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The price of knowledge

Sometimes difficult questions have easy answers, just like some complex problems have simple solutions.

Last night the TV-set got stuck. No signal, nothing. Self fixing failed.

Within 15 minutes 'TV Repair Services' knocked at my door. An old guy came in. After a short "Where?" I showed him my antique TV-set. For a moment he glanced at the dead set and after a simple "Ah.." he took a small hammer out of his bag and precisely tapped on the top left side of the set. Within a second the TV was back on.

"That'll be $ 25.25" he said dryly.

"$ 25,25 !", I stuttered back, "Just for tapping with this hammer? Can you specify that?"

"Yeh", he replied, "that's 25 cents for tapping with the hammer and 25 dollar for knowing where to tap".


As always in life: Knowledge has its price.

Next time you have a TV breakdown, don't mix things up by hammering yourself or hiring a next door 'hammer man'.
It's not about the hammer, it's about the knowledge and experience of people that help you.

So if you take advice for a complex (financial) matter, don't bother paying a substantial fee for a sound and simple advice. And never ever hire amateurs. Remember the old saying:

If you pay peanuts, you'll get monkeys

On the other hand, just paying respectable fees doesn't guarantee a sound advice at all. So always hire a real trusted professional and ask for credentials.

Sometimes even free advices raise our level of knowledge.....

Picture source: Arlington

Born Good or Bad? Polya helps

Were you born 'Good' or 'Bad'? The answer to this question can be given with help of mathematics!

Let's start with a simple model. When you were born, you had only a limited number of experiences. Let's assume you came to earth quite neutral, with one 'Good' (G) and one "Bad" (B) experience.
At this point in time, your (still unconscious) attitude and therefore expectation of a 'Good' (B) outcome of your next experience, will be 50%.

In line with the expression "You'll always reap what you sow" (Gal 6:7), or associative translated "You'll become what you X" (with X ='Think', 'Eat', 'Are', etc.)", your next experience will indeed turn out to be equally G or B.

Let's assume that providence decided, the outcome is G. Now you've become a more optimistic person. Your experience-bucket is filled with two G's and one B (experience), so your subjective 'colored' outlook on G's is 66,66% (2/3=[2 G's/(2 G's + 1 B)]) . You also look back on a relatively Positive Life Score of PLS=66,66% G's.
Would you have experienced a 'B score' instead, it would be the other way around and as a potential pessimist your outlook and PLS would have been lowered to 33,33% .

But happily you're a 66,66% (!) G-Score-optimist and life goes on. According to the same principles, the probability of scoring a new G-experience is now 66,66% instead of 50%.

As you may already notice, your PLS will more and more develop according your personal historical G- an B-experience track record.

A few questions that may rise, are:

• Does your Positive Life Score (PLS) has a limit? And if so, what's that limit?
• Once you're in a pessimistic phase, what are the changes of getting out?

Here's were the help of a great mathematician, George Pólya, comes in, by modeling the above situation in what is called:

Polya's Urn model
An urn contains G₀ Green (Good) and B₀ Black (Bad) balls. One ball is drawn randomly from the urn and is then placed back in the urn together with an (extra) ball of the same color.

Our Good&Bad exercise turns out to be a simplified two color Polya Urn Model (G₀=1,B₀=1) that is part of a large family of General Urn Models.

Properties
It turns out that this model has the following (translated)properties:

• On any given moment in your life if you do not know what kind of balls have been drawing before, the expectation of drawing a Good or Bad ball (experience) is always G₀ =G0/(G₀ +B₀) =50%.
  
  
• On any given moment in your life, gaining a Good or a Bad experience depends on the track record of G&B experiences in your life. So if you've experienced G Good experiences and B Bad experiences, your changes of experiencing a next Good experience are equal to the track record of your Positive Life Score : PLS_(G+B)=G/(G+B)
  
  
• The relative influence of a G or B experience on the PLS decreases rapidly as the number of total experiences increases. Your PLS has a definitive limit in (life)time with equal changes of outcome on the interval [0,1].
• As is clear from some simulations, the first 10 to 20 experiences in our life determine whether we'll become an optimist (PLS_(∞)> 0.75) or an pessimist (PLS_(∞)<0,25).
  
  
  
  
  
  
  
  
• Moreover, the first 5 to 10 experiences in your life already determine the direction of our PLS in life. This means that our parents and teachers have an important role in guiding us in our baby and youngster phase to a positive balanced number of experiences (a more than average PLS).
  
  For example if on a given moment in life you have had 4 Bad experiences and 1 Good, the probability of having a next Good experience is 20%. What's more frustrating is that the probability in this case to get in three steps to a 50% level is only about 3% (=1/5*2/6*3/7) . This illustrates the heavy responsibility of our parents and teachers.
  
  That's why it's for example so difficult to change your religion. Once the first 50 religion experiences have been brought in by your parents, it's hard to change from Budha to Allah or Christ, or the other way around.
  
  
• Once a more than average PLS is achieved, we're more likely to absorb a Bad experience without getting unbalanced. Parents and teachers can 'let go'.

Keep in mind, Polya's Urn is only a think-model to help you to become aware of the important mechanisms that play a role in becoming 'who you are' or 'what you'll be'.

Change?
Once you become experienced in life and your PLS direction has been set, you can only change this by either a Professional De or Re-programming (PDR) or a, what is called, Life Changing Experience (LCE). In PDR Bad experiences are taken away (i.e. out of the urn) and replaced by Good experiences, to regain trust and a higher confidence (PLS) level. In LCE's, your environmental or physical circumstances suddenly chance in such a way that you are forced to experience only just B (or just G) experiences. Another LCE is created by the change of context. What before were B experiences now turn out to be G experiences (or the other way around).

What if?
There are many other aspects that could be studied in relation to the Polya model. For example:

• What would be the effect if an experience is not just only Good or Bad, but a mix.
• What if a 'Good experience' doesn't trigger extra positive confidence (an extra G) but a negative experience (an extra B).

The answer in both cases is that almost always the PLS-limit=50% !, in other words: You'll become average.

But how does a little bit of extra Bad (or Good) influence the PLS limit? If you want to experiment and learn more about Good and Bad, go and visit Polya's Urn Experiment or look up the Math behind Polya's Urn

Math helps us to discover who we are or what we become...

Our Beat

From the moment we were born, 'our beat' has been set.

No matter what we do or say, 'our beat' in life go's on. No matter who we are or pretend to be, we're not able to oversing or shout down 'our beat'.

In every phase of life we play a different tune. As baby sometimes clumsy, but charming. As a child ambitious, but still fuzzy. As adult classic and convincing, as if we have become 'our tune' instead of 'our beat'.

But we're neither the notes we play, nor the space between them. Our tune plays on the background and 'our beat' keeps leading, whether we like it or not. Others may help us to find out in life what other tunes fit 'our beat', but they wont be able to change 'our beat'

Until finally 'our beat' slows down and we have to face our final moment, when 'our beat' transforms our tunes, guided by angels, in a new universal image, that'll beat(le)s you.

You won't stay beatless, and you can't beat 'your beat' in life, but you may try.

Now with this in mind listen to the next song. Can you distinguish the tune from the beat, the baby form the adult, life form death?


Try me 2 |

Your life in 5.16 minutes...
(Play it loud on professional stereo equipment)

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Client Lifetime Value (CLV)

In a Harvard Business Review called "Why satisfied customers defect", Jones & Sasser explain that even a 80% 'satisfied clients score', is no guarantee for sustainable success.

Common management misconceptions are:

1. A client satisfaction level below complete or total satisfaction is adequate.
2. It's not profitable to invest in changing customers from 'satisfied' to 'completely satisfied'.

Their conclusion is that, in most cases, 'complete customer satisfaction' is key in order to secure customer loyalty and generate sustainable financial performance.

Loyalty & Satisfaction
Despite of what sometimes intuitively is assumed, the relationship between loyalty and satisfaction is in most cases not linear, but depends on the competition level of a specific market segment.

In a Dutch presentation, called "CRM Myths", direct marketing professor Janny Hoekstra confirms this relationship and shows that even 'satisfied clients' are in the so called 'indifference zone'.

The 'art of client management' is obviously to create 'Apostles' and to avoid creating 'Terrorists'.

So stimulate, instead of discourage, your clients to give you feedback and to complain, because this is the only way to create new apostles.

NPS
A relatively new and, according to Harvard (The One Number You Need to Grow), probably better method to measure client loyalty is the 'Net Promoter Score' (NPS). Simply score your clients on a 0-10 points scale on the question: "Would you recommend company X ?'

Now simply calculate the NPS score (%) as:
NPS = Promoters% (rating 9&10) - Detractors% (rating 6 or less)

NPS scores of 75% or more prove world class loyalty.

Loyalty effect
Another, intuitively driven, perception is that the more customers are loyal, the more they generate profit.

In general this seems true, however as Hoekstra shows: not every 'more loyal' client is also per definition 'more profitable'.

Just like Reinartz (Insead) stated in his article : 'Not all custumors are equal'.

Reinartz defines different client groups called: Butterflies, Strangers, True Friends and Barnacles.

Each group urges a different approach in a Customer Client Strategy.

Investing in 'True friends' appears essential and eventually pays out.



Customer Lifetime Value
Actuaries that combine marketing an actuarial sciences could help by defining and calculating what is called: The Customer Lifetime Value (CLV)

The CLV of a specific client(group) could be defined as the discounted value of the yearly margin (m = profits - costs), with discounting rate (i) and the (client) retention rate (r).

CLV:Rule of thumb
In the strongly simplified case with constant margin, the CLV - as a rule of thumb - could be defined as the margin (m) multiplied with the so called margin multiple = r/(1+i-r).

Example: Discount rate = i =12%, Retention rate = r = 90%, results in a CLV of approximately 4 times the yearly margin.

As is clear from the formula and table above, the choice and impact of the discount rate is only significant in combination with a high (>90%) retention rate.

Modeling and creating Client Value is not only in the interest of the shareholder, but moreover a case of creating creating added value for clients, in particular 'best satisfied clients'.

More info at: Modeling CLV(insurance), Customer Metrics

Aerodynamic Career Style?

Careers follow the laws of aerodynamics. There are two main opposite style types of making career. You may choose to become a "Balloon Career Maker"(BCM) or a "Wing Career Maker (WCM).



Let's start with the most traditional way to make career

The Wing Career Maker (WCM)
As a WCM you use the aerodynamic Lift effect to get higher on the career ladder.
Although the lift of an airplane is a combination of several effects, a substantial part is what's called the Bernoulli Effect. In short, the airplane gets lifted because the curved shape (airfoil) of a wing forces the air that flows above the wing to a higher velocity than the air under the wing. Depending on the shape and the angle of the wing, this causes a low pressure above the wing and a high pressure under the wing. The result is the desired lift. In formula :

L = K . v² . A

(L = Lift, K = shape dependent constant, v= velocity, A =wing Area)

The WCM works just like that. By being more productive (= increase speed v), creating support for his ideas and actions (= create a larger area A), the 'beginning manager' relieves (the stress of) his superior managers (= under pressure above the wing) and - at the same time - puts pressure on his employees to perform (= High pressure under the wing). The result is he gets promoted (= lifted).

As the formula shows, 'being more productive' has an emerging quadratic effect, while 'creating support' only has a simple single multiplier effect on promotion.

By being conscious of the lift formula effects, the WCM has the opportunity to change his management style (= shape) and approach (=angle) in a way that he may reduce and calibrate the employee 'pressure effect' to a healthy (optimal) level. Reduction however, will have a negative effect on his career speed. On the other hand this healthy pressure level will motivate his employees for better performance and eventually lead to better company results on the long term.

The crucial question here is, does senior management have sight and steer on these 'long term' effects or are they only managing short time result? In the first case, promotion will lay ahead.

Now let's look at the opposite style.

The Balloon Career Maker (BCM)
The BCM makes use of another aerodynamic effect called Hot Air Balloon Lift. The heated air inside a balloon weighs less than the surrounding ambient air displaced by the balloon. The difference in the air weights is the gross lift. In formula:

L = V.g.(ρ_a - ρ_i)

(L = Lift, V= Balloon Volume, g = gravity constant, ρ_i = density inside, ρ_a = density ambient )

As BCM you don't seem to worry about your productivity and career speed. You focus on your desires and needs. You cultivate the fire that's burning within you (= heating of the air).
You invest (=heat) in yourself through study and training and expose your skills to your environment (= the air gets hot).

As a consequence you'll get noticed by higher management, who'll recognize your knowledge. Your star will rise (= Volume increases), you'll get promoted (=Lift),because you're a professional help instead of a higher management threat.

What's best?
There's no 'best way' to make career. Just be who you are and try to take advantage of thermal updrafts so that you may fly, rise and fall, like a thermal plane without working like a hound dog or studying like a madman. Enjoy life, be a glider!

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Zorro Decisions

In times of change, success depends, more than ever, on taking the right decisions that have the support of your team or family.
Because of the importance of such decisions, by nature we're not inclined to take any alternative or more risky solutions. Instead we go on 'Save' and base our decision on our passed experiences and our preferred and filtered ways of taking in information and making decisions.

As team or family member we all are selective in what we see or hear. More over, in changing times most of us avoid unnecessary conflict. Neither do we like extra challenge, as our bow cannot always be bent. We're captured in what is called our confirmation bias.

To prevent possible failures in decision making, it's important to include the different views and (decision) qualities of our team (family) members in a balanced way.

To help to make better and more considered decisions, we may use the so called Z-Technique, that Sue Nash uses in her action learning programs. This technique is based on the Myers Briggs Type Indicator (MBTI).

To remember it better, Steve Roesler , related this technique, that he called 'Decision z', to the tv and movie character Zorro. So we might call it the 'Zorro Decision' technique.

The Zorro Decision technique is based on 4 steps:

• Sensing
  Walk through and write down all possible facts and factual details.
• Intuition
  Take a 'big picture' approach to think 'long term'.
  Write down all opportunities, possibilities, and connections between cause and effect.
• Thinking
  Write down and discuss all possible solutions. Each with their pros and cons, risks, benefits, consequences and likelihood.
• Feeling
  What impact does the decision have on other stakeholders or group members ( the 'people factor') How will you feel about the result? Will it gain support or meet opposition?

Remember Zorro next time you're about to take a group decision!

Sources: Sue Nash Consulting, Roesler Consulting Group

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Manageable?

In order to succeed in a certain action, we often develop an action plan, a process that defines sub-actions in terms of who, what, when and where.

To guarantee that we succeed as much as possible, we have to maximize the control of this process of sub-actions. Make the process manageable.



In managing this process it's important to identify the nature and co-dependency of your sub-actions.

In general it's important to characterize sub-actions as follows:

Characteristic	Understandable	Predictable	Solvable
Simple	++	++	++
Complicated	+	+	++
Complex	-	-	+
Chaotic	--	--	-

Examples

Characteristic	Example	Description
Simple	Doorbell	Single component/ process with defined output
Complicated	Watch	Several components working together with defined output
Complex	Weather	Many interdependent components with hardly predictable output.
Chaotic	Clouds (form)	No sub components to identify, output unpredictable

Always analyze and characterize the components or sub actions of your action plan.
Not doing so will certainly cause trouble.

Example
One of the causes of the 2008 credit crisis is that we try to manage an in essential 'chaotic process' as a 'complicated process'. More traditional regulation rules (or governance back up) won't stabilize the banking system on the long run (in fact they make it worse), because these rules would imply that the nature of the financial markets is known and can be captured in a controllable mathematical linear system.

Financial markets are complex and chaotic systems, just like the weather. This implicates that regulation should be much more focused on "Plan B" measures than on detailed rule based regulation.

This means that regulation has to be formulated in such a way that Banks, instead of proving more and more that they will 'never' be insolvent (e.g. calculated risk=0,5%, that can't be calculated!), are forced to deliver Plan B's in which they state how they'll act in the 'unexpected' case of insolvency or iliquidity (average at least once in 200 years).

Just like you've got an umbrella in your car (Plan B), because you know that even though the weather forecast was 'sunny', you never can tell precisely when it's going to rain.

Most processes in life turn out to be chaotic on the long run. Analyze and control them, but don't forget to (always) carry your "Plan B" in your pocket.

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