The Decision Strategist

We use metaphors all the time. Not just to create pretty language, but in our thoughts and decision making as well. in How To Fight Advertising, I talked about an exercise I had tried that involved examining the stories we like to tell about ourselves. Recognizing those stories lets us realize when advertisers are using those stories to try and sell us something.

That is a specific example of how we use metaphors in our daily lives, but I think we use metaphors in virtually everything.

Metaphors for Life Goals

One of my primary goals is to own my own company. But when I think about owning my own company, I am not considering the process of actually performing the service, thinking about whether I will enjoy it, how much paperwork there will be, taxes, and all the other administrative stuff. I’m thinking semi-abstractly of a man in professional but laid back clothes smiling and working…

And that’s it. There aren’t a lot more details. What am I working on? Why do I exhude an air of excitement, happiness, and satisfaction? What is up with that pale blue abstract wall color?

The point is that we think in terms of metaphors. Stories for our lives that describe how we want to live. Of course, the reality of the situation is that there is a lot of time in any part of life where we aren’t filled to the brim with excitement.

Do you imagine falling in love as a couple outside laughing while the sun shines on them, the grass green, an antique stone wall running in the background while a stream gurgles cheerfully nearby?

Do you think of martial arts and sports in terms of flying through the air, or running really fast, perhaps using footwork or other methods to beat your opponents and succeed?

These are stories that I think of when I think of those things, but none of the stories much resembles my experience with martial arts or relationships. These are metaphors that I’m using to describe events and emotions.

Why We Like Metaphors

Metaphors are so much better than facts because they engage our whole brain. When we are involved in a story our sense of smell and taste and touch activate. Our heartbeat responds to excitement. It’s ever so much more fun than if we were to cycle through our supposition of a given job imagining the grueling minute details of showing up, logging on, checking email, responding to coworkers questions, resolving disputes, ad nauseum.

Thinking in metaphors is good because it gets us involved and excited. Without them we might never do anything. But they are dangerous also, because they can lead us to associate stories we like with decisions that we don’t like.

Fun With Storytelling

It can be a lot of fun, and a worthwhile exercise, to play around with your metaphors. When you think about your life goals, what kinds of stories to you engage? I like this because it’s just plain fun to sit down and imagine what your life will be like 5, 10, 15 years from now. Once you have several stories in mind, you can start to evaluate them in terms of how you can make that story as close to reality as possible.

A lot of our actions seem oriented toward achieving a story that we’ve committed ourselves to at some point. Sometimes we don’t realize that we don’t want that story anylonger. Sitting back and creating a bunch of new stories for your life gives you a chance to experiment and to realign your less conscious actions with a future that you still believe in.

-zot

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This post kicks off a weekly post discussing new decision making techniques that I haven’t talked about yet. This weeks technique is pareto analysis. pareto analysis is a simple process that consists of listing all the changes you are considering making, and raking them according to some applicable scale. I used it this last weekend to look at how much time I was spending here on The Decision Strategist, and whether I should reallocate some effort to other aspects of the site.

There are a million things to do when starting a new blog. There is the design of the site, generating interesting content, getting to word out, considering advertising and affiliate programs, tracking and analysis, and so on. At times it seems overwhelming, and there are entire blogs out there that cover the process.

There is a post at ProBlogger (sorry, I can’t find the exact article) that discusses the importance of not focusing too heavily on one aspect of your blog. I’m also a fan of ClearBlogging, among others.

I decided I needed to evaluate how I was spending my time, and here is an example of pareto analysis that I used to do so.

Pareto Analysis

Pareto analysis that can be used to prioritize a list of tasks or changes based on a score. First make a list of all your options, then rank the list according to a metric that makes sense. I should have done this when I was starting the blog, but I suppose it’s better late then never. Here is my list:

• Design
• Advertising
• Generating Interesting Content
• Tracking
• Marketing
• Reading Blog Advice Blogs
• Differentiating From and/or Copying The Competition

The key to getting something useful from pareto analysis is to use the right measurement to rank your options. My goal at this point is to increase the number of readers, so I’m going to rank things differently than someone who might be looking for ways to freshen up their blog. Unfortunately, I don’t have any knowledge of how the options I listed above actually help readership, so my ranking will be subjective (on a scale from 0 to 5).

• Design (1)
• Advertising (0)
• Generating Interesting Content (5)
• Tracking (2)
• Marketing (4)
• Reading Blogging Advice (2)
• Differentiating From and/or Copying The Competition (3)

I should have said that my goal is to gain and retain readers over the long term. Getting new readers in the short term is probably only dependent on the extent to which I submit my posts to social news sites, comment on other blogs, and market. Getting and retaining readers in the long term has something to do with all of the things on my list. Here is the list reordered by importance.

1. Generating Interesting Content
2. Marketing
3. Differentiating From and/or Copying The Competition
4. Reading Blogging Advice
5. Tracking
6. Design
7. Advertising

Here’s why I ranked these the way I did:

Advertising (0)

I mean advertising for other sites as a means of revenue generation, not advertising my site. I gave advertising a 0 because not only does it not bring anyone to my site, but, if done poorly, it could make people never come back.

Design (1)

Maybe design deserves a higher score than 1. I figure though that the default wordpress theme is good enough not to drive any readers away, and any changes will not make much difference unless you build a very distinctive look.

Tracking (2)

I don’t know that tracking is very useful in keeping readers, but it does tell you where they are coming from, which helps you assess the worth of different methods of getting people to come to your sight.

Reading Blogging Advice (2)

This is another one that possibly should be more highly ranked. I guess most of what I do in the marketing section is based off of what I read. But after you have some basic knowledge, I’m not sure that it contributes too much, though it’s probably important just to keep up with new ideas.

Differentiating From and/or Copying The Competition (3)

I haven’t found many blogs dealing with decision making, which means either no one is interested, or everyone has kept it in the fairly useless abstract realm. I guess we’ll find out. This is useful for generating ideas and stuff, but isn’t going to do much if you don’t have content.

Marketing (4)

By marketing I mean submitting your posts to Digg, Reddit, StumbleUpon, and other news and networking sites. This seems really important to me because it takes a while to make it up on the search engine rankings, and you need a way of getting readers when your blog is young.

Generating Interesting Content (5)

I know there are different philosophies on this, but I think that if you are looking to create a long term project that will be relevant and useful to people, you have to have good content. And I don’t just mean content that is maximized for SEO, I mean content that people will find interesting and useful in their lives. Without that, I don’t think the site will ever have a high number of readers. I just hope I can live up to the goal.

So How Have I Been Doing?

Turns out I’ve been focused somewhat differently than my list suggests. Here is how I’ve been spending my time so far:

1. Design
2. Reading Blogging Advice
3. Generating Interesting Content
4. Marketing
5. Tracking
6. Differentiating From and/or Copying The Competition
7. Advertising

Apparently I’ve gotten a little too caught up in the eye-candy. Some of this may also be due to my learning how to set up the whole blogging system, and to my delight in playing with different color themes, and just having a lot of information to assimilate. But I feel like this weekend I reached a point where I am finally happy with the way my site looks, so now I can focus on the main priority of generating content.

Think I missed anything or would you have ranked things differently? Leave a comment! How do you decide what aspect of your blog to focus on?

-zot

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There’s a good post over at Free Money Finance that talks about what to do with investments in the current economic situation. The article basically says that stocks are probably approaching their bottom in value and won’t drop much further. There is another article at Generation X Finance that more or less says the same thing, if I’m reading it right. The stock market is one of the most interesting things to analyze from a decision making perspective because it highlights so many quirky human behaviors. Referring back to our ever-growing list of Decision Making Errors:

Do what everyone else does

We are incredibly affected by what the people around us are thinking and doing. We see this in the stock market constantly, with huge groups of people buying in when things have approached their peak, and huge numbers selling out when values have dropped significantly. It almost makes me thing that the upswing in amateur investing is just a way to transfer income from average people to day traders. This is the conformity bias at work

“But it was worth twice as much six months ago!”

People succumb to referencing when valuing their investments, and they think that their investment is worth what it was when the market was booming. Worse, the endowment effect encourages them to value their asset as more than it is worth to sellers. Finally, the original investment is a sunk cost, and shouldn’t be considered in determining whether or not to sell, but it almost always plays a role.

You can see how in a declining market the conformity bias would encourage people to sell, while referencing, sunk costs, and the endowment effect would encourage people to buy. It’s plain though from historical trends that at some point panic takes over and the conformity bias becomes stronger. I like this post from Dr Housing Bubble

So what do we do?

So are the good folks at Generation X Finance and Free Money Finance right or wrong? It’s hard to say. They are right in warning that just because everyone else is worried about the markets doesn’t mean that we should be. What concerns me about this is that sometimes everyone is worried because the situation warrants it. Here are some numbers that should give you cause for concern:

• Public Debt: $8.9 Trillion or $29,653 per person.
• Consumer Debt: $2.4 Trillion, including $1.556 Trillion in non-revolving and $904 Billion in revolving debt.
• Imaginary Wealth: The economy has been sustained by an imaginary increase in wealth known as real estate values.
• ARM Resets: We still have several years of adjustable rate mortgages resetting to higher rates, and the resulting foreclosures, as shown by this image from Dr Housing Bubble.

These numbers make me cringe. I’ve seen a lot of different estimates of the expected losses due to the sketchy repackaging of high-risk mortgages to create class A investments, but it seems to be in the hundreds of billions. That’s hundreds of billions of money that didn’t actually exist.

While some people may be being alarmist about the situation, the economy stands to suffer from a major drop in wealth that just up and disappeared. When you combine this with the amount of debt that we all face, I don’t expect the economy to recover any time soon. Losses of wealth cause less investment in stocks, which leads to lower stock prices. I don’t think we’ve seen the bottom yet.

Of course, this is from the perspective of someone getting ready to start investing. If I held stocks or funds already, I’d probably stay in them just because I wouldn’t want to sell now at a loss (all those effects at work!).

Good luck. If you have a strategy you are pursuing post a comment or send me an email, I’d love to hear what you have to say.

In How To Invest In A Recessionary Economy Part I, I looked at the different places we could put our money if worried about a crashing stock market.

-zot

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Disclaimer: I’m not a professional investor and this article should not be taken as investment advice. I am only trying to figure out what to do with my savings in the coming months as I get out of credit card debt.

Let’s just assume for this post that all the doom and gloom about the economy is right. How do I invest without losing everything to crashing markets? Let’s just go over the problems again:

• The dollar is devaluing substantially.
• Real estate prices are collapsing in many regions.
• Adjustable-rate mortgages have 2 more years of resetting to do before we are in the clear.
• Consumer debt was 2.4 Trillion dollars in the 2nd quarter of 2007.

Of course, there are some people who think that this is a temporary dip and that the bursting credit bubble will be limited to the sub-prime fiasco. Free Money Finance is looking to buy because it is a stock sale. Maybe they are right, but I’d prefer something a little more safe. The question is, what? I think these are the options:

• US Index Funds
• US Mutual Funds
• US Bonds
• European Funds
• Developing Market Funds
• Commodities

US Index Funds

These are in vogue right now because of their low fees and good performance. The trouble is, if you think that the market as a whole is going to lose value, you don’t want to be invested in an index fund that is going to mirror that loss.

US Mutual Funds

These seem to be the staple of investment. If you think some US sectors will escape the recession, you may be able to find a mutual fund that is concentrated in that sector. The problem of course is that a recession tends to hurt almost everything, so it isn’t likely that mutual funds will do that well either.

US Bonds

US Treasury bonds are about as safe as you can get. If you really think things are going to crash, this is the place to invest. Still, bonds don’t protect you from a devaluing dollar. You may be earning a safe amount of interest, but if prices are going up faster, you’re still losing money.

European Funds

The Euro is strong right now, and maybe Europe will escape a global slump. But then, who wants to buy into a foreign market when the dollar buys you so little? If you think the value of the dollar will go back up, you probably don’t want to invest in foreign markets only to lose money when you convert back to dollars in the future. Of course, the flip side is true also

Developing Market Funds

The economies of developing markets are pretty heavily dependent on US consumption, and if that consumption drops, we’ll probably see some losses here too. On the other hand, they aren’t as concentrated on the US market as they used to be, so maybe they will be fine. The other problem here is that many foreign banks and companies are pretty heavily invested in the US market, and will see some big losses if the stock market crashes.

Commodities

I have a friend who is considering this. It seems like commodities are the ‘nuclear option’. You don’t want to buy gold when the price has increased so substantially, but the question is whether the dollar will regain value or not. If you think it will, then you probably want to hold off, and if you think it won’t you probably want to buy.

To me there don’t seem to be any particularly good options, and a lot of what you choose will depend on how badly you think things will get over the next few years. Some people like Mish have some pretty convincing arguments for why the US economy is going to be in bad shape for a while. Personally I anticipate 3-5 years of declining real estate values, low consumption, and the loss of a significant number of government services as the country realizes that between the housing bubble and the Iraq war it has built up a lot of debt and now it has to pay for it. But I don’t think that the economy is going to revisit 1929 as some people are suggesting.

What does this have to do with decision making you ask? Obviously deciding what to do with your money, especially when trying to predict the future, is a pretty big decision. How can we use decision making tools to navigate through these waters?

It might be best to try and recognize unconscious influences on what we are thinking. You can look at the page on Decision Making Errors for a discussion of the different ways that we make mistakes when making decisions. Lets start with a list of what you think is going to happen. Here’s mine:

• Real estate prices continue to drop. Combined with foreclosures and stricter credit, the perception of wealth decreases drastically, and people spend a lot less money.
• The dollar continues to devalue as the fed prints more money to pay for it’s very very expensive war, further constricting the budgets of normal people and causing more debt, bankruptcy, and less consumption.
• The rest of the world enters a recession as losses from real estate investment and over-investment in the dollar mount.

One of the ways in which we are bad decision makers is that we tend to place more emphasis on information we see more often. This is why most people think crime is getting worse even though it’s been declining for several years: we see it on TV every day. We also put more emphasis on facts that support what we already think. As someone concerned about the environment, I reject anything that suggests that nuclear power is a good option, even though it may actually be a good option.

So we look for information that supports our point of view and believe things that we hear about more often are more prevalent. This is the main reason for media frenzies, and we’re having one right now about the impending credit bubble burst. The next step is to try and identify all of your sources of information related to the list of predictions you made above.

• Housing bubble and economic analysis blogs
• Google News
• Coworkers, friends, and professional associates

Well no wonder I think that the economy is going to crash! All I read are personal finance blogs and housing bubble economic blogs. On these blogs I’ve seen a total of two articles suggesting that there isn’t going to be a crash. If going against the crowd means smart investing, these guys are doing the right thing. On the other hand coworkers, friends and associates are all involved in economic analysis themselves, so if anyone has the data and a feel for where things are going, it should be us.

Lesson for the day: I don’t know that this was a particularly helpful decision making exercise, but it did leave me with the thought that I really should be more careful about reading a variety of information sources. I shouldn’t just subscribe to The Nation, I should also subscribe to a conservative paper. I should read articles from both bulls and bears. Baby steps though, I don’t think I’m ready to listen to Rush Limbaugh just because I also listen to NPR.

Update: Since writing this a number of people have posted some information on the same idea. Check out Investing in a down market at The Simple Dollar, and The Dow is falling at Generation X Finance.

Also, please share your investment strategy or thoughts on the current situation. Thanks!

-zot

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