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Are you using your daily travel times right?

September 27, 2012 Leave a comment

Assuming that you are living in a metropolitan area, you are probably spending a lot of time using public transport. Undoubtedly it is the most efficient way to reach you workplace without the hassle of traffic-jams and the need to find a parking lot.

Even if you only have to travel 10 minutes one way, you are having a total of 20 minutes every day that you could use in some way effectively. And it doesn’t necessarily mean in a work related way. For example, the way back home is could be used to do something relaxing, so you are less stressed as soon as you arrive at home. Maybe you use the same argument for your way to work, saying that you want to arrive at your work place in a not-stressed-yet-mood, so you work efficiently right from the beginning. You could also use travel time to free up some of your valued and rare private time, maybe check your private e-mail-box and answer short replies right away, or read the paper to be up to date.

Alternatively, if you are not stressed by the idea of working on your way to work already, do some quick and easy stuff. Check your e-mail (if you can) and prioritize your tasks for the day. Also prepare for the meetings of the day and write a note of what you still have to do to be prepared. As soon as you are off the public transport you might even call your colleagues to discuss your strategy for the day… Doing so, might save you a couple of stressful minutes during your workday or give you a couple of minutes of downtime that can really add value. Or you might find some time to go for a cup of coffee during the day, what is a welcome change from work…

How are you using your daily time on public transport? And do you have any “special techniques” that make it more efficient? Share your experience with us…

Sebastian

Categories: Sebastian Tags:

The Allais paradox – Part 2

September 20, 2012 Leave a comment

Last week we introduced the Allais paradox, a decision problem in which the majority of people select mutually exclusive choices, thus highlighting irrationalities in human decision-making. Several experimental results suggest that humans try to avoid losses more than they seek gains, prefer certainty to uncertainty, place too much emphasis on the small probabilities and less weight on the larger ones. These behavioural patterns do not apply to every single individual, but are mere generalisations gained via the experimental evidence. What does this mean to the business world?

Frequently, it means that in certain situations where risk is desirable, managers seek to minimize it as to not suffer any consequences of failure. For example, actions that are done on repetitive basis, such as setting the budget, are very prone to “this specific situation syndrome”, i.e. they take each budget individually, not as a combination. As a consequence they try to minimize their chances of running over budget and thus inflate it, but in the long run (say 10 years) a greater level of risk is desirable for the organisation. That is because even if in 2-3 years budget was underestimated, in the other 7-8 years more resources were freed to cover the consequences of those overruns. You might say that no manager would stay in the same work place for 10 years and do the same sort of budget decisions, but this is about generalised behavioural trends and different people in the same position might do the same. What’s more as a senior executive with 10 managers reporting to you, you should actually want such a level of risk that 2-3 managers do run over budget, but those overruns should be compensated by the other 7-8 who did not. If all 10 managers did not go over budget, it likely means that your budget targets are such that resources are frozen, but could have been used more productively.

So why do we tend to punish budget overruns again?

Alex

The Allais paradox and its business application

September 14, 2012 1 comment

The Allais paradox is a rather simple example of how people are different from the “rational man”, a foundation of  traditional economic theory. Consider two options:

Option A: A gamble that pays you $3500 with 33% probability, 3400 with 66% probability, or $0 with 1% probability.
Option B: A gamble that pays you $3400 for certain.

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Consider a second set of choices:

Option A2: A gamble that pays you $3500 with 33% probability or $0 with 67% probability.
Option B2: A gamble that pays you $3400 with 34% and $0 with 66% probability.

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If you are like the most people (and weren’t using a calculator) you would have chosen option B and option A2. But these two options are not consistent with each other! If you take a closer look, you can see that the second set of options is created by subtracting 3400 with 66% from the first set of options. If we subtract the same amount from both options why would it change your mind?

A “rational man” in this case would calculate an expected utility of each option by multiplying outcomes and their probabilities. The option with the highest expected utility would win. In our case these are options A and A2. But as can be seen in this example people don’t seem to use the expected utility as their decision model, they tend to gestimate and choose an option that “looks good”.

This tendency of choosing options that “look good” actually shows that people make irrational choices and serves as a foundation for the Prospect Theory. There is a lot of math involved. According to experimental results people tend to give more attention to small probabilities (like $0 with 1% probability) and give less weight to large probabilities (like $3400 with 66%). Further more people tend to like gains less than they hate losses, as such a game where you can win $101 dollar with a 50% chance and lose $100 with a 50% chance is not attractive to many.

So! How does this apply to business? Read about this next week!

Categories: Alex Tags: ,

Taxonomy of professional services firm

September 7, 2012 Leave a comment

I know that at least some of our followers plan to apply to a professional services firm. What surprises me is that very few of them actually realize their function at an entry level position and subsequently what they will do on day to day basis. That being the case, I decided to share my view as to how professional services firms are structured. My view can be summarised in the diagram below, you can see position titles from the lowest (Consultant) to the highest (Senior Partner), with respective primary functions listed in the brackets.

Specialist

(Technical Advice)

Senior Partner

(Strategy)

Partner

(Sales)

Senior Director

(evaluation period for partner)

Director

(Supervision)

Manager

(Planning)

Senior Consultant

(Execution and Supervision)

Consultant

(Execution)

A couple of points I would like to note before discussing the consultant position that most of my friends apply for. First, note that post director level there is a split, this is my way of indicating that you can advance after director either by virtue of your technical knowledge or due to your salesman skills. Most directors wanting to become a partner have to demonstrate their ability to bring business to the firm before they are considered for the position, a few get promoted because of their ability to develop new products/technical knowledge (you just don’t need that many product creators). The split does not mean that you have sales partners and technical specialists exclusively, one person can potentially have both skills, but one of them is the reason they got promoted.

Now, the most interesting part is that Consultants are not there to create innovative ideas or to alter work processes. In most cases they simply do not have the knowledge to access organisational initiatives, thus their job is to execute and understand how professional services firms work. Yet, surprisingly many graduates actually want to portray themselves as innovative and filled with ideas, but if your employer needs you to execute on a timeline and budget, then he/she might be hesitant of candidates who may derail a well oiled process.

Alex

Categories: Uncategorized