Subba’s Serendipitous moments

February 25, 2009

It’s the perception, stupid!

Most decision making processes pay a disproportionate emphasis on the aspect of analysis after one has made an assessment of the situation.

In fact the more important the decision, the more sophisticated the analytical tools.

That by itself is not wrong. However what is wrong is that spectacular errors in decision making can occur not because the analytical tools are inadequate, but our perception tools are! In fact, I blogged about decision frames borne out of perception here

The recent crisis amply  illustrates why:

  1. Even the highly respected Alan Greenspan admitted that he made a mistake by assuming that self-interest would enable banks to protect their own share holders.
  2. Few people are even aware of the perception biases. Looking at and perceiving the world is an active iterative process of creating meaning. This process is dynamic and often it shapes the subsequent steps in the decision making chain including the choice of analytical tools.
  3. Like perception bias, we also suffer from some form of selection bias. There’s a strong predisposition to see data that confirm our biases and ignore data that contradicts them. We also seem to emphasize recent events than historical events when anticipating the future outcomes.
  4. We also seek refuge in the majority. Just because a majority hold a particular view is no proxy that they have to be right. Often a majority is caused by a social contagion and they tend to avoid facing the “Black Swan” moment. And as the crisis has shown, the majority need not be correct.
  5. We need to understand human motivation for sure. Rewards and penalties are one axis to monitor human behavior, but there’s another equally important axis that has been given less importance. The better we understand how fear and greed are represented at an individual level and how they respond to specific externalities, we would be able to avoid crisis. It more important for Type A personalities than Type B personalities.

So are there any ways to improve perception tools?

  1. First, there has to be humble admission that we have limitations and flaws in the way we think about a given situation.
  2. There has to be a more open and backwardly integrated communication of how we arrived at a particular assessment or how we ‘manufactured’ meaning as we saw the situation. Such a communication helps us to uncover the biases.
  3. Every feedback mechanism should be “de-politicized” so as to uncover inconvenient facts.
  4. I am actively looking for more perception tools, since I have long been convinced that better perception is superior to better analysis.

One of the approaches that I have adopted to improving my own perspective is to “sleep on it” for a while.

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Crisis creates a new consciousness

The picture from the Economist serves  as the perfect metaphor for the current crisis.

Every crisis brings along with it a new consciousness and a completely new perspective.

Individuals who have faced a terminal illness suddenly seem to value life and relationships more. Some turn intensely religious. Life is never the same before.

I think the same could be true for organizations. After a turnaround, most organizations have a renewed sense of purpose. IBM became a world class services organizations after Lou Gerstener came on board in the mid nineties.

I am beginning to slowly think that this is could be true for economies and countries. Liberalization acquired new currency and followers after India faced the economic crisis in 1991. Many “old model” firms died, some refashioned themselves and many new organizations just became global firms thanks to the liberalization. Infosys is one of them.

Now what has changed during the current financial crisis:

  • Nationalization which was so ‘un-American’ has suddenly found eminent backers from Alan Greenspan to Paul Krugman. It increasingly looks like that Citibank may be nationalized any time.
  • Markets are not perfectly efficient and people are not always the best protectors of their own self interest.
  • Belated realization that the CEO compensation and the bonuses for Wall Street traders have contributed to the crisis. When President Obama said that the bonuses handed out by banks represented “the height of irresponsibility” he spoke for a huge silent majority. As Raghuram Rajam says : “At the very least, shareholders deserve better explanations. More generally, unless we fix incentives in the financial system we will get more risk than we bargain for. Unless bankers offer these better explanations, their enormous pay, which has been thought of as just reward for performance, will deservedly come under scrutiny.”
  • The greatest brand names can struggle to survive. Lehman Brothers, Merrill are now consigned to the bins of history and even Citibank are struggling. It pays to be humble.

Can you think of any new consciousness that has emerged as a result of the economic crisis?

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February 23, 2009

The teacher’s calling

Filed under: Inspiration,Learning — Subbaraman Iyer @ 3:21 am
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Some have taught you formulas, others teach you to solve problems.
Some have taught you the names, others have taught you to question and learn.
Some have taught you to paint, others have taught you to see.
Some have taught you the scale, others have taught you music.

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The Greenspan shift

Filed under: Business,Perspective — Subbaraman Iyer @ 2:07 am
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What goes through the mind to change one’s ideology — from a high priest of free market and laisser-faire capitalism to becoming an advocate of nationalism?

I wonder about Alan Greenspan’s — the former Fed Chairman recent recommendation of nationalising US banks on a temporary basis.

Is it the extent of  crisis when this whole thing started unfolding under his watch and that there’s no other option left but to nationalise some of the banks?

Or was he truly ‘shocked’ that markets didn’t work as he said in the Congress testimony a few backs back? His exchange with the Congress representative is crisp, clear and honest:

Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Initially I wondered whether he was being naive about Wall Street being self-regulating, that it was in the interest of the financial world to protect the consumer and the shareholder’s equity.

However, later, I think it is the hallmark of a truly wise person to admit one’s limitations and endorse the right solution for the problem. It only means that he is not a prisoner of his own view. Standing up and owning an error in front of Congress is not easy. He is the only person who has admitted some culpability. No CEO in Wall Street or anyone in the Government have done so.

One should also not ignore that Alan Greenspan steered the US economy though one of its largest booms in history.

The common view is that people tend to be stubborn as one age. It takes a rare mind to abandon what you have believed in all your life.

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February 20, 2009

U.S. trade surplus and deficit

Filed under: Perspective — Subbaraman Iyer @ 11:25 pm
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A mind blowing visualization of the changing U.S. trade surplus and deficits with various countries. Watch the animation as the data changes on a monthly basis from Jan 1998 to Oct 1998.

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February 19, 2009

BearingPoint files for bankruptcy

Filed under: Business,Model — Subbaraman Iyer @ 9:18 pm
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BearingPoint (16,000 employees) which was spun out of KPMG in 2001 filed for bankruptcy. BearingPoint provides technology and management consulting solutions and had always reported losses since 2001.

The bankruptcy petition listed more than $1 billion in assets and more than $ 1 billion in liabilities. 30% of its business came from Government contracts and the firm may have to sell off some its business units to help deal with the debt.

I am still trying hard to understand how is it possible for a consulting and services firm to have so much debt.

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February 18, 2009

Microsoft, hurry up!

Filed under: Business,Competition,Model — Subbaraman Iyer @ 11:00 pm
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The cloud computing battle is being fought on multiple fronts including creating some confusion in everyone’s minds. It is no longer being considered a niche and the next 12-18 months will see it become mainstream.

IBM has increasingly become aggressive and has teamed up with Amazon Web services to deliver its software.

While Amazon had deals with players like Salesforce.com, OpenSolaris, MySQL, RedHat, this deal with IBM is significant because it gives Amazon the clout and respectability for the enterprise.

The interesting question is what happens to Microsoft? Microsoft announced Azure which I referred to here, but didn’t put in any aggressive plans to pursue this with a backward cloud model. Perhaps Microsoft will offer a Cloud OS sometime in the future.

With this deal, Microsoft would be left with no choice but to adopt the cloud model quickly and aggressively across all its software product range. The other key decision that Microsoft would have to make is if the Microsoft cloud can connect to the rest of the clouds be it Google, Salesforce.com or Amazon or other private cloud.

IBM will also have a significant advantage as it can drive more cloud economics — hardware, storage, infrastructure software and other applications and can build completely new pricing models to gain market leadership.

Microsoft cannot afford to lose any more time. Microsoft has to rally with its developers and close the gap.

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Nokia – Skype deal will change the market landscape

Filed under: Business,Competition — Subbaraman Iyer @ 10:46 pm
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Nokia and Skype announced a significant deal which will change the market landscape completely.

Skype with over 400 million subscribers has a lite version which works on several handsets including that of Samsung, Sony Ericsson, Motorola and some models of Nokia.

But this deal with close integration to the Nokia’s N97 and followed by other handset models will give Nokia a decisive advantage against their models. Nokia is already the largest handset manufacturer today.

The key group which will be severely impacted would be the VoIP players who may face survival  issues. Already the bulk of the VoIP service providers are challenged to convert their users to profitable customers. Unless they find an alternative strategy by integrating the VoIP services with other services, they will find it difficult to survive.

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