Weekly Digest #12 [Life and Work, Penalty Kicks, Corporate Nudge, Conversations, Stock Markets]

A snapshot of article summaries that we enjoyed reading ( Jan 21 — Jan 26)

“You put too much stock in human intelligence, it doesn’t annihilate human nature.”
— Philip Roth

Physics of life and work: Failure in life is attributed to many reasons based on our understanding of the situation and the environment. Archimedes principle is a famous principle in physics. In simple terms, it states that for a ship to float on water, it needs to displace a weight of water that equals that of itself. Drawing from Archimedes principle, one can uncover reasons for failure in life and work. We define success as (how well our environment supports good habits minus the number of goals you pursue) multiplied by your capacity to take action This leads to three main causes for failure: poor environment, lack of focus and low energy. Our surroundings shape our behaviors in powerful ways we often can’t see. As a thumb rule, it is difficult to stick to good habits over the long term in a bad environment. As surroundings and environment have a huge influence on our lives, it is better to design our environment. The better we design it, the greater the likelihood that we’ll stay consistent with our goals and achieve them. The second cause of failure is a lack of focus. We get excited to start new goals but after a little while we lose focus and fail to finish what we start. Thus the best way to avoid failure is to eliminate the inessentials and focus on things that matter. By eliminating the inessentials and shifting focus towards the essential, we create time and energy necessary to finish what we start on a consistent basis. The third cause of failure is low energy and lack of capacity to take action. Capacity can be narrowed to three things: time, energy and competency. If we pursue a task without time, energy and competency, we are setting ourselves up for failure. If a task requires more time and competency than you have available, then it is important to eliminate the task, increase the deadline or reduce the amount of task to be completed. As there are multiple factors that can cause a ship to sink in the middle of the ocean, there are a combination of forces that can cause failure in life and work. The interaction between these forces ultimately shape our life and destiny.

Penalty Kicks and Inaction: Penalty kicks can tell a lot about human behavior, behavioral biases, and judgment. This can be applied to investing as well as business management. In football during penalty kicks, neither player can compel the other to make a particular choice and there are no ties. One player wins and the other loses. The odds of success are also heavily skewed in favor of the striker and against the goalkeeper. A behavioral scientist analyzed over 11,000 penalty kicks and found that kicks were favorable to the striker 82% of the time. The outcomes were so similar that there was little difference in success outcomes between a striker shooting to their dominant side or weaker side. Another interesting observation that was made on a data set of 440 penalty shots from 1976 to 2016 was that strikers kicked their shots to the middle of the goal only 9% of the time and goalkeepers remained at the center of the goal for only 3% of the time. The reason for this anomaly is that both goalkeepers and strikers have a bias for action. The appearance of effort is seen as better than the perceived inaction of striker shooting straight and goalkeeper standing straight. The behavioral desire to fail for the right reasons overwhelms each player’s own self-interest to maximize the odds of their own success. This desire to fail for the right reasons is often seen in business management as well as in investing. Despite evidence that investors make positive returns over a long time, investors worry about daily market headlines attempting to time the market. The reason being the same as that in penalty kicks: when faced with stress, humans prefer action to inaction. Even after millions of years of human evolution, people have a hard time remaining motionless in times of stress, be it the stock market or the soccer field. In both soccer and investing, inaction with the odds on your side prove to be the best route to success. Long term success can be achieved if investors don’t succumb to making short term emotional decisions that damage long term chance of success in their investment goals.

Forecasts and the stock markets: Forecasting is the ability to predict the unknowable by measuring the irrelevant; this task employs most people on Wall Street. Market forecasts are tricky and no one can see the future. Surprising things happen in this uncertain world. The most important thing to know to accurately forecast future stock prices is what mood investors will be in the future. It is the most important variable in knowing stock market returns and it is unknowable. Market strategists believe that there is a demand for price targets and they have little choice but to cater to the demand. Forecasters feel that inaccurate forecasts will be forgotten but the accurate ones can be etched in memories of people. This propensity to remember successful forecasts and discount failures points to our symbiotic relationship with forecasters. Research suggests that people show belief in experts’ forecasts despite the uselessness of the forecasts because of the seer sucker theory. If things go wrong, you avoid responsibility and blame the forecaster. Hence no matter of evidence that points towards non-existence of seers, suckers continue to pay for the existence of seers. People like to believe that somebody really knows. A world in which no one really knows anything can be inherently frightening. Another reason for forecasting is overconfidence. People are overconfident of their abilities and their understanding of the markets. We think we know how things work but our understanding is not as comprehensive as we would like to believe. Research shows that people discover the value of humility after being aware of their limited understanding and tend to adopt more moderate open minded positions. Successful forecasters think in terms of probabilities and not certainties. They focus on what they don’t know as much as what they know and they update or change their forecasts rather than being wedded to them.

Crucial Conversations: Having crucial conversations on various aspects lie at the core of a well functioning organizational environment. Crucial conversations predict the magnitude of our influence, the health of our teams, the consistency of innovation, the strength of customer relationships and even the durability of marriages and friendship. When it matters most, we do our worst. We cower or coerce, obfuscate or exaggerate, contend or defend. We crave for tactical advice about mastering the verbal ordeal. There are four things that we must do and if we do that well, the odds of improving the conversation increases. The first is getting the motives right. Under conditions of stress and threat, our motives become short term and selfish. The problem with short term motives is that they preserve the present by mortgaging the future. The first thing to do when preparing for a crucial conversation is to reset your motives. This can be done by answering a simple question: What do I really want? The second is getting your emotions right. Unhelpful emotions are a barrier to a productive conversation. Our emotions have less to do with what the other person is doing and more to do with the story we tell ourselves about what they are doing. The third thing is gathering the facts. Never start a crucial conversation by sharing your conclusion. It is important to share the facts, premises and laying out the data to provide the conclusion. Explaining the logic as to how a particular decision was arrived at for a healthy conversation. The fourth thing is to get curious. An important attitude to bring to a crucial conversation is a blend of conversation and curiosity. Many people think curiosity weakens them and resist it, but in fact, curiosity makes you more persuasive. When you listen deeply and sincerely, others feel less of a need to resist in order to be heard.

Corporate Nudging: Post Richard Thaler’s publication, the word nudge has since caught on in the corporate world and, along with better data analytics and improved intervention techniques, has helped accelerate the advance of behavioral science into the corporate mainstream. Companies intend to promote change and increase productivity on the factory floor, design better products, drive higher sales, and enhance decision-making processes. Nudge units create win-win outcomes for companies, employees, and customers. Combined with the best practices we’ve already gleaned from working with companies, here are some key takeaways from the conversations we had with the 14 experts on strategic choices, organizational structure, team composition measurement challenges, and ethical considerations. First — Where should the nudge unit focus? Will it be employee focused (dealing with questions such as motivation, better decision making in boardrooms, healthier eating, and healthier living), customer-focused (dealing with issues such as encouraging better pension provision or infusing behavioral science into the marketing mix), or a combination of the two? Second — Where in the organization should the nudge unit sit? The strategic purpose of a company’s nudge unit will likely determine its location in the structure of the organization. Some businesses have small targeted units within areas such as R&D or marketing, or they house their behavioral-science and data-science teams together to capture synergies. Others seek to reap broader benefits by creating a global nudge-operations hub with a cross-functional remit, often reporting directly to senior leadership. Third — How to populate the unit? Hiring the right people, whether inside or outside the organization, is a critical path to success. The majority of respondents did both, with most expressing a preference for going outside, at least at the outset when foundational skills might not yet be in place. Fourth — What is being done to set up the unit for success? Cross-functional involvement is key to any behavioral-science agenda. Data scientists and researchers are especially important, as they can support the initial behavioral diagnosis efforts to uncover customer-behavior insights and report on experimental efforts. Designers are critical, as they help implement the details required to drive behavior change. Fifth — How to demonstrate impact? Nudge teams won’t win support from the top or gain the trust of other teams if they don’t provide evidence of their impact. That means translating changes in behavior, unearthed through data monitoring, into measurable value — for instance, increased retirement savings of employees. Sixth — Are ethical challenges being faced head on? Some people worry that nudging may be a paternalistic practice or, worse still, open to manipulation. An important task of the nudge unit is to deal with this responsibly. Some organizations in recent years, for example, stand accused of harnessing predictable human errors for their own gain, sometimes in covert ways. While others have tried to apply the nudge model to sales campaigns which showed little regard to whether the approach was helping solve the needs of customers or whether customers understood what was happening. Creating an effective nudge unit requires much more than hiring a few experts who understand heuristics and statistics. It’s up to senior management to create the conditions for success by helping to focus the unit, situate it in the organization, celebrate its impact, and hold it to high ethical standards. Leaders who tackle these challenges boost the odds that the unit’s nudges will cause real movement in the organization, and in its performance.

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