White water white wash

We like things we are good at and we are good at things we intentionally practice.

We practice better numeracy through examples like A+ BS HSA rates. The point there was that organizations choose favorable framing in absolute or relative numbers.

Numbers are just characters in a story.

LoTR has Frodo. Stranger Things has Eleven. Batman has Batman. Tim Harford’s advice for better numeracy is to ask who is telling me this story and why are these the characters?

A clever example comes from the August 2022 episode of Acquisitions Anonymous where the hosts discuss a Vancouver white water rafting company. Business pitches use numbers to tell a story about why a business is worth a lot of money. Like a job interview or a date, it’s a polished version. 

This particular pitch used a blended SDE (seller’s discretionary earnings) multiple. Rather than value the business on elevated 2021 numbers, the seller’s broker included 2019 & 2018. That is a wolf in sheep’s clothing and co-host Bill D’Alessandro pulled away the mask. 

Yeah, Bill begins, blended earnings are often good but the 2021 Covid-19 bump is so large it pushes the weighted average higher than any other year. Pre-Covid-19 the SDE was around three-hundred-thousand-dollars but the weighted average is over five-hundred. 

Averages, weighted or otherwise, work best with distributions like number of autos owned, Wordle guesses, or years of school. 

Averages, weighted or otherwise, work terribly with distributions like financial wealth, number of testicles (an average of one), and movie revenue. 

Stories work best with coherent characters. Number stories work best with coherent calculations. We are experienced with stories about people. We stop books, leave theaters, or stream something else if we don’t like the way things fit together.

We’ve so much less experience with numbers. 

But now we have a little more. Thanks Bill.

2022 definitions

These are an ongoing series.

Psychological literacy: An understanding of ones unconscious and automatic processes. (via Dolly Chugh)

Heterogeneous: a data set where the mean is misleading. More here, here, and here.

Zoom towns: An enjoyable place to live enabled by remote work. (via Conor Sen)

Hopium: the drug of hope, as in, “you’re high on hopium.”

Inflation: the balance of supply and behavior.

Temperature: (An idea we love to talk about here, here – and this tweet is a great addition.

Breakthrough: (An update) In the early 2000s, Daniel Yergin said, the question around American energy was, “would imports rise to sixty or eighty percent?” Well, that didn’t happen.

“This guy, George P. Mitchell, in Texas was convinced you could get gas out of shale rock. He had a commercial reason, to supply a substantial party of Chicago’s natural gas and his fields were running down. It took sixteen years to get halfway there and another five years to get a complete breakthrough in 2003. People never saw it coming. No one saw the scale of it, how fast the U.S. went from the biggest importer of oil in the world to the biggest producer of oil in the world – a net exporter which was inconceivable.”

Fixing weaknesses (NFL)

Ethics aside, there are no bad businesses – only the wrong business model. Successful organizations have the right people interacting in the right way given the conditions. Outcomes are a mix of who and how with a sprinkling (or deluge) of randomness. 

One ‘condition’ is the relationships with customers. Amazon sellers interact through Amazon, and whatever information the everything store deems important is what the who needs to figure out how to do. As a result those stores compete on price and stars. 

Another ‘condition’ is fickle investors. Money managers prefer clients who aren’t depositing and withdrawing money constantly. So they write letters, go on podcasts, and pitch what they do in an effort to get the right clients. Organizations with a low CAC have figured out the current how

A ‘how’ we’ve advocated is to always fix your weaknesses. Eric Eager explains an NFL example. 

“The Chiefs just got done with negotiations with Orlando Brown, who wanted to be the highest paid left tackle in football. The Chiefs balked, and it’s a great decision. If you pay for a guy to go from an 85% win rate to a 95% win rate, that doesn’t matter nearly as much as taking your weakest guy from an 80% win rate to 87%.”

For NFL offensive lines the conditions are such to fix your weaknesses. 

A lot of times we look at the who and the how. It’s the nouns and verbs that are most salient. ‘Hire a new salesperson to make more calls.’ Instead should we start with the system conditions?

Systems are clearer during change. The four eras of consumerism: rural homes and mail, city center stores, suburban expansion, and internet DTC saw changes in the distribution and communication conditions and the dominant businesses changed. System analysis, relative to who and how, is likely underrated. 

Average measurements are overrated because they are easy to compute, give a number which implies certainty, and convey ideas about as well as a bunny ears black and white television.

Fixing weaknesses is a good default option. But so is asking about the system. It’s a non-obvious and valuable way to figure out how the who can do their best work. And maybe that means fixing weaknesses.

Robot vacuum innovation using JTBD

Robot vacuum innovation using JTBD

Too fast? Slow down. Too hot? Cool down. Too little? Add more. Too long to wait? Make it shorter. Maybe.

Waits are complainable for a couple of reasons. Fairness, if someone enters a line later but finishes sooner. Ambiguity, if the wait duration is unknown. Comfort, if there’s somewhere to sit, charge a phone, or entertain us, waits can be wonderful.

Not all problems have “symmetrical solutions”. Changing something else might change the main thing. Even better, sometimes something else is easier.

For instance, we bought a Roomba. It is loud. Rather, it is Loud AF.

Too loud? Make it quieter. Maybe. But loudness has layers like, how much noise I can hear. One change is quieter. Though that tradeoff makes it more expensive.

Another approach is to hear it less. The Roomba does just that! The vacuum has a scheduling feature and integrates with smart homes. Want a quieter Roomba? Run it when no one is home.

Asymmetry is at the heart of Alchemy. Rory Sutherland wants people to see that problems are asymmetrical and then use psychology (in this case, technology) to solve the problem in a new way.

The idea of symmetry is from Bob Moesta in episode 7 of the Circuit Breaker podcast. The idea of tradeoffs is from episode 2. One of the Roomba’s competitors is non-consumption, episode 13.

‘Typical’ monthly mortgages (1971-2022)

This is the ‘typical’ house payment for the last fifty years. ‘Typical’ being the median sale price and average thirty year rate.

If my parents had bought when I was born they paid $982. But if they bought when my brother was born, it would be almost two-hundred dollars less each month. A huge difference for a young family.

The sweet spot for modern buyers was October 2011 when payments flirted with $1,000. 

The Covid-19 drop and surge can be seen toward the right. It wasn’t until August of 2021 that payments crossed the trend line into wild heights. 

What difference does it make for someone now? Since the end of 2020, the ‘typical’ payment increased seven-hundred dollars a month. 

Interest rates are a headline metric, but are not the most important thing for buyers. The fall 2022 ‘typical’ monthly payment is: $2,580. A $50,000 decline on the purchase price is equivalent to 1% lower interest payments. Not only that, home prices have a .9 correlation with monthly payments whereas interest rates have a -.55 score.

Housing is easy news to consume. The bad is about rising prices and rates. The good is about remodels, flips, and luxury. The truth is somewhere in the middle, here it’s in color.

How “off track” are housing prices? The red line is the 2016- March 2020 trend line relative to the graph of median listing prices. Currently prices are a 33% premium to what the historical growth suggests.

United States figures only.

Sweet words

Successful copywriting uses the customer’s language. Find out what, how, when, and why the customer thinks – and the words they use.

One accent of customer language is certainty. We dislike not knowing. Not knowing feels risky. It’s why this bag of sugar is so sweet: 30 calories per serving. Diets are trends. Eat this or that? Now or later? Are health bars actually healthy? Is sugar bad for me? It’s too much! But this simple bag of sugar puts it in the customer language: calories, and not that many. 

Road construction is another example, only inverted. Fines doubled when workers present. I don’t know how much, but I certainly don’t want it to be doubled! In this case, the natural dislike of the unknown is magnified and aids in the messaging to slow down. 

This hook helped Jaws (1975) set the mold for summer blockbusters. It was a difficult movie to make, in part due to “that sonofabitchin’ bastard rig” (the shark) which kept breaking down. The footage was such a mess that during editing Steven Spielberg used barren shots of the water along with John Williams’ score. That was great because rather than seeing the shark, audiences imagined the shark, a worse fate. 

Organizations can remove or introduce anxiety in their customer communications. How much depends. On what? On what the customer thinks. 

We talked about Jaws’ role in the evolution of the movie business model in this post, Batman BATNA. Contact too:

1 math trick for better predictions

Warning, this is “I watched one YouTube video” level of expertise. Also, some graphs have truncated y-axis.

Predictions are fun. Will a dice roll four or greater? Will it rain tomorrow? Will this company be worth more money tomorrow, next month, next year? An event does or doesn’t happen. We get to predict an outcome.

If an NFL team wins six of their first seven games how many games will they win in total? Well 6/7 is ~85%, and there are seventeen games therefore they’ll win ~14.5 games. But in 2021 there was a team that won six of their first seven games and one math trick could predict it.

Pierre-Simon Laplace gives us the “rule of succession”. That sounds complicated but it’s simple: For any number of outcomes add one to the observed cases and two to the total cases.

Here are four coin flips: heads, heads, tails, heads. The observed rate for heads is 0.75 (3/4). The ‘Laplace’ rate for heads is 0.66 (4/6). Laplace’s addition shifts predictions away from ‘never’ and ‘always’. This is the secret. ‘Never’ and ‘always’ are rare for sequential events.

Here is what the Laplace rate looks like compared to the observed rate for eighteen coin flips.

Here is what the Laplace rate looks like compared to the observed rate for the “six of the first seven” football team, the 2021 Tampa Bay Buccaneers.

Laplace starts at .500. Tampa wins six of their first seven games (.857) but Laplace only increases to .777. Their final winning percentage was .764.

Then there’s the 2021 Detroit Lions, a team that lost their first eight games.

The Laplace rate doesn’t know anything. It doesn’t know coins are 50/50. It doesn’t know about Tom Brady. It doesn’t know the Lions are bad. It’s just a formula that slowly adjusts to extreme events.

Laplace (b. 1749- d. 1827) didn’t have the NFL, so he made predictions about something else, the sunrise. The observed rate is 1.00. The Laplace rate, after 10,000 observed sunrises, is 0.99990002. So you’re saying there’s a chance?

No. That’s a simple wrinkle. Laplace called the sunrise a special “phenomena” which “nothing at present moment can arrest the course of.”

Coin flips, dice rolls, and drawn playing cards are random and have an expected rate.

Sunrises are special phenomena and Laplace’s rate is less helpful.

Football outcomes are a mix. They’re like the sunrise, in that teams have inherent principles. They’re like coin flips in that predictions are difficult, a sign of randomness.

Math helps: relative vs absolute saving rates, people live longer the longer they live, what the mean age means, the vaccine friendship paradox, how many ants long is Central Park?, or how many rolls of toilet paper do the residents of Columbus Ohio use in a week?

Math can be simple. Technique (add one to the numerator, add two to the denominator) and a bit of explanation (extreme events are rare without explanatory phenomena) is all we need.

Simpson’s Paradox

Alice farms carrots and corn. She plants 10 carrots (harvests 90%) and 100 ears of corn (harvests 75%).

Bob farms carrots and corn. He plants 1,000 carrots (harvests 85%) and 100 ears of corn (harvests 70%).

Though Bob harvests a lower percent of carrots and corn, than Alice, his total harvest is higher. This is Simpson’s Paradox.

AliceBob
Carrots9/10 = 90%850/1000 = 85%
Corn75/100 = 75%70/100 = 70%
Total84/110 = 76%920/1100 =84%

Wikipedia has examples of Simpson’s Paradox: UC Berkeley gender bias and batting averages, but it’s farming that grows my insight. Picture Alice with her backyard garden. She has a two acre lot. There’s a house, a shed, and maybe a pond. For her 110 seeds of carrots and corn Alice probably has some raised beds. Now picture Bob’s homestead with a thousand carrot seeds.

Another example.

There are two girls in the same high school, Kim and Abby. They take English 101, but with different teachers. Kim does well, earning 88/100 on the homework portion and 80/100 on the exam portion of the class, and Kim’s final grade is 84%.

Abby’s teacher assigns a lot(!) more homework. She earns 860/1000 on the homework portion and 75/100 on the exams, and Abby’s final grade is 85%. Kim did better on each section, but Abby’s final grade was higher.

Okay. Put a pin in that paradox and consider this:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which is more probable: Linda is a bank teller [or] Linda is a bank teller and active in the feminist movement?

Okay. Last one.

There are 100 persons who fit the description above (that is, Linda’s). How many of them are:

  • Bank tellers? [___] of 100
  • Bank tellers and active in the feminist movement? [___] of 100.

What we’ve done is reframe problems. We’ve changed the story around the numbers and our understanding.

Simpson’s paradox is easier to understand thinking geometrically in terms of farm space or using familiar examples like school. Linda, via the conjunction fallacy, is easier to understand in percentages rather than absolutes. Rory Sutherland suggests solving life’s problems like sudoku puzzles. Look at it from one direction but if that doesn’t work try another. Use your current experience to find a future answer.

The Spinal Tap Workout (made up start up)

This is part of the made up start up series.  

Spinal Tap, the 1984 mocumentary follows a band of bumbling Brits. In one iconic scene, Christopher Guest (lead guitarist) describes his ‘special’ guitars to Rob Reiner (filmmaker). And their amps which “go to 11”. 

Befuddled, Reiner asks why not make eleven ten. Guest replies, because eleven is more than ten. 

It’s an iconic scene. 

Ten is special thanks to our fingers. Ten is easy thanks to repetition. 

Other number bases aren’t intuitive. We are used to ten. Binary counting looks like this: 0, 1, 10, 11, 100, 101, 110, 111, 1000 and so on. We aren’t used to binary but it’s great for computers. Zero and one are simply open and closed circuits electricity races through. This is why computers are amazing, lots of microscopic gates and speedy electrons charging through. 

Numbers are only tools and we should use the right tool for the job. This gets us to “three sets of ten”. 

Three sets of ten was (is?) the default workout. Three sets of ten curls, presses, pushes, pulls. Three sets of ten sit ups, pull ups, or get ups.  Why ten? Our fingers! 

Here’s the pitch: three sets of eleven

That’s silly. But hold on. There are many examples of what we call ‘Large N small p‘. It’s the Google search effect. Google holds a Large Number of auctions and earns a small percent of each ad buy. Making a few cents each transaction isn’t a great business unless it’s repeated a lot. Sales calls are “a numbers game”. Large N small p also accounts for unlikely events. If someone is ‘one in a million’ there’s eighty people like them just on planet earth.

Three sets of eleven uses the Large N small p effect to make workouts better. Participants only do one more repetition for 10% greater results.

Of the made up start up series this idea is not the best. How could you even sell this? But it’s in the non-obvious explorations that we find the better ones. 

The Sandler Rules (a short review)

It is helpful to think of The Sandler Rules: 49 Timeless Selling Principles and How to Apply Them like Parenting Teens with Love and Logic. Both books suggest shifting from helicopter parent or pushy salesperson to more of a consultant. For Sandler it’s principle 39. 

For Sandler, for sales, the customer’s progress is all that matters. It’s not how hard you worked. It’s not the feature. It’s not what you think. It’s not the last time this happened. 

It’s. Just. The. Customer’s. Progress. 

To find that the salesperson must be honest, a contradiction to the caricatures. “When interacting with prospects and clients, your objective is to uncover the truth, even if it’s not something you want to hear.” 

One obstacle, ironically, on the path from honesty leading to truth is knowledge. You can know too much. So, act like a dummy (Rule 17). Remember, selling is not about telling (Rule 14). 

Doctoring is a helpful analogy. Dermatologists don’t digress into the sciences  – they diagnose damage. The sales system differs from the medical one and strictly comparing the two makes the man on the moon mistake, but the philosophy is the same. 

Author David Mattson does a nice job of collecting the principles and assigning interesting ideas to each. My favorites: 

  • Rule 2: Don’t spill your candy in the lobby. Get information don’t give it.
  • Rule 4: Explain ‘no’ is okay. Aim to uncover the truth – even if it’s something you don’t want to hear.
  • Rule 13: No mind reading, don’t assume and clarify vague responses.
  • Rule 14: “‘Selling’ is not about “‘telling.’”
  • Rule 22: Defuse bombs right away – bring up the problem.
  • Rule 27: “You can’t sell anybody anything, they must discover they want it.”
  • Rule 37: “All Prospects Lie, All the Time… but why, and about what.”
  • Rule 38: The problem they bring you is never the real problem, “diagnosis is the salesperson’s responsibility”.
  • Rule 41: Whatever is happening is your responsibility
  • Rule 48: A life without risk is a life without growth

Sandler was suggested in Bob Moesta’s book Demand Side Sales. This book is an aligned sales system to the JTBD approach. Rules 37 & 38 (“all prospects lie, all the time” & diagnosis is the salesperson’s job) fit well with the curiosity inherent in JTBD.

The Sandler Rules: 49 Timeless Selling Principles and How to Apply Them is a fast read, best for the JTBD curious and those looking for some sales support. 

Here’s the review for Parenting Teens…

And the JTBD series