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Mental bias leaves us unprepared for disaster
August 14, 2017 | Financial Times | Tim Harford.

Even if we could clearly see a crisis coming, would it have made a difference?

The 2004 storm, Hurricane Ivan, weakened and turned aside before striking New Orleans. The city was thus given almost a full year's warning of the gaps in its defences. The near miss led to much discussion but little action.

When Hurricane Katrina hit the city, evacuation proved as impractical and the Superdome as inadequate as had been expected. The levees broke in more than 50 places, and about 1,500 people died. New Orleans was gutted. It was an awful failure but surely not a failure of forecasting.

Robert Meyer and Howard Kunreuther in The Ostrich Paradox argue that it is common for institutions and ordinary citizens to make poor decisions in the face of foreseeable natural disasters, sometimes with tragic results.

There are many reasons for this, including corruption, perverse incentives or political expediency. But the authors focus on psychological explanations. They identify cognitive rules of thumb that normally work well but serve us poorly in preparing for extreme events.

One such mental shortcut is what the authors term the “amnesia bias”, a tendency to focus on recent experience (i.e. "disaster myopia" the human tendency to dismiss long-ago events as irrelevant, to believe This Time is Different and ignore what is not under one’s nose). We remember more distant catastrophes but we do not feel them viscerally. For example, many people bought flood insurance after watching the tragedy of Hurricane Katrina unfold, but within three years demand for flood insurance had fallen back to pre-Katrina levels.

We cut the same cognitive corners in finance. There are many historical examples of manias and panics but, while most of us know something about the great crash of 1929, or the tulip mania of 1637, those events have no emotional heft. Even the dotcom bubble of 1999-2001, which should at least have reminded everyone that financial markets do not always give sensible price signals, failed to make much impact on how regulators and market participants behaved. Six years was long enough for the lesson to lose its sting.

Another rule of thumb is “optimism bias”. We are often too optimistic, at least about our personal situation, even in the midst of a more generalized pessimism. In 1980, the psychologist Neil Weinstein published a study showing that people did not dwell on risks such as cancer or divorce. Yes, these things happen, Professor Weinstein’s subjects told him: they just won’t happen to me.

The same tendency was on display as Hurricane Sandy closed in on New Jersey in 2012. Robert Meyer found that residents of Atlantic City reckoned that the chance of being hit was more than 80 per cent. That was too gloomy: the National Hurricane Center put it at 32 per cent. Yet few people had plans to evacuate, and even those who had storm shutters often had no intention of installing them.

Surely even an optimist should have taken the precautions of installing the storm shutters? Why buy storm shutters if you do not erect them when a storm is coming? Messrs Meyer and Kunreuther point to “single action bias”: confronted with a worrying situation, taking one or two positive steps often feels enough. If you have already bought extra groceries and refuelled the family car, surely putting up cumbersome storm shutters is unnecessary?

Reading the psychological literature on heuristics and bias sometimes makes one feel too pessimistic. We do not always blunder. Individuals can make smart decisions, whether confronted with a hurricane or a retirement savings account. Financial markets do not often lose their minds. If they did, active investment managers might find it a little easier to outperform the tracker funds. Governments, too, can learn lessons and erect barriers against future trouble.

Still, because things often do work well, we forget. The old hands retire; bad memories lose their jolt; we grow cynical about false alarms. Yesterday’s prudence is today’s health-and-safety-gone-mad. Small wonder that, 10 years on, senior Federal Reserve official Stanley Fischer is having to warn against “extremely dangerous and extremely short-sighted” efforts to dismantle financial regulations. All of us, from time to time, prefer to stick our heads in the sand.
amnesia_bias  biases  books  complacency  disasters  disaster_myopia  dotcom  emotional_connections  evacuations  financial_markets  historical_amnesia  lessons_learned  manias  natural_calamities  optimism_bias  outperformance  overoptimism  panics  paradoxes  perverse_incentives  precaution  recency_bias  short-sightedness  single_action_bias  Tim_Harford  unforeseen  unprepared 
august 2017 by jerryking
Keeping America's Edge
Winter 2010 | National Affairs | Jim Manzi.

.....One of the most painful things about markets is that they often make fools of our fathers: Sharp operators with an eye for trends often outperform those who carefully learn a trade and continue a tradition. ...First, To begin with, we must unwind some recent errors that fail to take account of these circumstances. Most obviously, government ownership of industrial assets is almost a guarantee that the painful decisions required for international competitiveness will not be made. When it comes to the auto industry, for instance, we need to take the loss and move on. As soon as possible, the government should announce a structured program to sell off the equity it holds in GM. ....Second, the financial crisis has demonstrated obvious systemic problems of poor regulation and under-regulation of some aspects of the financial sector that must be addressed — though for at least a decade prior to the crisis, over-regulation, lawsuits, and aggressive government prosecution seriously damaged the competitiveness of other parts of America's financial system ........Regulation to avoid systemic risk must therefore proceed from a clear understanding of its causes. In the recent crisis, the reason the government has been forced to prop up financial institutions isn't that they are too big to fail, but rather that they are too interconnected to fail......we should therefore adopt a modernized version of a New Deal-era ­innovation: focus on creating walls that contain busts, rather than on applying brakes that hold back the entire system.....Third, over the coming decades, we should seek to deregulate public schools. .....We should pursue the creation of a real marketplace among ever more deregulated publicly financed schools — a market in which funding follows students, and far broader discretion is permitted to those who actually teach and manage in our schools. There are real-world examples of such systems that work well today — both Sweden and the Netherlands, for instance, have implemented this kind of plan at the national level......Fourth, we should reconceptualize immigration as recruiting. Assimilating immigrants is a demonstrated core capability of America's political economy — and it is one we should take advantage of. ....think of immigration as an opportunity to improve our stock of human capital. Once we have re-established control of our southern border, and as we preserve our commitment to political asylum, we should also set up recruiting offices looking for the best possible talent everywhere: from Mexico City to Beijing to Helsinki to Calcutta. Australia and Canada have demonstrated the practicality of skills-based immigration policies for many years. We should improve upon their example by using testing and other methods to apply a basic tenet of all human capital-intensive organizations managing for the long term: Always pick talent over skill. It would be great for America as a whole to have, say, 500,000 smart, motivated people move here each year with the intention of becoming citizens.
social_cohesion  innovation  human_capital  Jim_Manzi  immigration  recruiting  interconnections  too_big_to_fail  economic_downturn  innovation_policies  outperformance  capitalization  human_potential  financial_system  regulation  under-regulation  too_interconnected_to_fail  systemic_risks  talent  skills 
august 2017 by jerryking
Mall REITs: 1Q17 Recap & 2Q17 Preview - Thasos Group
Key Conclusions

Most REITs operating malls classified as high quality Class A by Green Street Advisors have negative YoY foot traffic on a rolling quarterly basis through May 2017:
Simon Property Group (SPG): -5.4%
General Growth Partners (GGP): -5.7%
Taubman Centers (TCO): -6.2%
High-tech stores such as Apple, Microsoft, and Tesla have no effect in preventing declining traffic.
Malls with destination restaurants such as Cheesecake Factory and P.F. Chang’s underperform by 3.5%.
Malls with high-end department store anchors such as Nordstrom and Macy’s underperform by 3%.
Malls and strip centers with grocery stores and consumer staples outperform by 5%.
location_based_services  shopping_malls  REITs  insights  Thasos  outperformance 
july 2017 by jerryking
Five U.S. sectors expected to outperform in 2016 - The Globe and Mail
PAUL BRENT
Special to The Globe and Mail
Published Thursday, Jan. 07, 201
forecasting  trends  outperformance 
february 2016 by jerryking
Innovation: If you can’t make yourself obsolete, someone else will - The Globe and Mail
GUY DIXON
The Globe and Mail
Published Thursday, Jun. 26 2014

I think at the root of the problem is a deficit of ambition [JCK: i.e. a lack of chutzpah or audacity] The larger the corporation, the safer they become. What I’ve witnessed, certainly between 2008, 2009, is this deficit of ambition.....All of our research points to the fact that companies that do manage and measure innovation outperform those that don’t. You can put resources into place, and that’s where managing it comes in: deploying resources that will support innovative, new ideas; ensuring that you have a strong knowledge architecture – and that it is a formal, systemic thing, so that people access knowledge that is already developed; ensuring access to markets – that’s a structural element. Do your people have access to customers and markets?; and actively managing talent and selecting people and promoting them and ensuring that they have an orientation toward innovation and the development of new ideas....What percentage of turnover or revenue is presented by products that have been introduced in the past number of years? And for different companies, in different industries, that’s going to vary. Companies that are very successful treat that number as sacrosanct for the sales projection for next year and the bottom line for next year....Way too many companies are focused on market share versus the modern metric of, ‘Are we gaining a disproportionate share of opportunity?’ [Is this distinction something to be explored with the help of sensors, location-based services and the LBMA??] And then we’re back to this abandonment thing.
Managing_Your_Career  organizational_culture  playing_it_safe  innovation  metrics  ambitions  opportunities  market_share  complacency  measurements  talent_management  ideas  obsolescence  disproportionality  latent  hidden  self-obsolescence  large_companies  new_products  Fortune_500  brands  Guy_Dixon  outperformance  systematic_approaches 
june 2014 by jerryking
If I was...setting out to be an entrepreneur - FT.com
January 15, 2014 | FT | By Daniel Isenberg.

“Worthless Impossible and Stupid: How Contrarian Entrepreneurs Create and Capture Extraordinary Value”.

...If I were setting out as an entrepreneur today, I would buy an existing company to scale up rather than build a start-up from scratch. I would make incremental tweaks of improvement rather than innovate, exercise cool judgment rather than hot passion and build my departure plan from day one...a lot of great businesses, such as PayPal [the online payments system] and Kaspersky [the internet security company] are carved out of, or combined from, existing assets, or are family businesses taken sky-high by the second or third generation...Rather than start a new company, I would buy a rusty old business to fix up and grow as fast as I could. I want a discarded company that is undervalued but can be dusted off, refurbished with vision and talent, and scaled up. I would be talking to venture capitalists....I know that proprietary technology is not a market maker by itself. Great marketing and management almost always trump big innovation.

Minnovation – small tweaks on existing products – is what moves the ball of economic growth forward. Neither Facebook nor Google, for example, were technology pioneers.

Big innovations are few and far between and are often the stuff of large companies with long patience and deep pockets....Next, I would drain my venture of passion and replace it with commitment, hard work and realistic and relentless self-assessment....start with a stark test of harsh neon lights, exposing every flaw and crack long before the market does so that I can fix them before the customers vote with their feet....plan one's passionless departure from the start, creating a platform to allow the talented people and partners I hire to outperform me very soon.
entrepreneur  entrepreneurship  rules_of_the_game  unglamorous  books  Daniel_Isenberg  advice  howto  passions  exits  lessons_learned  turnarounds  contrarians  scaling  minnovation  undervalued  under-performing  carveouts  family_business  proprietary  incrementalism  self-assessment  customer_risk  breakthroughs  large_companies  vision  refurbished  spin-offs  hard_work  dispassion  marketing  management  commitments  marginal_improvements  unsentimental  outperformance 
january 2014 by jerryking
Real estate agent’s school opinions spark firestorm in GTA
Sep. 08 2013 |- The Globe and Mail |by GREG McARTHUR.

Although it’s not unusual for real estate agents to post test scores on their websites, Ms. Kostyniuk, has gone two steps further, devising her own methodology for ranking schools and then offering her candid opinions, often on video. Her system, she says, is supposed to take into account socio-economic factors to make the rankings fairer, but instead she has sparked a firestorm on websites popular with educators. While she is applauded by the likes of the Fraser Institute for trying to measure school performance, lawyers with the Peel District School Board are discussing how they can persuade her to cease and desist publishing her ranking system. “I think we’re going to appeal to her sense of good taste and respect and ask her to not do this to our schools,” said the board’s director of communications, Brian Woodland....Her rankings rely primarily on the standardized tests administered by Ontario’s Education Quality and Accountability Office, but with a few twists. In an effort to identify underrated schools, she created what she calls the Teacher Difficulty Index.

While filming herself in promotional videos outside many of Mississauga’s schools, she says she encountered teachers and principals who revealed to her the four main factors that make a teacher’s job more difficult: lower household income levels, parental education, the number of single parent households in the neighbourhood and the number of ESL students. She purchased data about these factors from a polling company, and using a formula – she previously worked as a geomorphologist, her website says – came up with a list of schools that she believes are environments where it is more difficult to teach. From there she developed a “potency list” – schools that perform better than they should given the socio-economic factors in their neighbourhood.
real_estate  education  schools  performance  Mississauga  indices  underrated  data  ranked_list  standardized_testing  teachers  school_districts  rankings  data_driven  test-score_data  outperformance  creating_valuable_content 
september 2013 by jerryking
Top-Down Disruption
May 23, 2005 | Strategy + Business | by Nicholas G. Carr.
As Clayton Christensen warns, look out for the underdog — but also beware the leader of the pack.

A single-minded focus on bottom-up disruptions, the model is also potentially dangerous. It may lead managers to overlook a very different sort of disruption — one that emerges not at the bottom of the market but at the top.

In stark contrast to the bottom-up variety, top-down disruptive innovations actually outperform existing products when they’re introduced, and they sell for a premium price rather than at a discount. They’re initially purchased by the most discriminating and least price-sensitive buyers, and then they move steadily downward, into the mainstream, to recast the entire market in their own image. A top-down disruption is as revolutionary as a bottom-up one. But the good news for incumbents is that they have a much better chance of surviving, or even spearheading, the former than the latter.
Nicholas_Carr  Clayton_Christensen  outperformance  disruption  innovation  large_companies  top-down  bottom-up  dangers  dual-consciousness  overlooked  single-minded_focus 
july 2012 by jerryking
Is Marriage for White People? — By Ralph Richard Banks — Book Review - NYTimes.com
September 16, 2011 | NYT | By IMANI PERRY

"...The impediments to marriage for black people are daunting and
multifaceted.

Black women significantly outperform black men in high school and
college. As a result, the black middle class is disproportionately
female and the black poor are disproportionately male, and the gap is
widening. Extraordinary rates of incarceration for black men, and the
long-term effects of a prison record on employment, exacerbate this
situation. Banks refers to studies indicating that “in evaluating
potential mates, economic stability still matters more for
African-Americans than for other groups.” Yet they may never find that
security, and therefore never marry.

Moreover, the benefits of marriage don’t accrue as readily for
African-Americans as for other groups precisely because of their
economic instability."
African-Americans  book_reviews  disproportionality  marriage  mass_incarceration  middle_class  multifaceted  outperformance  racial_disparities  relationships  stigmatization  unemployment  women 
september 2011 by jerryking
FT.com / Entrepreneurship - Get the valuation right and don’t insult the vendor
November 9 2010 | Financial Times | by Roger Smith, a director
of Stirling Business Solutions, a business broker. “Don’t insult a
vendor by offering a price you wouldn’t accept unless you were
desperate, unless of course they are. You may have to live with the
consequences if he feels aggrieved and leaves the company in a bad state
before he departs. “To bridge expectations and manage risks, earn-outs
[which pay sellers more if they outperform] are the name of the game.
Spend as much time defining the formula as you did agreeing it in
principle. “Share swaps will preserve your cash and keep a younger
vendor incentivised. “Have a must have and a desirable list, as this
will help manage deal fever.”
exits  valuations  entrepreneurship  earn-outs  selling_a_business  buying_a_business  outperformance 
november 2010 by jerryking
Money Grows on Trees as Palm Oil Outperforms Crude (Update3)
Aug. 29, 2006, (Bloomberg News) G&M pg. B12 By Claire Leow and Saijel Kishan
investments  ideas  palm_oil  filetype:pdf  media:document  outperformance 
march 2009 by jerryking

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