The Decision Strategist

Often when making a decision we focus on ranking our options and then choosing the best one as in pareto analysis. We start at the top and proceed to the next best option and so on.

Sometimes it is better to start at the bottom.

Why is this helpful?

We tend to consider options in two stages. In the first we eliminate options that are deal-breakers. These are options with factors that disqualify them even if their positive aspects are great. It might be a great job located in a city you hate, or a great car with an automatic transmission when you only drive manual.

In the second stage we look at the remaining options and roughly weigh their positive and negative aspects, but tending to focus more strongly on the positives.

It works well if there are only one or two options that are easily discernible as the best choice, but if several options could be great or are roughly equal, we can have a really hard time with this second stage.

By ranking options from worst to best, we are forced to explicitly consider the negative factors, which can help bring to light issues with some of the options which we previously thought were all equal.

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I received my rejection notice from Ycombinator last night. I’m not too disappointed, mainly because I didn’t have high hopes for being accepted in the first place.

The Ycombinator application process is a great example of principal-agent relationships (touched on in Signal to Noise Ratio in the Consulting Industry). Like all situations in which assets are transferable but not distributed equally, the principal (Ycombinator) has the difficult job of determining who gets the asset, while the agent (the applicant) does their best to appear desirable.

The agent has a big incentive to lie as long as they won’t get caught, and the principal has to deal with not knowing the qualities of the agent with any degree of accuracy.

At Ycombinator their application process is different from most. Their main tactic for eliciting a true view of an applicant is to ask interesting and difficult questions. It is very difficult for an agent to fake worthwhile answers. It’s similar to the hiring methods of Google and the like, focusing on the results of the thought processes of the applicant.

Which is why I don’t understand the questions that my girlfriend has to answer for her med school applications. The questions are typically something like: “Describe how our mission statement fits with your life goals and motivations”.

Everyone hates trying to answer questions like this because they are so open ended. You can’t help that everyone is using exactly the same lines. How many ways can you say that practicing medicine and helping people are very important to you?

Worse, I suspect that the determining factor on these essays is how well they resonate with the admissions officer reading them, which can’t be strongly correlated with the abilities of the applicant.

I suspect that the reason universities ask these questions isn’t so much to determine good applicants, but to weed out the ones who can’t write coherently. It’s an elimination technique instead of a selection technique.

Maybe it also has to do with a difference in the number of applicants they are accepting also. Ycombinator only accepts maybe 10 groups, so they have the luxury of selecting the very best. Universities have to select a much larger group, and so perhaps it is more efficient to simply eliminate the lower 75% instead of searching for the top 2%.

Anyway, this started off being more about principal agent models, but I guess I got sidetracked into the idea of how to evaluate information when there is a poor signal to noise ratio.

There are a lot of other situations that fit the same principal-agent model. Biologically, consider males (agents) competing for the right to mate with a female (principal). Economically, people (agents) compete to be able to work at a company (principal) and on the flip side companies (agents) compete to have their product bought by consumers (principal). Politically, candidates (agents) compete for the favor of the public (principal). In education, students (agents) compete to be accepted to schools (principal).

It’s not surprising that we should find this relationship in so many places, at the heart of the interaction is the need to determine the qualifications of an entity and the entity’s desire to be selected.

Enjoy the weekend.

-zot

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Between an office move and having the flu I haven’t had much of a chance to write posts, but don’t worry, I’ll be back on it starting tomorrow.

-zot

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Google Adsense, affiliates, and their derivatives have encouraged a whole new direction in the monetization of internet sites now, especially blogs. So much so that I sometimes wonder if the entire internet isn’t just a giant group of advertisers struggling for links.

UPDATE: Techcrunch has an interesting article discussing some of the same material.

But there’s just one problem:

People have to buy things to make advertising worthwhile.

With the world economy entering what looks like a severe credit crunch and Americans owing more than 2.4 Trillion Dollars (that’s more than $8,000 of debt per capita), not to mention a loss of wealth due to declining housing prices, many economists are expecting a consumer spending-led recession.

In other words, people won’t be buying as much from internet ads anymore.

On the other hand, advertising is a curious business. In some ways, the less people buy the more companies advertise. Still, I’m expecting the price per ad to do some substantial declining in the next couple of years, which corresponds to a loss of income for all the ad-supported blogs sites out there.

That doesn’t bode well for Adsense supported startups out there either. Though I think Paul Grahams thoughts about the direction of startups in general are pretty spot on, I think the survival rate is going to start doing some plummeting as consumer spending slows.

Survival rates of businesses always decline when we enter recessions, but this one may be particularly bad.

I’d love to see some data on types of organizations that tend to thrive during economic turmoil. I’m betting it isn’t financial institutions (at least not this time) or consumer products. We might see a rise in alternative communities though.

-zot

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