The Decision Strategist

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

Popularity: 8%

Vote for this post on: These icons link to social bookmarking sites where readers can share and discover new web pages.

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

Popularity: 12%

Vote for this post on: These icons link to social bookmarking sites where readers can share and discover new web pages.

As what is essentially a research consultant, I run into a fair amount of joking, nudging, and winking when I start to talk about ’surveys’ and ‘focus groups’.

Fortunately I work with data and statistics, so I get to claim a little bit of distance from the more laughable methods.

Regardless, it has me thinking about how consultants are generally perceived and very expensive and ineffectual. I think the idea of hiring someone to research and evaluate a problem or policy, though it has it’s issues, isn’t inherently bad. The methods themselves are terribly bad. It really comes down to one thing:

A few consultants are exceptionally good and the rest spend a lot of time surfing the web.

It’s true of any industry that there are a few exceptional people and/or businesses and the rest are mediocre, but with consultants the mediocrity is easily visible. The problem then isn’t that all consultants are hacks, but that it is difficult to tell whether a consultant has done a good job.

In other words, the signal to noise ratio (Paul Graham) is poor.

There are copious examples of situations with a poor signal to noise ratio (SNR). Consider the employer trying to figure out if the employee is working, the lender evaluating a potential borrower, regulators eyeing a company and any application process such as for school, work, Ycombinator, Peace Corps, or hiring a babysitter.

If you have a background in Game Theory, you might notice that poor SNRs tend to exist in a principal-agent situation. A principal-agent situation is one in which one person/organization has something and the other person/organization wants it. The possessor (the principal) has to decide whether to give it to the desirer (the agent). A poor SNR exists because the agent is always motivated to present themselves in the best light possible, and so the principal has to do their best to see through the presentation to determine actual quality. In other words, the agent is actively reducing the SNR.

So back to consultants. The mediocre consultant will choose to purposely increase the amount of noise in the presentation of their work because they realize that 90% of perception is how you look and not what you say (to cite an irrelevant and entirely made up statistic). Further, it is easier to increase the value of your work by making it look spiffy than by doing better quality work (to a point).

From the point of view of the person who hired the mediocre consultant, they have little incentive to attack the consultants work unless it is obviously shoddy. The hirer doesn’t want to be the person who hired a bad consultant, and so will only attack the consultant’s work if it is obviously shoddy.

Is it any wonder that the industry as a whole is a joke?

The consultants holy grail is to discover the aspect that separates excellent consultants from mediocre ones and make that the center of their work. It also has to be easily discernible but not easily faked.

Somehow I think the only thing that qualifies is thorough hard work.

-zot

Popularity: 12%

Vote for this post on: These icons link to social bookmarking sites where readers can share and discover new web pages.

SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis is sort of all the rage in strategic planning these days, and is typically applied in a business setting to strategize about a certain objective. It is also this week’s new decision making technique, though it isn’t explicitly used in decision making as much as strategy. In this case I’m going to apply it on a personal level to analyze my own strengths, weakness, opportunities and threats.

Part of the popularity of the SWOT analysis may come from it’s simplicity. Once an objective is defined, a list of each aspect is created. This list is used to create a strategy for achieving the objective.

Yet that simplicity is also the source of it’s criticism. SWOT analysis has been criticized because it leads people to think they have done an adequate job of planning when all they’ve done is list four categories of aspects. SWOT analysis allows you to consider the factors that are affecting a situation or objective, but doesn’t provide the strategy itself.

One key for a useful SWOT analysis is to make sure you have an explicitly defined objective. SWOT analysis in the abstract tends to contribute to the error of thinking SWOT is adequate and the analysis ultimately has little relevance. Since I’m doing this exercise on a personal basis, here’s my objective:

To move into more creative work based on idea generation and execution in programming and design.

Corollary: Given the tendency for businesses to reward status quo success over creative innovation, it is likely, though not necessary, that this means a startup or freelance work.

With this objective in mind, the first step of a SWOT analysis is to consider the internal factors: strengths and weaknesses. These should be things that are inherent to the person (or company usually) and not things that involve external factors.

Strengths and Weaknesses

The next step is to consider the external factors: opportunities and threats. These are things like political and economic factors, market trends, situational and environmental changes, etc…

Opportunities and Threats

That’s the complete SWOT analysis process, but I hardly have a strategy at this point. I’ll have to work on developing one and post it later. There are some key things to point out here though.

First is that I listed more positive than negative factors when talking about myself and less positive factors when thinking about the external situation. Is this a result of selective consideration of evidence as a confirmation bias, or is it just the truth of the situation? Something tells me that if I was someone else doing this analysis on me I’d find more negative personal aspects.

Second, there are some things I listed that need qualification or explanation. I should start by saying that I need to go back and revise my objective to explicitly say creative problem solving instead of just creative work. When I think of creative work I’m generally thinking of new approaches to problems, not things like art or poetry (not to dis on all you cool artists out there).

Another thing that strikes me is looking at the lists of strengths and weaknesses, I am much more capable of succeeding that I usually think. One of my perennial weaknesses is that I underestimate my ability to program, but as I work with code more and more, I am finding myself naturally learning and able to do stuff I would have recently balked at.

None of my weaknesses seem particularly strong or debilitating. Further, taking advice that I heard from somewhere (maybe The 4-Hour work Week), I’m going to focus on increasing my strengths rather than eliminating my weaknesses. Why? Because the return on investment for increasing my strengths is exponential, while the return to eliminating my weaknesses is (at least in the beginning) linear at best, not to mention demoralizing.

One the other hand, my biggest concern for any advertising-based revenue source (such as this blog) is that a consumer spending led recession, especially with the astronomically high levels of debt, will result in a significant decline in sales of all kind, including ad-based internet sales.

So that’s a SWOT analysis, and it gives me a basis for examining the variety of factors that will affect my failure or success in obtaining my goal. If you’re like me, you’re thinking that it’s rather similar to other decision making techniques like the Pros-Cons-Fixes method used in What am I doing with my life? and Plus-Minus-Interesting used in Buy vesus Rent Part II.

The only real difference is that instead of considering the pros and cons of each option in a decision, we’re considering the pros and cons of ourself or our organization with respect to an objective, and we’re explicitly separating internal and external factors.

If you’d like more information on SWOT analysis, Wikipedia has a nice SWOT Analysis page and businessballs has some good (though garish and terribly designed) information here.

On an entirely different note, why do so many decision making and strategic planning web sites seem like the digital version of a car salesman? There are only two real possibilities here. Either all these decision making techniques are snake oil, or the techniques are ok but the consultant is about as valuable as a car salesman.

Decision making techniques in general seem useful, but don’t do much to account for decision making errors. In a way they are merely the formalization of methods we do implicitly. Though I think there are real benefits to plotting things out explicitly, I’m not convinced of the usefulness of hiring consultants to do so. My suspicion is that there are a few really good ones and a whole lot of ineffectual ones, just like most other fields. More on this later.

-zot

Popularity: 100%

Vote for this post on: These icons link to social bookmarking sites where readers can share and discover new web pages.