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This is just awesome

As seen on nudges blog and indexed blog.

1. Challenge your assumptions (both implicit and explicit assumptions)
   • Think about why and under what circumstances your assumptions could be wrong
2. Be aware of any heuristics/Rules of thumb (System I thinking) during the decision making process
3. 3 C’s — Communicate, Communicate, Communicate
4. Assemble the most diverse team as possible
   • Be aware of GroupThink
   • Do not tolerate escalation of commitment
5. Reward based on the soundness/cleverness of the decision making process, not on the results!
6. Be Allocentric
   • Why are the buyers buying and the sellers selling? (Think about Incentives — always)
     • Who Chooses?
     • Who Pays?
     • Who Uses?
     • Who Profits?
   • Simulate by role playing
   • PARTS — Players, Actions, Rules, Tactics and Scope
   • Remember the typical games
     • Prisoner’s Dilemma (PD)
     • Entry/Preemption
7. Always reframe from a neutral, positive, and negative context (mentally change your reference state)
8. Expand your domain of analysis (Examine the games in the larger context)
9. Choice architecture matters
10. Consider the outside view (analysis based on the base rates and remember to avoid sample selection bias) versus the inside view

Excelled op-ed in the NYtimes titled “Your Brain Lies to You“

FALSE beliefs are everywhere. Eighteen percent of Americans think the sun revolves around the earth, one poll has found.

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This phenomenon, known as source amnesia, can also lead people to forget whether a statement is true. Even when a lie is presented with a disclaimer, people often later remember it as true.

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Adding to this innate tendency to mold information we recall is the way our brains fit facts into established mental frameworks. We tend to remember news that accords with our worldview, and discount statements that contradict it.

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Psychologists have suggested that legends propagate by striking an emotional chord. In the same way, ideas can spread by emotional selection, rather than by their factual merits, encouraging the persistence of falsehoods about Coke — or about a presidential candidate.

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Journalists and campaign workers may think they are acting to counter misinformation by pointing out that it is not true. But by repeating a false rumor, they may inadvertently make it stronger. In its concerted effort to “stop the smears,” the Obama campaign may want to keep this in mind. Rather than emphasize that Mr. Obama is not a Muslim, for instance, it may be more effective to stress that he embraced Christianity as a young man.

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Consumers of news, for their part, are prone to selectively accept and remember statements that reinforce beliefs they already hold.

Thaler and Sunstein make similar arguments in their book: nudge about how voters rely on System I (Automatic, intuitive) brain rather than on the System II (Rational, Reflective) brain.

Excellent article on the pitfalls of home ownership (and the bias against renters in US) by Paul Krugman in NYtimes yesterday.

But here’s a question rarely asked, at least in Washington: Why should ever-increasing homeownership be a policy goal? How many people should own homes, anyway?

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And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers; investors who want to provide rental housing are on their own.

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There are some real disadvantages to homeownership.

First of all, there’s the financial risk

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Owning a home also ties workers down

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Finally, there’s the cost of commuting.

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All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting.

And while we’re at it, let’s try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream — and still have a stake in the nation’s future.

Check out Secrets of Angel Investing

Also, I attended a few talks/presentations (including one by David Rose of Rose Tech Ventures, NYC) on how to pitch to VCs, what VCs look for, and so on. The following is a collection of some of my notes from these talks:

Qualities/Things Angels/VCs look for (most of this is from David Rose’s talk at CBS):

• Integrity (Most important of all)
• Passion
• Experience & Knowledge (Deep domain knowledge)
  • As David Rose said “I would rather invest in an entrepreneur who has failed, rather than one, who has never tried before”
• Sales, Finance and Product Management Skills
• Leadership
• Commitment (”Bad things happen to all businesses!”)
• Vision (Rarely do VCs/Angels invest in “me-too” businesses)
• Realism/Pragmatism (Don’t try to solve problems, you possibly can’t!)
• Coachability

Presentation Guidelines (Influenced by David Rose’s talk at CBS and emails on NextNY):

• Start with a story/something dramatic, an anecdote
• Always lay the groundwork first (don’t assume that the audience know everything — don’t assume anything!)
• Specifically mention the things you know and understand and things you do not
• Do not lie. Don’t be dogmatic!
• Absolutely no typos, errors, and internal inconsistencies
• Keep it short.
  • Good Presentation: Short, Short bullet points
  • Better Presentation: Just the headlines on the slides
  • Best Presentation: Just images on the slides (and you tell a story through it)
• Tell a story
• Rehearse, Rehearse
• Anticipate the questions (Be allocentric — think about the questions you would ask if you had to invest your 401K money in the startup!)

What do VCs look for:

I plan to write about some frameworks on how to think about new products and innovation.

This is first article in that series.

This post is about the 9x effect in product management and innovation. Prof Gourville has written about this effect:

Gourville, J. T. (2004). “Why consumers don’t buy: The psychology of new product adoption.”

Essentially, product innovation occurs as per one of the 3 scenarios:

The most common scenario is the third one, where the consumers loses some (hence, the increase in cost due to increase in price or loss of some features) and gains some (increased benefits due to new features).

Enter Prospect theory:

1. Customers take reference points as given (status quo matters)
2. Relative reference frame
3. Losses loom larger than gains (~2.5x)

Which implies the “endowment effect”.

In addition, it is likely that the consumers will incur the costs now, but reap the benefits later (lack of salience of the benefits & hyperbolic discounting), further decreasing the consumers willingness to adopt the new product.

On the other side, the product manager/developer is biased towards the new product:

1. Reference frame is the new product — different status quo than the consumers
2. Emotional/unbiased opinion of the new product

This leads to the 9x effect — a mismatch between the consumers and the product developers/managers of about 9 times. Said another way, consumers only tend to adopt products that are at least 9 times superior to the existing products!

Great article on Gigaom by Anand Rajaraman on how to finance your startups: Venture Capital, Angels or Bootstrap?

While I agree with most of the ideas in the article, IMHO, the technology matters even less (Perhaps, this discussion below is limited to Internet/Wireless tech startups).

If the startup is targeting a new market, then there are clearly no barriers to entry:

• There aren’t any economies of scale yet (no supply side barriers to entry)
• Maybe some proprietary technology — but not likely
• Definitely no customer captivity yet (no demand side barriers to entry)
• Government regulations — don’t bank on it!

Thus, what matters is:

• How quickly some barriers to entry are created
• How efficiently (cost) the operations are run: execution baby!

Therefore, I believe VCs care about the potential market size ($100m+) and the management team (has to be “backable”).

The article also touches on the notion of the inside view (founders tendency to ignore the base rate — misconception of the base rate and place too much emphasis on “uniqueness”) v/s outside view (VCs or angels viewpoint which is more likely to be based on base rates and information based on their previous experiences and less biased by the “uniqueness” of the current venture).

Excellent article on the nudge blog on Group deliberation failures

To summarize:

1. Shared information dominates/crowds out unshared (but known) information
2. Predeliberation errors are amplified
3. Cascade effect: Successors tend to not disclose their (unshared) information and conform with the initial speakers

Solomon Asch’s experiments on conformity are classic:

• Replicating the experiments today
• Asch’s conformity experiment

Check out the Solomon Asch Center

As Guy Kawasaki says:

“They are still too long, still using meaningless buzz words like “revolutionary,” and still don’t have credible business models. If only they would adhere to the 10/20/30 rule of Powerpoint: Ten slides, twenty minutes, 30 point font.”

I would add that better still use Keynotes and no words/letters at all, just speak to pictures on the slides!

A collection of my ideas on how to pitch to VCs, coming soon …

Lately, I have been reading some papers and books on Behavioral Economics. I must say that I am quite fascinated with the concept of “bounds of Decision Making”:

• Bounded Rationality: Individual judgements are limited in their rationality due to various reasons (lack of complete information, time and cost issues, self-serving bias, intelligence limits, perceptions, limited recall abilities, etc.)
• Bounded Awareness
• Bounded Ethicality: Our ability to be ethical is limited (System 1 effect).

In addition, there are inter-temporal inconsistencies (hyperbolic discounting: excessive importance to the present at the expense of sacrificing the future or long term interests!), bounds on self-interest (fairness bias).

The book by Max. H. Bazerman develops these concepts and is a great read (although it is a “text” book).