Archive for December, 2007

Corporations versus the Marketplace

December 22, 2007

It’s useful to compare the way things work within companies versus how things work in the marketplace.

  1. How people are paid:
    • Company: people are paid based on whether they do what they’re expected to do. In a company how much money you make depends on someone’s expectations of you.
    • Marketplace: people get paid based simply on what they do. In the market you don’t get paid any more money if you exceed your (or someone’s) expectations. Example: your local deli owner doesn’t make any more money if his sales at the year end beat his expectations.
  2. What happens to information:
    • Company: people have an incentive to hide information. Example: people don’t want to upset their bosses, so they don’t reveal problems; further, they avoid disagreeing with their boss.
    • Marketplace: businesses have an incentive to uncover valuable information and act on it. Example: a shoe store owner wants to know what kinds of sneaker kids will be buying this summer.

Ideally, inside a company employees would be paid based on what they do, not on someone’s expectations.

Companies should be looking for ways to provide their employees with the incentive to uncover and act on private information.

The Wisdom of Crowds by James Suroweicki

Humans are relatively good at induction and relatively poor at deduction; computers are just the opposite

December 21, 2007

Induction is reasoning from a limited number of observations toward a general conclusion. A classic example: After observing that 2 or 10 or 1,000 ravens are black, you may decide that all ravens are black.

Another way of thinking about induction is that it is reasoning by pattern recognition – we fill in the gaps of missing information.

With deduction you start with a set of possibilities and reduce it until a smaller subset remains. For example, a murder mystery is an exercise in deduction. Typically, the detective begins with a set of possible suspects — the butler, the maid, the business partner, and the widow. By the end of the story he has reduced this set to only one person: “The victim died in the bathtub but was moved to the bed. Neither woman could have lifted the body, nor could the butler with his war wound. Therefore, the business partner must have committed the crime.”

Humans are relatively good at induction and relatively poor at deduction. Any of us is capable of instantly recognizing a face (an inductive task), yet most of us would have a tough time quickly doing the deductive calculation:

(239.46 x 0.48 + 6.03) / 120.9708

Computers are relatively poor at induction and relatively good at deduction. A simple pocket calculator can quickly and perfectly do the calculation, while it is a very hard programming challenge to get even a powerful computer to accurately recognize a face.

The Origin of Wealth by Eric D. Beinhocker and Logic for Dummies by Mark Zegarelli

Story telling and story listening are important to the way we think

December 20, 2007

Stories are central to our mental processes for understanding, remembering, and communicating.

Plato said: “Those who tell stories rule society.”

The next time you are at a dinner with friends, sit back for a minute and observe the goings-on.  What is everyone doing?  Most of the evening will probably be taken up exchanging stories, funny ones, sad one, stories about friends, stories read in the newspaper, and so on.

Why is story telling and story listening so important to the way we think?

Stories are a way in which we learn.  For example, by reading Shakespeare, we can learn all sorts of useful lessons about love and family relationships.  The best selling business books are often stories of successful individuals or companies; everyone wants to read stories about how Jack Welch or Bill Gates “did it,” hoping to glean patterns of success.

The Origin of Wealth by Eric D. Beinhocker

Companies are paying people to lie

December 19, 2007

Companies are paying people to lie.

Companies offer bonuses to executives and workers when they surpass a given target. Companies do this to push executives and workers to meet goals that seem unattainable. But the real effect of these kinds of targets is to encourage people to be deceptive, i.e. to lie. Below are a couple examples to illustrate this.

Goldbricking in a Machine Shop

Lathe operators in a certain machine shop are paid according to what’s called a “piece-rate incentive system.” They start out with a rate per piece. Once they hit a certain target, their rate per piece increases. Once they get over a second hurtle the rate per piece increases again.

The problem the workers faced was that if they worked too hard or too fast, the hurtle would be raised. So, the workers restricted their output and worked more slowly than they might have.

Instead of trying to be as productive as possible, they spent their time figuring out how to manipulate the rate per piece so they could make as much money as possible.

Management Lowballing

The phenomena we just saw with the lathe operators is also at work with managers.

Tell a manager that he will get a bonus when budget and performance targets are met and two things are sure to happen:

  1. Managers will set targets that are easily reachable by lowballing their estimates for the year ahead and poor-mouthing their prospects.
  2. Once targets are set they will do everything they can to meet them.


The company does not know the real productivity of the lathe operators.

The company does not know what the real performance is of its managers.

Companies need good information to plan for the future, but they are not getting it because they are paying their employees to lie.

— Extracted from The Wisdom of Crowds by James Suroweicki

Word of the day: Lowball

December 18, 2007

lowball, to deliberately estimate a lower price for a service or merchandise than one intends to charge.

Example Usage: to lowball the cost of a move.


Be a creative genius up till the age of 90 (and beyond)

December 17, 2007

Dr. Irving Lorge, a psychologist at Columbia University showed that older people lose nothing in mental power if they keep up their active interests. He showed that the ability of the mind to think and create, barring illness, is with you until the age of 90 and past. There are a host of dramatic instances in history that points up this fact:

  • Rodin, the sculptor, did some of his finest work after 70.
  • Michelangelo was 70 when he painted the frescoes in the Sistine Chapel.
  • Verdi composed the opera Otello at 75 and Falstaff at 80
  • Thomas Hardy was in full flush of literary creation at age 88.
  • At 98 Titian painted the Battle of Lepanto.

In fact, 5% of all the works of genius have been done after the age of 80.

Words of Power by Wilfred Funk

Expand your vocabulary, expand your world

December 15, 2007

Thought without words is impossible.

There is such an intimate connection between ideas and words that whatever deficiency or fault there may be in the one necessarily affects the other.

The more words you know the more clearly and powerfully you will think.   And also, the more ideas you will invite into your mind.

Words of Power by Wilfred Funk

Example of an Information Pattern — Garlic Lowers [Does Not Lower] Cholesterol

December 15, 2007

A few days ago I wrote a blog on information patterns. Today I will give an example of an information pattern.

There is a debate occurring in parts of our society on whether garlic lowers cholesterol. There are documents on the web that claim garlic lowers cholesterol, and there are documents that state garlic does not lower cholesterol.

“Garlic Lowers Cholesterol” represents one information pattern.

“Garlic Does Not Lower Cholesterol” represents another information pattern.

Each web page which claims garlic lowers cholesterol is an instance of the “Garlic Lowers Cholesterol” information pattern.

Each web page which states garlic does not lower cholesterol is an instance of the “Garlic Does Not Lower Cholesterol” information pattern.

Tips to stay warm and save money during the winter season

December 14, 2007

During the heating season, keep the draperies and shades on your south facing windows open during the day to allow the sunlight to enter your home and closed at night to reduce the chill you may feel from cold windows.

More tips:

Word-of-the-day: bailiwick

December 13, 2007

bailiwick (BAY-li-wik) — a person’s area of skill, knowledge, authority, or work.

Example Usage: to confine suggestions to one’s own bailiwick.

Synonyms domain, department, sphere, territory, turf.