when you proceed in the face of uncertainty. It may sound like a trivial difference, but the implications run deep.

During the course of reading the book, a few things become abundantly clear and with plenty of evidence to back the claims up. First, the markets are not rational or efficient. While this shouldn’t really come as a shock to anyone, for some reason the vast majority of (surprise!) finance professionals still act as if it is. The problem with utilizing this knowledge? No one person is rational either, so good luck in trying to beat the market. Second, the remarkably – for the lack of a better word – strange world of analysts, with all the expectations to beat the estimates and the resulting whisper estimates, “The Number” etc is revealed. Third, practically no actively investing funds does any better than the market on average – a find which any analyst, who supposedly trust mathematics, should find somewhat disturbing; already back in the 60s:

The scholarly consensus that nobody on Wall Street knew what he was doing began to harden. “Many academics have concluded that the value of investment advice is virtually zero,” Burton Malkiel and a Princeton colleague wrote in 1968.

Probably the most interesting part of the book is the anatomy of several market crashes and how they came to be. What’s most amazing are the rationalizations that some offer to explain the quirks and crashes away in order to keep holding on to the fatally wounded theories; this is from a chapter dealing with the 1987 crash:

“The appropriate response to the October performance of the market is applause“, Gene Fama declared. Fama’s reasoning was that an inefficient market would have been one in which the price decline occurred slowly. The rapid adjustment (a.k.a. crash) was evidence of how quickly the market processed new information. Left unanswered was what exactly that new information was. If your belief in efficient markets was strong enough, you didn’t need to know. The omniscient market had been able to sense something that, even after the fact, individual scholars and investors were unable to pin down.

At the end, some sobering conclusions are drawn. While fixing the market is probably too big a task to accomplish in short order, there is something companies can do, and something society needs to ponder:

It means that managers of a publicly traded company should insulate themselves and their employees from day-to-day or even month-to-month stock price fluctuations.
[..]
The biggest and hardest questions have to do with what sort of role we as a society give financial markets. For the past three decades the answer, backed by the theories of the rational market, has been to give markets an ever larger role – shoving aside other institutions such as governments and corporations. Now, though, we seem to have arrived at a turning point. It’s not just that the rational market theories have fallen apart. Financial markets have fallen apart, too.

All in all a very useful and interesting book that provides a lot of history and background to the nature of the market and how it works. Like I said, I found the first part somewhat boring reading, but overall the book was excellent. I would’ve hoped for some more coverage on the GFC, but then again the GFC as a tool against the rational market theory is a bit like shooting fish in a barrel so that might’ve been too easy.. The Myth of the Rational Market also gives a good background to many familiar names and as such provides much better context for understanding where Greenspan, Samuelson, Summers, Buffett, Minsky, Keynes, et al come from and what they’re all about.

Oh, and did I get the proof I was looking for that markets indeed are not rational? Yes. But, notably, I also learned that they’re not completely insane either and there actually can be some useful information embedded in the market figures.

The Brain Rules by John Medina has long been on my reading list and I finally got around to it. The book is constructed around 12 “brain rules”, each of which covers some aspects of the brain we know for sure. The we know for sure-part is important, because there is no shortage of books that speculate on what the brain does and how it does it, whereas all the “rules” in this book are backed up by numerous scientific studies. Perhaps surprisingly we don’t know much about the brain, but even more surprising is that what we do know is not being taken seriously.

For example, there are many aspects of how the brain works that are in direct conflict with how we try to use it – there is very compelling evidence that if we made the ideal learning or working environment, they would be pretty closely exactly the opposite of how schools and work environments look today. In the name of cost-effectiveness, we are implementing strategies that are directly opposing to proven methods of actually improving learning and working. I find that appalling.

One rule is about attention. The lack of true multitasking capabilities has been recently brought up in other fora like New York Times as well. The simple truth is that the human brain cannot multitask – we are biologically incapable of processing multiple attention-rich inputs simultaneously. We must jump from one task to another and the task-switching takes a remarkably long time. Speaking of the task switching process, Medina explains:

Incredibly, these four steps must occur in sequence every time Eric switches from one task to another. It is time-consuming. And it is sequential. That’s why we can’t multitask. That’s why people find themselves losing track of previous progress and needing to “start over”, perhaps muttering things like “Now where was I?” each time they switch tasks. The best you can say is that people who appear to be good at multitasking actually have good working memories, capable of paying attention to several inputs one at a time. Here’s why this matters: studies show that a person who is interrupted takes 50 percent longer to accomplish a task. Not only that, he or she makes up to 50 percent more errors.

Yet, the modern office is purpose-built to promote interruptions.

The attention-chapter also covers other truths, such as the attention span that we have – including many examples on how to overcome the fact that our attention span comes in 10-minute segments in, say, a presentation.

Other chapters explain, among other things, the importance of physical exercise and sleep, the importance of repetition to recalling and impacts of stress on how the brain works. In the chapter on sleep, we also return to the now-famous study that showed a simple nap can improve the performance of people by 34%. Yet, how many companies encourage or even condone their staff sleeping for half an hour during the day? Not many. Yet, if you sleep for 25 minutes and if it results in even a 25% performance improvement over the rest of the working day, the time “lost” will be more than recovered through improved performance.

And then there are the lessons on learning – and how learning in a unisensory environment is vastly inferior to a multisensory one (thanks to what is called the supra-additive integration – ironically, just reading the book is a unisensory experience so expect to forget a lot about it unless you take notes etc);

The groups in multisensory environments always do better than groups in the unisensory environments. They have more accurate recall. Their recall has better resolution and lasts longer, evident even 20 years later. Problem-solving improves. In one study, the group given multisensory presentations generated more than 50 percent more creative solutions on a problem-solving test than students who saw unisensory presentations. In another study, the improvement was more than 75 percent!
[..]
All explanations about multisensory learning also deal with a counter-intuitive property lurking at its mechanistic core: extra information given at the moment of learning makes learning better. [..] Stated formally: it is the extra cognitive processing of information that helps the learner to integrate the new material with prior information.

The Brain Rules also touches on the topic of reality – in that none of us really perceive reality but the reality we see is just our opinion of it, and that we are all hallucinating all the time; in short, the trust we place on our eyes to serve us a faithful, up-to-the-minute, 100% accurate representation of what’s actually going on is sorely misplaced.

The Brain Rules is certainly an interesting and even fun read. In addition to fascinating explanations on many interesting aspects of the brain, it provides many bits of practical and useful advice how you as an individual can make sure your brain works as well as it can. Like already mentioned, it also highlights major deficiencies in the way things are done in societies today that are just plain wrong in light of science – tackling these issues will take a bit longer than making sure you have enough sleep and exercise, but need to be resolved at some point anyway. The pinnacle of idiocy perpetrated by corporations globally is the destruction of productivity and performance in the name of increasing productivity and performance – and the refusal of school systems to change or even explore new strategies is also nothing short of stupid. Meanwhile, I’m sure you can glean a few interesting and useful bits of information by looking at The Brain Rules and implementing what you can.

The world of high tech is filled with tales of spectacular failure and sheer stupidity; it is some of these tales that In Search of Stupidity – Over 20 years of high-tech marketing disasters (2nd edition) by Merrill (Rick) Chapman chronicles. While hindsight is always 20:20, Chapman argues convincingly that most if not all of the disasters could have been avoided, given just a modicum of common sense and situational awareness at the time. Better decision making might not have been enough to completely turn the fortunes but most of the idiocy could have been avoided. Having said that, In Search of Stupidity makes for very entertaining reading precisely because many companies did act so idiotically.

The book covers a period of some 25 years from 1980s to the middle of the first decade of the 21st century. That means lots of fascinating things made it in but lots were also missed, such as Apple’s new-found success in the mobile business. The title is however somewhat misleading; it’s not just marketing disasters that caused all the disasters – in most cases it took the co-operative idiocy of the entire company to drive them to the ground as successfully as many did. It’s also not just about failed companies, but also a pointed criticism at the many assumptions and beliefs that corporate world still holds dear. At the very beginning the well-known book In Search of Excellence is, once again, convincingly debunked. For those unfamiliar with the book, In Search of Stupidity provides the best summary I have seen so far:

The basic thesis of In Search of Excellence isn’t complex and can be summed up succinctly: Excellent companies create corporate cultures in which success flourishes. (Yes, this is something of a tautology, but it’s a nice one and people always like reading it.) An excellent corporate culture is one that loves customers, loves its employees, loves the company’s products, and loves loving the company. Once enough love is flowing through the corporate veins, a company will organically become excellent and in turn create excellent products and services. This will lead to more customer, employee, product, and corporate love, lifting all concerned to an even greater heights of selling and purchasing ecstasy. The cycle becomes self-sustaining, and a universe of almost sybaritic business success awaits those who master the Zen of Excellence.

If that sounds kooky, that’s because it is. Many companies identified in Search of Excellence were not excellent. Like Lanier. In Search of Stupidity explains what Lanier really was, pointing out that:

In Search of Excellence thought Lanier was really excellent, a company that “lives, sleeps, eats, and breaths customers.” [...] The only problem with all of this was that Lanier wasn’t an excellent company; it was a dead company, a shot-through-the-head dinosaur whose sluggish nervous system hadn’t yet gotten round to telling the rest of its body to lie down and die.

.. and of course explaining why Lanier was dead and how it came to be. Well-known companies are given great coverage in the book; Apple, IBM, Digital Research, Microsoft, Ashton-Tate, Siebel, Intel (remember the bunnies? And the Pentium debacle?), Motorola, Google, Palm, Sun Microsystems, Value America, MicroPro, Novell, Borland, Netscape etc etc. If you’ve been involved in the high-tech industry any amount of time, it’s an excellent trip down the memory lane. And if some of these don’t sound well-known to you, well, maybe you should read the book.

But while dissecting the failures (and a few successes) of various companies in a very insightful, yet funny, way is the core of the book, there are plenty of other lessons to take away from it. Memorable lessons in product positioning, marketing, innovation, branding, handling journalists and PR, and many other facets are offered. Without going into those in any great detail, below are a few of my favorite parts of the book:

On the theories of bubbles – as applicable to the bubbles of today as the tech bubble of 2000:

Many reasons for the dot-com boom have been offered, but all are somewhat unsatisfactory. The most common explanations postulate the following:
[...]
* Wall Street is full of idiots. This theory is both popular and has a lot going for it.
* The people who bought stock from the idiots on Wall Street were also idiots. What?! Are you implying that the American people’s failure to, when confronted with IPOs that reeked of red ink and gobbled on about idiotic schemes to sell 30-pound bags of pet food directly to consumers at a guaranteed loss (Pets.com), not fall laughing hysterically to the floor before kicking these IPO turkeys out the door somehow makes them responsible for their own losses? This sort of speculation isn’t even worth a reply!

On the failure of Value America; this is something Google also recently failed at with the Nexus One:

The company also didn’t understand that when you sell something to a customer, you “own” that customer and all the customer’s associated problems, including the problem of customer dissatisfaction with a purchase.

On how Windows achieved it’s market position and on the difficulty of formulating and executing a “winning” strategy and actually, how corporate success is largely a matter of chance:

But for Windows to achieve its current monopoly position, the following events had to occur:
* Xerox, the original inventor of what we now call the graphic user interface, had to never develop a clue about how to commercialize most of the groundbreaking developments that came out of its PARC labs.
* Digital Research had to blow off IBM when it came calling for an operating system for the original IBM PC.
* IBM, which during the early years of its relationship with Microsoft could have crushed the company like a bug, had to behave as if prefrontally lobotomized from 1985 to 1995 as the gruesome OS/2 saga ground on.
* Apple had to decide to not license the Macintosh operating system, a decision that led to the company from approximately 30 percent market share in the early 1980s to 4 percent market share by 2006.
[...]
Now, how does one fashion a credible strategic plan that assumes your competition will agree to collectively shoot itself in the forebrain while unpredictable market forces break in such a way as to help ensure your eventual success?

The answer is that you can’t.

And as a final quote, several suggestions to the music industry are offered in order to improve their business, like stop suing people. Sensible, yes, but I still like this last recommendation the best

A final suggestion is that decreased drug use by industry executives might lead to clearer thinking.

Now, the book certainly has some shortcomings, but dealing mostly with established, well-known history they are nothing major. Ironically, history in the form of events that took place after the book was written (in the past 4-5 years), has made some comments invalid. For example, Amazon is poked a lot of fun at while the company is quite successful these days. Also, not everyone will like Chapman’s humorous style of writing, but if you were able to stomach the above quotes, you’ll be fine. Finally, the author’s prediction of it taking 6-10 years before e-books begin to disrupt the print business proved, surprisingly in the tech world, to underestimate the pace of development.

All in all however, In Search of Stupidity is a highly entertaining, educating and recommended reading if you work in the high-tech industry. And if you don’t, you might have a good laugh at us – and perhaps lull yourself to a false sense of security that spectacular failures are only limited to the high-tech industry…

When in the US, e-commerce was pure bliss already ten years ago. Stuff was cheap, came to your door fast and reliably and the whole shopping experience was just good. In Finland, to understate a little, things were not so good. Relatively few companies had (or have) an online store and the prices were in line with the brick-and-mortar stores, i.e. absurdly high. Especially the shipping costs (largely thanks to the Itella-monopoly, no doubt) were just insane. Some improvement has happened in recent years, but there’s still a long way to go.

Anyhow, I was expecting Australia to fall somewhere between Finland and US in terms of online commerce. And most of the times it does, but at times the experience is even worse than in Finland – a big disappointment. First, relatively few companies are online here. There is increasing, but still low, awareness of how to do e-commerce properly (let alone m-commerce, let’s not even go there). Second, shipping, while cheaper than in Finland, takes surprisingly long even from “nearby”. Third, by coincidence or not, it was an Australian online merchant who happened to be the first one to ever lose my credit card details which forced me to get new cards after fraud attempts.

Now, years ago e-commerce really took off with books first, so here is a case study from yesterday about getting a book. I wanted to buy this book. By nature, I first checked Amazon US: $25 AUD plus $17 AUD for expedited international shipping, so $42 AUD total and I could expect to get the book in about 10 days. That doesn’t sound too bad for a big, 750+ pages, hardcover book.

What about the local competition? First up, Borders: sticker shock of $89.95 AUD and a delivery time of 10-12 days. Angus & Robertson was in the same ballpark. Only Dymocks was significantly cheaper at $55 AUD, but still more expensive than Amazon. None of the Australian vendors charged explicit shipping costs, but the high initial price and shipping times of 10-12 days explain why that is so. As a comparison, the book would have cost about $50 AUD including shipping if bought (with)in Finland with a delivery time of 5-15 days (annoyingly wide scale).

Let’s take a look at the figures again:

Remember that Borders, Dymocks and Angus & Robertson are all local, Australian companies and the Amazon US order is shipping from literally the other side of the planet just for me. If one bought more than one book, the figures would be even more favorable for Amazon.

Whenever an individual can import goods from halfway across the planet, while paying for individual express air cargo, for up to 50% less than the domestic companies are charging, some aspect(s) of competition and/or efficient markets are clearly missing.

The next completed book on the subject of visual presentations on my to-read list was The Back of the Napkin: Solving Problems and Selling Ideas with Pictures by Dan Roam. The subject is quite accurate; this is a book that tells you how to use visual aids to solve problems and does a pretty good job at it, too.

The book starts by quite appropriately debunking some of the myths that keep people from drawing; i.e. the familiar “But I can’t draw” and “I’m not a visual person” excuses. After those possible initial in-your-head restrictions, it’s off to work creating pictures. The book, as far as books come, is a very hands-on book, encouraging you to draw (by hand! not with a computer) the numerous examples.

Beyond the introductory chapter, the book is divided into three parts; Discovering Ideas, Developing Ideas and Selling Ideas. Along the way, several frameworks are developed to help categorize and remember what kind of visualizations are out there, what are the questions they need to answer and so forth. One of the most useful ones is the SQVID which helps decide whether a picture should be simple or elaborate (S), qualitative or quantitative (Q), explaining vision or execution (V), focus on individuals or comparisons (I) and whether it depicts change (D for delta) or as-is/status quo. SQVID combined with a list of different kind of visualizations provided, one can easily choose the most appropriate type of picture for most situations.

I found the Back of the Napkin to be a highly interesting and useful read. The frameworks it offered will most certainly come in handy in the future. One of the most interesting insights was at the end of the book; it is often forgotten was that a picture does not need to be so simple as to not require any explanation:

This brings us to the last problem in this book, namely, Is a problem-solving picture “bad” if it requires an explanation? After all, doesn’t the old adage “a picture is worth a thousand words” tell us that good pictures always stand on their own?
 
The answer is no. All good pictures do not need to be self-explanatory, but they do need to be explainable. It’s a rare problem-solving picture of any sort that can carry a clear message, convey powerful meaning, and inspire deep thoughts without at least a caption. [..] the point isn’t to replace all the words; the point is to use a picture to replace those words that are more effectively conveyed, understood, and remembered visually.

All in all, highly recommended for most problem solvers. Btw, the book also has a website at http://www.thebackofthenapkin.com/ along with some convenient downloadable “cheat sheets” for the presented frameworks.

Bob Sutton has become one of my favorite management book authors. This particular book – Weird Ideas That Work – How to Build a Creative Company – deals, as the subject suggests, with some more practical advice on how to build a creative and innovative workplace. It’s a relatively straightforward book in the sense that the bulk of the book consists of 11½ ideas in 12 chapters that many, especially the more conservative managers, may find weird.

How weird? Well, Sutton tells you, for example, to:

• Hire people who make you uncomfortable, even those you dislike
• Encourage people to ignore and defy superiors and peers
• Find some happy people and get them to fight
• Avoid, distract and bore customers, critics and anyone who just wants to talk about money
• Don’t try to learn anything from people who seem to have solved the problems you face

Just how weird they are depends on your point of view. In any case, unless you’ve studied innovation processes more, at least some are likely to come off as somewhat strange and counter-intuitive. However, as also stated in the title, the ideas work; there is extensive literature and research to support these ideas. While much of the actual research can be found via the references, Sutton does give plenty of examples where possible and appropriate.

One important thing to keep in mind when reading – and especially when implementing – the advice in this book is that it’s meant as helpful stuff for creative or innovative companies. You do not – I repeat DO NOT – want to implement these things in a place that needs rigid adherence to a standard process or extreme repeatability. What’s also worth bearing in mind is that while the result is likely a more innovative company, it will not be the kind of place all people enjoy working in. It will also mean, with high likelihood, that you fail more. While that may sound bad, it’s only natural because a high success rate means you’re probably not very innovative. I quote a quote of James March from the book:

Unfortunately, the gains for imagination are not free. The protections for imagination are indiscriminate. They shield bad ideas as well as good ones – and there are many more of the former than the latter. Most fantasies lead us astray, and most of the consequences of imagination for individuals and individual organizations are disastrous. Most deviants end up on the scrap pile of failed mutations, not heroes of organizational transformation.

How about the downsides of the book itself? Well, having read quite a bit on innovation, many case studies easily get repetitive. I for one am getting tired of hearing the same examples over and over again; for example, whenever the best innovative companies are discussed, there is IDEO. There’s also 3M and the stories of microreplication and Post-It notes. Other ubiquitous companies are Apple, IBM and Intel. Don’t get me wrong; they’re all great companies that make for inspiring examples, but enough is enough.

Overall Weird Ideas That Work is a wonderful book that’s a quick and interesting read. What I particularly liked is that it’s comparatively down-to-earth in the sense that there is plenty of actually implementable advice in the book, not just some kind of ethereal ideas. While an analytical person might hope for some more proof that these ideas actually do work, with enough background information you realize that they in fact are highly likely to work. But again with the caveat that you should only try these if you want to increase innovation in your company or unit and are also prepared to deal with the negative consequences. But as they say, “no pain, no gain”.

As a summary I can highly recommend this book to at least 95% of the companies who claim to be innovative (and these days, who doesn’t?) – but fall far short of a actually being truly innovative.