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If you haven’t seen this video, by all means, stop whatever it is you’re doing and watch it. It will change your life.
Dr. Pausch is dying of Pancreatic Cancer. There is nothing he can do about it . . . except choose how he will live the time he has left. Incredibly inspirational.
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Tags: RandyPausch, Last Lecture, Pancreatic Cancer, Dying, Decision Making, Decision Quality
A piece in the USA Today the other day called “Consumers cut back on small pleasures” reports that more an more we’re passing up Lattes, bottled water and other small luxuries.
Such small luxuries seemed almost necessities in happier economic times. But no more for lots of folks, including those and other USA TODAY readers who described how they’ve changed their habits.
The murky financial outlook and recession fears are factors. Another driver: fear of being out of step with a cultural mind-set that increasingly says less is more. If your best friend and next-door neighbors are cutting back on little luxuries, shouldn’t you be, too?
“For years, we had the opposite. It was all about keeping up with the Joneses. Now, the Joneses are starting to cut back,” says Ellie Kay, author of 12 personal finance books.
The cold, hard numbers on the nation’s economic mood bear out that consumers don’t feel flush.
Consumer confidence plummeted in February to its lowest since February 2003, which was just before the U.S. invaded Iraq. The Conference Board’s much-watched index of consumer confidence fell to 75 from 87.3 in January, the group reports
“There’s a sense that prices are rising — and will continue to rise — but wages will not,” says Ken Goldstein, economist at The Conference Board. “This is squeezing household budgets whether they’re $200 per week or $200,000 per year. Folks are looking closely at anything they don’t have to purchase now.”
Most consumers actually feel more pain from these small cuts than from big ones. You miss your daily java jolt a lot more than, say, a new car you’d only hoped to buy sometime this year.
I can’t see how that comes as a surprise to anyone. What I do find interesting is the motivation behind it.
For years, David Bach of “Automatic Millionaire” fame has been going on about the “Latte Factor.” His notion is that if you, wait for it, cut back on lattes, bottled water, and other small luxuries and put that money to work in an index account or something like that, you’ll sock away a big pile of money a couple of decades down the track.
If I had to guess, I would say that more people are cutting back because of their concerns about the economy than were cutting back with an eye towards retiring rich. In fact, I’ll bet many of those aspirants compounded the problem by spending money on David’s books, tapes, and seminars. Think of how rich they could become if they had put that money into savings instead?
I have nothing against David Bach (duly noted). It is interesting to note, however, that fear is the story here. We are much more motivated by fear of loss than we are love of gain. By orders of magnitude it turns out. Think about that next time you’re looking at a decision.
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Tags: latte, latte factor, finish rich, automatic millionaire, recession, inflation, decision making, decision quality
We recently posted a new ebook to our website that covers some of the basic principles of decision making. If you haven’t already, please download it. You can find it on our front page.
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Tags: DecisionMaking, Decision Quality, DQI LLC, eBook
Sometimes I wonder what the “experts” see in the numbers that I don’t see. An example of this is the raft of headlines today about the Fed trying to balance the “contradictory pressures of slowing growth and inflation.” For example, here are some snips from the NYT . . .
In testimony prepared for the House Financial Services Committee, the Fed chairman acknowledged that the central bank faces increasingly contradictory pressures of slowing growth and rising consumer prices.
But his bottom line appeared to be that, at least for now, policy makers are more worried about averting or at least softening a possible recession.
And this . . .
He predicted that the housing downturn will continue to slow the economy “in the coming quarters,” noting that financial markets are still in turmoil and that it has become more difficult to obtain credit. Consumer spending has “slowed significantly,” he said, partly because of rising gasoline prices, slowing job growth and the decline in household wealth as a result of falling home prices.
At the same time, Mr. Bernanke tried to make it clear that the Fed is watching inflation closely. He acknowledged that inflation may climb slightly more rapidly than the policy makers projected in January. Fed officials then estimated that consumer prices would climb to a range of 2.1 percent to 2.4 percent in 2008.
“Any tendency of inflation expectations to become unmoored or for the Federal Reserve’s inflation-fighting credibility to be eroded would greatly complicate the task of sustaining price stability and could reduce the flexibility of the F.O.M.C.,” Mr. Bernanke warned Wednesday, referring to the Federal Open Markets Committee, which sets interest rates.
Often when you read this sort of thing the writer will go on to draw the distinction between inflation and “core inflation” which is somehow meant to mean something.
To back up just a second, the Fed has been especially watchful of inflation for decades now. But what are we really talking about here?
Inflation is generally calculated using the Consumer Price Index or CPI. Core Inflation is usually the CPI minus the effect of energy and food. It’s also calculated using the “outlier” method which tends to get at the same thing by a different means.
So what goes in the CPI you might ask (and there are a couple of different CPIs it turns out)?
Hmmm. So when you take out food and energy, there’s not a lot left is there? Oh wait, there’s health care. Except those costs are completely unhinged from reality. They just go up and up at multiple rates of the CPI every year. In fact, they’ll consume 20% of the GDP in ten years, or so they say. So if we’re excluding outliers, why not that one?
Or how about education. Same thing. The price of a university education bears no relationship to any underlying economic dynamic other than inflation. Universities are virtually immune to the kinds of pressures companies face to manage costs, conserve, etc. So they just hike the price and everyone follows suit in a non-colluding sort of way they say.
How about housing. Well we all know what’s going on with that.
So what is this inflation thing that the Fed is so concerned about if it’s not anything that’s going up other than all the things that are going up for reasons that have nothing to do with monetary policy?
There are several points worth considering here that relate to decision-making.
The dynamic that most concerns the Fed is inflation. They respond by fooling around with monetary policy. But the one lever that has the biggest impact on the whole system is energy costs. And that’s not driven by US consumer or even industrial behavior. It’s driven by the actions of OPEC, the huge demands by China and India for energy (just to pick two), and the speculative behavior of financial actors. In other words, what drives the price of oil has nothing to do with anything that the Fed can influence.
Good statistical analysis requires that you normalize for outliers . . . forces that artificially impact the behavior of the model. But looking at the list that makes up the CPI, I would say they’re all outliers or none of them are. I don’t know about you, but I pay for food on a pretty regular basis. I pay for energy at least monthly.
Energy isn’t the only component of the calculation that is non-responsive to the actions of the Fed. It doesn’t matter what interest rates are, if you’re sick, you’re going to the doctor (assuming you have the means to pay for it). The same is arguably true for education.
So I guess that leaves “other.”
I’m sure there are “real” economists who would tell me I’m all wrong. I say bring it on. I can’t conceive of how anyone can make good “fact-based” decisions when the facts they’re using have no causal relationship with the decision they think they want to make. Or coming at this from the other direction, I can’t see how you can make a “fact-based” decision if you choose to ignore data about drivers you find inconvenient.
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Tags: inflation, core inflation, consumer price index, cpi, recession, Fed, decision making, decision quality
The Seattle Times reports that the local school district finds itself in a bind because of old technology . . .
An aging computer — so old that the University of Washington has an early model on display as a museum piece — stands between the Seattle School Board and the changes it wants to make in how the district assigns students to schools.
The computer, called a VAX, was first sold in the late 1970s. The district still uses two VAXes of late-’80s to mid-90s vintage. They use old-fashioned disks and stand about 5 feet tall. Staff members sometimes look for used replacement parts on eBay.
To keep tweaking the VAXes, district staff warned last week, is risky and a waste of time. To replace them, however, likely comes with a cost that made School Board members cringe: a delay of about a year in putting the new assignment plan into action.
We’ve had some experience helping clients with problems exactly like these. Not the part about finding money where there doesn’t seem to be any. That’s a different kind of skill.
The issue here is making what seems like a difficult decision.
Worth noting here is the danger of a classic decision trap: sunk costs. The VAX computers are bought and paid for. So is the programming. So is the maintenance. You don’t get those dollars or hours back. So the issue here is going forward and a frame that sounds like: What is the best solution for assigning children to schools? What complicates the frame is a thicket of laws and regulations that . . .
It’s not an easy puzzle to work and it’s one that’s tailor made to computing. It’s just not tailor made to a device with less computing power than an I-phone.
There are at least three alternatives here . . .
It is a simple math exercise to model the problem, the solutions, and the uncertainties. The hard part isn’t even finding the money. One way or another, it will be spent. In this case, the hard part is probably the realities of budget politics where a dollar isn’t a dollar; it’s all about the pocket it comes from.
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Tags: SeattleSchool District, VAX Computer, Sunk Costs, Decision Trap, Decision Making, Decision Quality, DQI
Many hold out hope that the salvation of the wildly-expensive and under-performing US Health Care “system” will be rescued by informed consumers armed with information about themselves, facilities, providers, potions, and treatment options. That may even be true. A piece in the New York Times called Insurance Fears Lead Many to Shun DNA Tests reminds that the availability of information cuts both ways.
The first, much-anticipated benefits of personalized medicine are being lost or diluted for many Americans who are too afraid that genetic information may be used against them to take advantage of its growing availability.
In some cases, doctors say, patients who could make more informed health care decisions if they learned whether they had inherited an elevated risk of diseases like breast and colon cancer refuse to do so because of the potentially dire economic consequences.
Others enter a kind of genetic underground, spending hundreds or thousands of dollars of their own money for DNA tests that an insurer would otherwise cover, so as to avoid scrutiny. Those who do find out they are likely or certain to develop a particular genetic condition often beg doctors not to mention it in their records.
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Tags: healthcare, DNA, DNA Tests, Decision Making, Decision Quality
Elizabeth Kolbert has written a nice review of a fine book on decision making called Predictably Irrational, by Dan Ariely.
In “Predictably Irrational: The Hidden Forces That Shape Our Decisions” (Harper; $25.95), Dan Ariely, a professor at M.I.T., offers a taxonomy of financial folly. His approach is empirical rather than historical or theoretical. In pursuit of his research, Ariely has served beer laced with vinegar, left plates full of dollar bills in dorm refrigerators, and asked undergraduates to fill out surveys while masturbating. He claims that his experiments, and others like them, reveal the underlying logic to our illogic. “Our irrational behaviors are neither random nor senseless—they are systematic,” he writes. “We all make the same types of mistakes over and over.” So attached are we to certain kinds of errors, he contends, that we are incapable even of recognizing them as errors. Offered FREE shipping, we take it, even when it costs us.
And from a bit further in the review (she loves long paragraphs) . . .
Whatever else it accomplishes, “Predictably Irrational” demonstrates that behavioral economists are willing to experiment on just about anybody. One of the more compelling studies described in the book involved trick-or-treaters. A few Halloweens ago, Ariely laid in a supply of Hershey’s Kisses and two kinds of Snickers—regular two-ounce bars and one-ounce miniatures. When the first children came to his door, he handed each of them three Kisses, then offered to make a deal. If they wanted to, the kids could trade one Kiss for a mini-Snickers or two Kisses for a full-sized bar. Almost all of them took the deal and, proving their skills as sugar maximizers, opted for the two-Kiss trade. At some point, Ariely shifted the terms: kids could now trade one of their three Kisses for the larger bar or get a mini-Snickers without giving up anything. In terms of sheer chocolatiness, the trade for the larger bar was still by far the better deal. But, faced with the prospect of getting a mini-Snickers for nothing, the trick-or-treaters could no longer reckon properly. Most of them refused the trade, even though it cost them candy. Ariely speculates that behind the kids’ miscalculation was anxiety. As he puts it, “There’s no visible possibility of loss when we choose a FREE! item (it’s free).” Tellingly, when Ariely performed a similar experiment on adults, they made the same mistake. “If I were to distill one main lesson from the research described in this book, it is that we are all pawns in a game whose forces we largely fail to comprehend,” he writes.
You can read the rest of the review here.
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Tags: ElizabethKolbert, Predictably Irrational, Dan Ariely, Decision Making, Decision Quality
Even if you can’t stand the idea of motorcycles, you should spend a few minutes playing around with the Vincent Motors Configurator . . .
If you’re interested in motorcycles, perhaps you should avoid it. This thoroughly engaging doodad allows you to wile away the hours not only dreaming about the brand-new throwback Vincent you can’t afford, but to dream about it in specific, customized-for-you detail. Brilliant.
People have two relationships with choices. One is that they are overwhelmed by the choices they perceive they face. Sometimes that’s because there are too many. Sometimes that’s because of the perceived consequences (in which case the problem isn’t with the choices, it’s with the outcomes you associate with the choices).
More often, we have too few choices, or at least two few interesting choices. There are lots of reasons for that, most of which have to do with being stuck in a rut . . . a rut of defining the problem in the same old ways or looking in the same old places for solutions.
The Vincent Motors Configurator is brilliant on the last point. It gives you lots of ideas. And because the company wants to sell you a bike, it gives you lots of ideas about how to think about and dream about their bike.
It’s brilliant for another reason as well (there, I’ve used that adjective thrice now). It engages the user in a branded transaction. That means it has done the following . . .
Involves the customer
Engages information for trust. With every mouse click, you’re trusting the brand more and giving the company more information.
Adapts the experience based on the interchange.
Delivers the essence of the brand.
I have a paper on the Branded Customer Experience. Email me if you’re interested.
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Tags: VincentMotors, Configurator, midlife rider, motorcycles, lust
Tags: Branded Customer Experience, Configurator, Decision Making, Decision Quality, Vincent Motors
So it appears that Fidel Castro is stepping down as President of Cuba. In at least one odd bit of symmetry, Senator John McCain served on the USS Enterprise which took part in the Cuban Missile Crisis.
Robert Kennedy wrote a book about those events called “Thirteen Days.” In my opinion, it’s part of the canon on good decision making . . . mandatory reading.
The afterword, written by Richard Neustadt and Graham Allison highlight some of the important meta-themes in the book . . .
The Cuban missile crisis is important at three distinct levels. First, the crisis stands for something central in our time: we live under the cloud of nuclear weapons. Our imaginations have been dulled by metaphors. But it is nonetheless true that today men control the power to destroy mankind. Second, this crisis is a microcosm of problems of the modern American Presidency. Crises tend to highlight the basic characteristics of an institution. The Cuban missile crisis does this for a number of dilemmas in our governmental system Third, this even poses dramatically a central constitutional issue for the 1970’s: namely, the respective roles of President and Congress in making war. During the Cuban missile crisis, the President alone decided and disposed. Two hours before his decision was announced to the world, Congressional leaders were informed that the United States was responding to the Soviet missiles with a naval quarantine.
Interesting words to contemplate these many years later.
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Tags: Cubanmissile crisis, Fidel Castro, John McCain, Richard Neustadt, Graham Allison
Seattle Times columnist wrote a humorous piece today called “Bargains too good to pass up” that’s meant to poke at Microsoft’s efforts to purchase Yahoo. For less than what the Redmond giant will likely pay for Yahoo, the company could buy . . .
It’s probably written in jest, but raises a good point. These are dumb alternatives if the frame on the problem is, “How do we catch up to google?” They’re potentially brilliant alternatives if the question is posed differently. Therein lies one of the most important lessons in decision making: take a hard look at the question you’re asking. A different question generates a different set of alternatives.
Which is the second lesson. Give yourself more alternatives. It’s often the case that the path lies in some other, not immediately obvious direction.
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Tags: Microsoft, Yahoo, Amazon, NewsCorop, Interpublic, WPP, Decision Making, Decisions
