Let's have a second look at Peter Bevelin's Seeking Wisdom, focusing on specific ideas from his work.
1a) Praise changes behavior, criticism does not - emphasize what is going well.
1b) Appealing to interest almost always works - for example, why do something unethical, since it exposes you to blackmail?
1c) Paying people for a shift and sending them home when the work is done is the best incentive for prompt and accurate work.
Psychology is always lurking in this book and one of its main applications is to motivation. I don't believe in the partnership of carrots and sticks (most carrots are basically sticks anyway) so the above thought helpfully clarifies the orange approach. However, from my experience many people simply don't respond to feedback, preferring instead to make inevitable errors, then 'learning from mistakes'. Why is this such a popular method? Do sailors learn by sinking their own battleships? Self-interest and clear incentives are buoyant tools when directing a deluded skipper.
The third quote was based on a particularly memorable anecdote about shift workers - no matter what the boss did, the work always expanded to fill the allotted time. One day, the boss declared - the shift ends when the work is done. Again, motivation using self-interest, delivered via the clearest of incentives, and in this case enough to ensure an efficient shift.
2a) Humans excel at interpreting new information such that all prior interpretations remain intact.
2b) A good place to put armor is where the bullets did not hit - everyone else hit by those bullets likely didn’t make it back.
The subtlety in the above pair is that when the vehicle returns to the base, the temptation is feel good about the success - they made it home because the armor protected them. The failure to consider those who perished means more of the same, ensuring that the next round of casualties will have been entirely preventable.
3) A great lesson in education is knowing how to do something when it needs to be done, whether you like to do it or not.
This type of 'insight' is a possible way to measure privilege; someone whose life is defined by want and necessity will not derive this great lesson from having to complete a problem set in the wee hours of the morning.
4a) Never ignore a subset of information just because it’s not easily or clearly counted as the rest. Try to be roughly right, not precisely wrong.
4b) An inferior option makes a relatable but superior option more attractive. For example, most people choose money over a fancy pen, but some switch to a fancy pen if a bland pen is added to the original choices.
This picks up on a point I made in the original reading review. The specific example builds on a finding that people overvalue options if it wins in a direct comparison to a similar choice. If you offer someone a fancy pen or money, they choose differently than if the choices included a third option, the bland pen. If you want to be roughly right when choosing among many options, perhaps one way is to narrow the decision to two options, and then proceed as if those earlier options were never part of the equation.
5a) EBITDA is odd because it suggests depreciation is not an expense, that it is a non-cash charge. It’s merely unattractive because you pay before the return, and therefore the returns in the future represent accounting gymnastics.
5b) Cost reductions alone aren’t important, it’s also a question of whether you recognize the benefits of those cost reductions.
Frankly, I only barely understand topics like EBITDA from reading about the balance sheets of soccer clubs, a topic thoroughly covered by The Swiss Ramble (who is now exclusively on Twitter - here's a not very illuminating example that mentions EBITDA). The larger point is good enough for now - the accounting maneuvers are always fun so long as you can support the business with cash flow. Otherwise, it quickly becomes like a river just gone dry; you suddenly see all the crap that inflated the water level.
The cost reductions get to the same idea. Again, on the surface it's always a great idea to reduce costs, but a reduced cost is in itself no automatic benefit. If the immediate benefit isn't obvious, the money is either going into an investment (which will take time to pay off) or to the profit margin (which means it might disappear into ownership's personal bank accounts).
6a) One way to evaluate a stock is to consider the whole thing, then translate the overall business into a pretax revenue amount that equates to your desired rate of return. OK, you value it at $500B, and you want a 10% return… if you must wait a year, that means $80B a year pretax… how many such businesses exist?
6b) Stocks have value because of dividends, not earnings. Earnings are a means to the end, either paid out in dividends or reinvested to produce dividends later. To justify putting down cash now, an asset must return cash later.
I think people create a great deal of confusion for themselves when they think of stocks as something resembling ownership in a company. Sure, there are enough parallels to make it true, but the bottom line is that unless you buy a majority of the shares stock ownership is little more than a right to future earnings. So instead of asking whether you want to 'own' part of the company, ask - can I get a dividend out of this stock asset?
7) Economists do well to ask ‘then what?’ If we trade away future claims on our output, then others have to invest in us.
I was trying to think up a colorful analogy for international trade, and this is what I got: it's like two guys standing face-to-face, each with a handful of the other guy's you-know-whats. They have two options: (1) twist or (2) let go. But here's the catch, or twist - if one guy lets go, the other guy will immediately twist. So what do you think will happen? At the very least, they'll invest enough into the situation so that no one suddenly becomes interested twisting, or letting go.
I've otherwise written enough about this topic - I mean both 'then what', and also Seeking Wisdom. Not sure if I've written enough about My Analogy for #7, but let's say it's enough for now, so I'll, er... let you go. Anyway, we'll finish up with part two next week.
