Principle of Universal Options

Whatever the challenge, field or situation, there are options to invest in to hedge risk and unceirtainty.



This is a rather bold assertion, but I believe it to be very true. Some examples:

Stock market: Options and other derivatives.
Commodity and currency markets: Hedging or futures.
Business and personal economy: Insurance, portfolio management,
Personal health: Excercise, healthy food, vacations
Personal Career: Education, training, parallell ventures
Project Management: Real Options, Risk and change management
Engineering: Modularity, flexibility
Medicine and psychology: Alternative treatment forms

My note to self? Whatever the challenge, there will be heging possibilities that for a limited cost will reduce the risk we are facing.

Evolutionary Prediction - The Wisdom of the Crowds

From my point of view, the biggest single paradigm shift in human history can be marked by the introduction of theoy of evolution and the theory of natural selection. The theory not only gives us meaning in understanding the past, it is the basis for the most powerful ways we have to predicting the future.



First and foremost, it opened up a totally new perspective on the whole concept of humans and where we come from. Old school religious theories were thrown out (even though some hardcore bible-enthusiasts still cling to sci-fi concept of intelligent design).

Secondly, and maybe just as important it gave us a general reference model that can be used outside the domain of biology. Topics like desease spread, stockmarket behaviour, agriculture, development of societies, climate change to the control of robots are today modeled and inspired by evoutionary principles. Th set of theories analytical models are now so detailed that they are or close to be proven.

Due to this last reason, an evolutionary prediction model given these theories would be rather neat. We could predict - given a set of factors - how humans, may evolve, how a desease will spread or maybe how societies may evolve and in that way use the models to set in countermeasures that can reduce the impact of an unwanted trend. There will never be a psychohistory like Isaac Asimov describes in his foundation series. Still, I believe the predictive gains would outweigh the misses.

As can be expected, this evolutionary prediction idea is not new. Darvin himself set out several predictions and many were proven. Some examples can be found here. There are also several evolutionary and genetic algorithims that are used extensively in many scientific fields - like the ones mentioned above.

What is most exciting though in relation to evolution , is the insights so well described in The Wisdom of Crowds (Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations).



Its central thesis is that a diverse collection of independently-deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts. To exemplify, lets mention a few cases from book:

1. The best predictor of the next president in the US is a betting market on the next president.
   
2. The best predictor of the number of jelly beans in a jar is a average vote between a diverse group of people.

In many ways this is exactly how evolution descibes it. The best solution is the most likely to survive given a diverse and selfish set to select from. The volume of the crowds is the selector.

This evolutionary crowdsourced prediction method has just started to be implemented. One of the best examples is how google has set up internal crowdsourcing to perform strategic prediction. Nice results! I bet Google will survive for quite some time in the evolutionary game of corporations. ;D

Broken Windows

Have you ever left a cup on the kitchen table and an hour later the whole kitchen is a mess?



If you have you have experienced the broken window theory:

The observation that a few broken windows in an empty building quickly lead to more smashed panes, more vandalism and eventually to break-ins. The tendency for people to behave in a particular way can be strengthened or weakened depending on what they observe others to be doing.

The thory developed by Dr. Keller in the beginning of the eighties has been a role model for crime reduction in several US cities and studies show that it has some sense to it. According to the theory, the prevention of the effect is to stop all kinds of small crimes - like grafitti, shoplifting etc - and violent and serious crime will drop as well. Since the theory was implemented in practice in many US cites (most famous is New York), you can see that violent crime rates dropping in many US cities.



Yes there are critics to the theory, but it still makes sense. Personally, I see that the insight is relevant in so many other areas that affect us - from the private to our business lifes. Hence, a great idea.

Clean you desk, wash your car, put the cups in the washing machine, allow no sloppy work in your team. Who knows what may happen if you don't.

90-9-1 Community!

As described here before [1], power laws are very potent at describing many type of phenomena. Latest principle is the 90-9-1 principle of online communities [2].

The concept is simple. In an online community, 1 percent are creators of content, 9 percent are editors of content and the remaining 90 percent are just the curious audience watching. The phenomenal thing is that this rule seems to be proportional, so that getting more creators to a site, increases the editors and the audience.


My bet is that many users act in different roles depending on the site they use, but that there is a small minority of heroes out there that generates most of the community content - and hence drives the traffic.


[1] The Vital Few or the Trivial Many?
[2] 90-9-1 Principle

The Seven Principles of Influence

The book Influence [1] gives a unique guide to how people are influenced by 7 different principles. Here we list them:

1. Perceptual Contrast - when one item is presented after a more expensive one, the first item presented will be considered cheap.

2. Recipocation - when a person is given something he will try to repay, in kind, what he was given. The strategy is to give a person some small favor (a rose, a candy) and get big benefits in return (your purchase)

3. Commitment and Consistency - once a person has commited to something he will continue being consistent to this commitment. Hence, by getting an initial commitment from one you wish to influence, the target will likely by consistent further on with his initial commitment.

4. Social Proof - people will tend to base their beliefs or act upon what other similar people in the same situation would believe in or act after. The social proof principle is the strongest when similar people are the basis for the proof or if the person to decide is unceirtain in the situation.

5. Liking - people tend to say yes to other people they like. Liking can be increased by such things as the others physical attractiveness, similarity, though compliments or through continued contact with the other person.

6. Authority - people with some sort of authority (knowledge, titles, clothes etc) will tend to have influence over others.

7. Scarcity - an item or other sort of quantity that is percieved as scarce will be considered attractive. People assign more varue to an opprotunity when it is considered less available.





[1] Influence: Science and Practice

The Vital Few or the Trivial Many?

When the Pareto Principle [1] was popularized within business and engineering in the 1940s by Dr. Joseph Juran, he called his theory "The Vital Few and the Trivial Many" [3] : A few vital inputs produce most of the results. For many years now that has been how we are taught to prioritize ideas and activities in business. However, thanks to the Internet, the Pareto Principle is being falsified [4] in various domains.
The insight comes from power law theory [2]. As one can see in the figure to the right (from wikipedia) , a power law distribution can be split into a vital few (the green area) and the trivial many (the yellow). What is happening for many products and services sold via the Internet is that demand is shifting down the tail - making the tail fatter and the head slimmer! According to [5] there are 3 reasons for this:

1. Cost of production of many products from music and books to Internet services is falling, thereby creating more available products in the tail.
2. Cost of inventory and distribution is falling though JIT production, digital content and application hosting. The marginal cost of one more product ore product feature in the inventory is extremely small, making it profitable for low volume sales of one item.
3. The Internet and it's search engines and communities are creating new ways for consumers and businesses to find more specialized products and solutions that fit their exact tastes and needs.
   

This insight is rather extraordinary because it shows that lucrative business opportunities exist where there was said to be none. Furthermore, there are signs that the profit margin is larger and the competition smaller at the tail per unit than at the head. Sounds like faster money to me!

[1] The Pareto Principle
[2] Power Laws and Long Tails
[3] The Vital Few and the Trivial Many (external)
[4] Falsifiability (external)
[5] The Long tail (exteral)

The Pareto Principle - After 101 Years

The Pareto Principle or the 80/20 [1] rule as it has often been called, was first noted in 1906 by economist Wilfredo Pareto while he was studying the wealth distributions of people. Apparently, 80% of a nations wealth was in the early 1900s controlled by 20% of the population. Since then, the Principle has been popularized in management theory and is applied in all sorts of domains. Take for instance blog entries such as this [3].

It seems that 100 years later the relationship has become even more differentiated. According to [2] 10% of the worlds population control 85% of the wealth. Hence, if Pareto had lived today, the Pareto principle would have been called the 85/10 rule.

[1] Pareto Principle - an explanation of the Pareto principle and further reads.

[2] UN study of the wealth distribution in the world - ppt of some very interesting figures.

[3] Notes to Self blog entry about 80/20 in your daily life