Tuesday, August 28, 2012

Scientists measure brain waves to figure out personal information

The Emotiv Epoc is one way that users can give...
The Emotiv Epoc is one way that users can give commands to devices using only thoughts (Photo credit: Wikipedia)
Upstart Business Journal

by Amora McDaniel , Reporter August 28, 2012  |  10:39am EDT

Scientists used a commercially-available gaming headset to hack a person’s brain and identify his address, PIN numbers and bank information, according to the UK's Daily Mail.
English: The Daily Mail clock, just off Kensin...
English: The Daily Mail clock, just off Kensington High Street (Photo credit: Wikipedia)

The scientists from the University of California, University of Oxford, and University of Geneva took an everyday Emotiv brain-computer interface—a $300 commercial-grade headset—and showed the subjects pictures of images of familiar objects such as banks, people, and PIN numbers. They then tracked the person’s P300 brain wave, the signal that activates when
a person recognizes meaningful information.

Image representing TechCrunch as depicted in C...
Image via CrunchBase
The results were pretty scary. The Daily Mail reports the team was able to figure out where the person lived 60 percent of the time and determined the first number of the subject’s PIN number 40 percent of the time.
TechCrunch adds the scientists could also determine the person’s birth month 60 percent of the time and the bank branch of their ATM with 30 percent accuracy.

Scientists said the benefit of this brain-hacking technology would be for police interrogation. Maybe so, but the information they gleaned from the subject's brains was more information than a hacker would need to change someone's password over the phone. This technology has the potential to be really awesome or really dangerous.
Amora McDaniel
Reporter - Upstart Business Journal
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Friday, August 17, 2012

Drawing A Hard Line

How advisors can use critical path strategies to provide cash flow in retirement.

Financial Advisor Magazine
August, 2012 issue
By Robert Kreitler

retirement (Photo credit: 401(K) 2012)
Managing a portfolio to provide retirement income is complicated. But as advisors draw a map to help their clients negotiate the twists and turns, they might consider something called a “critical path.”
This is the amount of capital, plotted over time, that clients will need to achieve a particular necessary objective. … It’s a convenient line in the sand between those who take on more conservative positions and those who take on more risk.

The way it works is that retirees on or below the critical path can take no risk. They must instead use investments such as guaranteed products that offer them the closest thing to riskless, bond-like returns. These allow the investor to pass that risk on to a third party.

If they are willing to change their objectives, however, and rise above the critical path, they can free themselves of these restraints. Those above the critical path can invest using traditional strategies that strive for higher returns than what third parties could guarantee them. …

One of the more powerful benefits of the critical path is that advisors can use it to explain to clients why they need to modify what might be impossible plans (below the critical path) and instead increase savings, delay retirement or demand less income after they stop working. (See Figure 1.)

The critical path is based on “risk capacity”—the ability of an investor to take a loss and still achieve a stated objective, such as retiring on time. Most literature, on the other hand, focuses on risk tolerance, a psychological factor, that asks questions such as how much a portfolio can drop before an investor can no longer sleep at night. In 2008, many learned the importance of risk capacity when portfolio losses forced changes in many retirees’ plans. The difference between capacity and tolerance is significant.

When an investor is below the critical path, he or she must use riskless investments. In those cases, the investor has said that there is no compromising and no risk can be taken. … At the same time, some advisors might ask why those below the critical path must only use riskless investments when they might benefit from traditional investments that have historically offered higher returns.

… The reason they are limited is that they have said their objective must be achieved, and traditional investments carry some risk. Rather than taking on risk that could destroy their plans, it might instead be that these investors need to relax their demands.

English: Investment Process Focused on Risk Me...
English: Investment Process Focused on Risk Measurement & Management (Photo credit: Wikipedia)
But it’s important to remember that the critical path is a theoretical concept. Truly riskless investments do not exist. And a person’s objectives are not likely to be absolute and uncompromising. People change their minds, particularly when given unpleasant choices. Nor should investors be thinking of nominal returns at the expense of real returns. Nonetheless, the critical path offers a useful foundation for building investment strategies in the real world.

Individuals below the critical path face the unpleasant task of deciding how to cover the difference between the lifetime income they can generate and their expenses. To do this, they can either seek supplemental income from outside sources, now or in the future, or they can reduce their standard of living below what they currently call “acceptable.”

A retiree on or below the critical path can also modify what she considers to be absolutely necessary objectives (such as living expenses that are non-negotiable). If, by making this change, she moves above the critical path, then she would be able to invest in nonguaranteed investment vehicles and seek the higher returns available in traditional investments (and also take on their inherent risks). This could have the benefit of increasing her retirement income.

Those who sit above the critical path can use no guaranteed investments and rely entirely on their portfolios to generate annual income, which they would gather from sources such as dividends, nonguaranteed interest and capital appreciation, as well as through their consumption of capital. … Should their investments underperform and their objectives be endangered, they would need to change their strategies … They would need to purchase investment and insurance products to lock in their positions and receive guaranteed income to cover their essential expenses. …The threat that they will need to convert to riskless or guaranteed investments should be a strong incentive to keep them on a more conservative path.

Even so, individuals above the critical path may still want to make a portion of their income guaranteed. They could develop a plan to cover all or a portion of their living costs from guaranteed sources and then supplement those with the income of dividends, interest, etc. In doing so, they have, in effect, lowered their critical path. With a portion of their income guaranteed, the rest of their portfolios can be more aggressive to seek higher returns.

The Risks Retirees Face People in retirement face a number of threats:
• Higher-than-expected living expenses (typically inflation)
• Unexpected expenses to cover long-term health care
• Less-than-expected investment returns
• The possibility of living longer than expected and depleting resources

With these problems looming in front of them, guaranteed products offer retirees the closest thing to riskless returns. Of course, there are no riskless investments. Guarantees by high-quality third parties such as bond issuers or insurance companies promising future payouts are the closest thing. And there are big differences among these groups in the quality of their promises.

Laddered TIPS, immediate annuities with inflation riders and longevity insurance are all logical choices for retirees seeking guaranteed income. Deferred annuities with living benefits are another option, but they are hard to understand and have high expenses. Presumably, investors go to these third parties because they have little or no risk of defaulting on their promises. …

Traditional open-end mutual funds that hold bonds do not qualify as a guaranteed investment vehicle, even though the bonds themselves may guarantee a future payment. The funds are actively managed for objectives such as current income or total return and do not offer guaranteed future payments for retirees.

The Conservative View Of Risk
In their book Risk Less and Prosper: Your Guide to Safer Investing, authors Zvi Bodie and Rachelle Taqqu argue that most individuals, including retirees, should invest most of their portfolios in conservative investments, particularly TIPS. After enough is put away to take care of basic needs, they write, the surplus can be invested in risky assets such as stocks.

In some recent papers, researchers argue that ...
In some recent papers, researchers argue that the return from an investment mainly results from exposure to systematic risk factors. Jaeger, L., Wagner, C., “Factor Modelling and Benchmarking of Hedge Funds: Can passive investments in hedge fund strategies deliver?”, Journal of Alternative Investments (Winter 2005) (Photo credit: Wikipedia)
This is a bold challenge to the investment practices used by the majority of advisors and supported by the majority of the investment community—the traditional approach of modern portfolio theory, which says that including some risky assets increases expected risk-adjusted returns. Advisors typically use these techniques for managing investors’ portfolios regardless of whether they are above or below the critical path. Bodie and Taqqu say that most investors can’t take this risk. In other words, they say most investors really sit below the critical path.

A practical way to locate retirees on the path is through a “decumulation benchmark.”

This benchmark was proposed by authors Stephen Sexauer, Michael Peskin and Daniel Cassidy in the January/February 2012 issue of Financial Analysts Journal. (They call it a “defined contribution-decumulation benchmark.”) …

The benchmark is useful because investors can use it to calculate how much capital they would need for a particular level of guaranteed lifetime income. It is made up of nearly riskless investments, so it is a useful reference for comparing other strategies that don’t offer guaranteed lifetime income. And what’s more, plotting the results over time approximates the location of the critical path.

Understanding Financial Leverage
Understanding Financial Leverage (Photo credit: Wikipedia)
For the “decumulation” benchmark, the investor purchases both laddered TIPS and longevity insurance initially. The TIPS purchases are laddered to provide constant, inflation-adjusted returns for 20 years. The longevity insurance also purchased at the beginning offers lifetime income after 20 years. This product, however, is not available with an inflation rider, so after 20 years the income is not adjusted for inflation. Since the authors published their paper, the government has started to sell 30-year TIPS, which for some people may negate the need for longevity insurance.

Sexauer, Peskin and Cassidy compare this strategy to purchasing an immediate annuity with an inflation rider. The laddered TIPS and longevity insurance offer very similar cash flows for the same invested dollars for the first 20 years. But after 20 years, the immediate annuity keeps offering increases to offset inflation, while the TIPS and insurance do not.

Still, say the authors, most retirees would prefer the laddered TIPS and insurance because they could still access the remaining investment in the TIPS during the first 20 years, whereas they could recover none of the original investment in the immediate annuity after it’s purchased. On day one, the market value of the TIPS is 88% of the total investment, a desirable benefit for someone who might change his or her mind, while the cost of the deferred life annuity is 12%.

The critical path can be thought of as the dividing line between those who argue for conservative portfolios like these, and those who argue for the use of strategies entailing some risk, typically based on modern portfolio theory.

Not Always Applicable? In some situations, the critical path may not apply.

Obviously, if you have college bills to pay in six months and you have no alternative options, the assets should be invested in a riskless manner. The individual would have no alternative options if the assets lost value.

During longer periods of time, investors may have additional flexibility to meet or even modify their objectives; for example, they could choose a college with lower costs, tap funds from other sources or even defer their college start date. In those cases, they would not need to use the critical path.

Nor does the path always apply to retirees. Those who have the option of delaying their retirement, going back to work or reducing their living expenses can modify their objectives. How about those people who can’t find additional resources and need 30 years or more of income? Can they change their living expenses? Probably, but perhaps they don’t want to, and it’s critical for them to receive the income. If so, the restraints of the critical path should apply. Over long planning horizons, some retirees may want to hold on to some investment risk because third parties offer unfavorable guaranteed returns.

Some retirees would be better off keeping some risk to themselves. … After the stock market fluctuations and underperformance of the last decade and a 30-year bull market for bonds, investors have tended to forget the concept of the equity premium. They are asking, is it really certain that stocks will outperform current bond returns over the long haul? Should they take risks that institutions are not willing to take? Or will these stock returns be high enough to abandon a return that’s guaranteed (albeit lower). Even after asking those questions, some retirees should consider saying yes to stocks.

Financial Repression
We are not in normal times. … With interest rates so low, third parties can offer return guarantees based only on abnormally low interest rates. In the past, such periods of financial repression were temporary, and hopefully that will also be true this time.

How does financial repression affect the decisions retirees need to make for their lifetime income? For starters, they might want to avoid locking themselves into long-term commitments for now and stay flexible. That means the best approach might be to retain more investment risk. Later, when the economy is less dominated by government policies that keep interest rates artificially low, retirees can adopt strategies with the assurance that guaranteed rates are competitively priced.

Challenging Conventional Thinking
While the critical path is only theory, advisors can use it to help their clients challenge their basic assumptions. With it, clients can quickly grasp their limits and find the best way to free themselves from its constraints by changing their financial plans. This can mean increasing their savings, extending their planned retirement dates or curbing their retirement needs.

The critical path may also encourage advisors to challenge some of their own beliefs. The popular use of modern portfolio theory (even in an updated from) is based on the premise that all individuals can take risk. This may not be true for those on or below the critical path. If advisors accept the concept, it would mean a big shift in the foundation of their investment strategies.

Robert Kreitler, CFP, manages a New Haven, Conn., branch office of Raymond James Financial Services Inc. He spearheaded an effort with Ibbotson Associates and the FPA to create the “National Savings Rate Guidelines.” He is the author of Getting Started in Global Investing. The opinions in this article are those of Robert Kreitler and not Raymond James.
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Monday, August 13, 2012

Hidden flaws in strategy

Can insights from behavioral economics explain why good executives back bad strategies?

McKinsey Quarterly
MAY 2003 • Charles Roxburgh

After nearly 40 years, the theory of business strategy is well developed and widely disseminated. Pioneering
MSI Behavioral Econ - John Gourville
MSI Behavioral Econ - John Gourville (Photo credit: Iamctodd)
work by academics such as Michael E. Porter and Henry Mintzberg has established a rich literature on good strategy. Most senior executives have been trained in its principles, and large corporations have their own skilled strategy departments.

Yet the business world remains littered with examples of bad strategies. …Flawed analysis, excessive ambition, greed, and other corporate vices are possible causes, but this article doesn’t attempt to explore all of them. Rather, it looks at one contributing factor that affects every strategist: the human brain.

MSI Behavioral Econ - Dan Ariely
MSI Behavioral Econ - Dan Ariely (Photo credit: Iamctodd)
The brain is a wondrous organ. As scientists uncover more of its inner workings through brain-mapping techniques,1 our understanding of its astonishing abilities increases. But the brain isn’t the rational calculating machine we sometimes imagine. … But whatever the root cause, the brain can be a deceptive guide for rational decision making.

The basic assumption of modern economics—rationality—does not stack up against the evidence. …
Insights from behavioral economics have been used to explain bad decision making in the business world,2 and bad investment decision making in particular. … Likewise, behavioral economics has been applied to personal finance,3 thereby providing an easier route to making money than any hot stock tip. However, the field hasn’t permeated the day-to-day world of strategy formulation.

This article aims to help rectify that omission by highlighting eight4 insights from behavioral economics that best explain some examples of bad strategy. …

Behavioral economics tells us that the mistakes made in the late 1990s were exactly the sorts of errors our brains are programmed to make—and will probably make again.

Flaw 1: Overconfidence

Our brains are programmed to make us feel overconfident. This can be a good thing; for instance, it requires great confidence to launch a new business. … The world would be duller and poorer if our brains didn’t inspire great confidence in our own abilities. But there is a downside when it comes to formulating and judging strategy.

John Maynard Keynes Русский: Джон Мейнард Кейн...
John Maynard Keynes Русский: Джон Мейнард Кейнс Türkçe: John Maynard Keynes (Photo credit: Wikipedia)
The brain is particularly overconfident of its ability to make accurate estimates. Behavioral economists often illustrate this point with simple quizzes: guess the weight of a fully laden jumbo jet or the length of the River Nile, say. Participants are asked to offer not a precise figure but rather a range in which they feel 90 percent confidence—for example, the Nile is between 2,000 and 10,000 miles long. … Most of us are unwilling and, in fact, unable to reveal our ignorance by specifying a very wide range. Unlike John Maynard Keynes, most of us prefer being precisely wrong rather than vaguely right.

We also tend to be overconfident of our own abilities.5 This is a particular problem for strategies based on assessments of core capabilities. …

Related to overconfidence is the problem of overoptimism. … The twin problems of overconfidence and overoptimism can have dangerous consequences when it comes to developing strategies, as most of them are based on estimates of what may happen—too often on unrealistically precise and overoptimistic estimates of uncertainties. …

There are ways to counter the brain’s overconfidence:
Dick Thaler & Leon Wieseltier, best men
Dick Thaler & Leon Wieseltier, best men (Photo credit: bettina n)
  1. Test strategies under a much wider range of scenarios. But don’t give managers a choice of three, as they are likely to play safe and pick the central one. For this reason, the pioneers of scenario planning at Royal Dutch/Shell always insisted on a final choice of two or four options.6
  2. Add 20 to 25 percent more downside to the most pessimistic scenario.7 Given our optimism, the risk of getting pessimistic scenarios wrong is greater than that of getting the upside wrong. …
  3. Build more flexibility and options into your strategy to allow the company to scale up or retrench as uncertainties are resolved. Be skeptical of strategies premised on certainty.

Flaw 2: Mental accounting

Richard Thaler, a pioneer of behavioral economics, coined the term "mental accounting," defined as "the inclination to categorize and treat money differently depending on where it comes from, where it is kept, and how it is spent."8 Gamblers who lose their winnings, for example, typically feel that they haven’t really lost anything, though they would have been richer had they stopped while they were ahead. …

Avoiding mental accounting traps should be easier if you adhere to a basic rule: that every pound (or dollar or euro) is worth exactly that, whatever the category. In this way, you will make sure that all investments are judged on consistent criteria and be wary of spending that has been reclassified. Be particularly skeptical of any investment labeled "strategic."

Flaw 3: The status quo bias

In one classic experiment,9 students were asked how they would invest a hypothetical inheritance. Some received several million dollars in low-risk, low-return bonds and typically chose to leave most of the money alone. The rest received higher-risk securities—and also left most of the money alone. What determined the students’ allocation in this experiment was the initial allocation, not their risk preference. People would rather leave things as they are. One explanation for the status quo bias is aversion to loss—people are more concerned about the risk of loss than they are excited by the prospect of gain. The students’ fear of switching into securities that might end up losing value prevented them from making the rational choice: rebalancing their portfolios.

A similar bias, the endowment effect, gives people a strong desire to hang on to what they own; the very fact of owning something makes it more valuable to the owner. Richard Thaler tested this effect with coffee mugs imprinted with the Cornell University logo. Students given one of them wouldn’t part with it for less than $5.25, on average, but students without a mug wouldn’t pay more than $2.75 to acquire it. The gap implies an incremental value of $2.50 from owning the mug.

The status quo bias, the aversion to loss, and the endowment effect contribute to poor strategy decisions in several ways. First, they make CEOs reluctant to sell businesses. McKinsey research shows that divestments are a major potential source of value creation but a largely neglected one.10 CEOs are prone to ask, "What if we sell for too little—how stupid will we look when this turns out to be a great buy for the acquirer?"  …

These phenomena also make it hard for companies to shift their asset allocations. Before the recent market downturn, the UK insurer Prudential decided that equities were overvalued and made the bold decision to rebalance its fund toward bonds. Many other UK life insurers, unwilling to break with the status quo, stuck with their high equity weightings and have suffered more severe reductions in their solvency ratios.

This isn’t to say that the status quo is always wrong. Many investment advisers would argue that the best long-term strategy is to buy and hold equities (and, behavioral economists would add, not to check their value for many years, to avoid feeling bad when prices fall). In financial services, too, caution and conservatism can be strategic assets. The challenge for strategists is to distinguish between a status quo option that is genuinely the right course and one that feels deceptively safe because of an innate bias.

To make this distinction, strategists should take two approaches:
  1. Adopt a radical view of all portfolio decisions. View all businesses as "up for sale." Is the company the natural parent, capable of extracting the most value from a subsidiary? View divestment not as a failure but as a healthy renewal of the corporate portfolio.
  2. Subject status quo options to a risk analysis as rigorous as change options receive. Most strategists are good at identifying the risks of new strategies but less good at seeing the risks of failing to change.

Flaw 4: Anchoring

One of the more peculiar wiring flaws in the brain is called anchoring. Present the brain with a number and then ask it to make an estimate of something completely unrelated, and it will anchor its estimate on that first number. The classic illustration is the Genghis Khan date test. Ask a group of people to write down the last three digits of their phone numbers, and then ask them to estimate the date of Genghis Khan’s death. Time and again, the results show a correlation between the two numbers; people assume that he lived in the first millennium, when in fact he lived from 1162 to 1227.

Anchoring can be a powerful tool for strategists. In negotiations, naming a high sale price for a business can help secure an attractive outcome for the seller, as the buyer’s offer will be anchored around that figure. Anchoring works well in advertising too. Most retail-fund managers advertise their funds on the basis of past performance. …  By citing the past-performance record, though, the manager anchors the notion of future top-quartile performance to it in the consumer’s mind.

However, anchoring—particularly becoming anchored to the past—can be dangerous. Most of us have long believed that equities offer high real returns over the long term, an idea anchored in the experience of the past two decades. …Our expectations about equity returns have been seriously distorted by recent experience. …

Besides remaining unswayed by the anchoring tactics of others, strategists should take a long historical perspective. Put trends in the context of the past 20 or 30 years, not the past 2 or 3; for certain economic indicators, such as equity returns or interest rates, use a very long time series of 50 or 75 years. …

Flaw 5: The sunk-cost effect

A familiar problem with investments is called the sunk-cost effect, otherwise known as "throwing good money after bad." When large projects overrun their schedules and budgets, the original economic case no longer holds, but companies still keep investing to complete them. …

Why is it so hard to avoid? One explanation is based on loss aversion: we would rather spend an additional $10 million completing an uneconomic $110 million project than write off $100 million. Another explanation relies on anchoring: once the brain has been anchored at $100 million, an additional $10 million doesn’t seem so bad.

What should strategists do to avoid the trap?
  1. Apply the full rigor of investment analysis to incremental investments, looking only at incremental prospective costs and revenues. This is the textbook response to the sunk-cost fallacy, and it is right.
  2. Be prepared to kill strategic experiments early. In an increasingly uncertain world, companies will often pursue several strategic options.11 Successfully managing a portfolio of them entails jettisoning the losers. The more quickly you get out, the lower the sunk costs and the easier the exit.
  3. Use "gated funding" for strategic investments, much as pharmaceutical companies do for drug development: release follow-on funding only once strategic experiments have met previously agreed targets.

Flaw 6: The herding instinct

… This desire to conform to the behavior and opinions of others is a fundamental human trait and an accepted principle of psychology.12 Warren Buffett put his finger on this flaw when he wrote, "Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press."13 For most CEOs, only one thing is worse than making a huge strategic mistake: being the only person in the industry to make it.

… At times of mass enthusiasm for a strategic trend, pressure to follow the herd rather than rely on one’s own information and analysis is almost irresistible. Yet the best strategies break away from the trend. Some actions may be necessary to match the competition—imagine a bank without ATMs or a good on-line banking offer. But these are not unique sources of strategic advantage, and finding such sources is what strategy is all about. "Me-too" strategies are often simply bad ones.14 Seeking out the new and the unusual should therefore be the strategist’s aim. Rather than copying what your most established competitors are doing, look to the periphery15 for innovative ideas, and look outside your own industry.

Initially, an innovative strategy might draw skepticism from industry experts. They may be right, but as long as you kill a failing strategy early, your losses will be limited, and when they are wrong, the rewards will be great.

Flaw 7: Misestimating future hedonic states

What does it mean, in plain English, to misestimate future hedonic states? Simply that people are bad at estimating how much pleasure or pain they will feel if their circumstances change dramatically. … People adjust surprisingly quickly, and their level of pleasure (hedonic state) ends up, broadly, where it was before.

This research strikes a chord with anyone who has studied compensation trends in the investment-banking industry. Ever-higher compensation during the 1990s led only to ever-higher expectations—not to a marked change in the general level of happiness on the Street. …

Another illustration of our poor ability to judge future hedonic states in the business world is the way we deal with a loss of independence. More often than not, takeovers are seen as the corporate equivalent of death, to be avoided at all costs. Yet sometimes they are the right move. …

… We do seem very bad at estimating how we would feel if our circumstances changed dramatically—changes in corporate control, like changes in our personal health or wealth.

How can the strategist avoid this pitfall?
  1. In takeovers, adopt a dispassionate and unemotional view. Easier said than done—especially for a management team with years of committed service to an institution and a personal stake in the status quo. Nonexecutives, however, should find it easier to maintain a detached view.
  2. Keep things in perspective. Don’t overreact to apparently deadly strategic threats or get too excited by good news. During the high and low points of the crisis at Lloyd’s of London in the mid-1990s, the chairman used to quote Field Marshall Slim—"In battle nothing is ever as good or as bad as the first reports of excited men would have it."  …

Flaw 8: False consensus

People tend to overestimate the extent to which others share their views, beliefs, and experiences—the false-consensus effect. Research shows many causes, including these:
  • confirmation bias, the tendency to seek out opinions and facts that support our own beliefs and hypotheses
  • selective recall, the habit of remembering only facts and experiences that reinforce our assumptions
  • biased evaluation, the quick acceptance of evidence that supports our hypotheses, while contradictory evidence is subjected to rigorous evaluation and almost certain rejection; 
  • groupthink,16 the pressure to agree with others in team-based cultures
… False consensus, which ranks among the brain’s most pernicious flaws, can lead strategists to miss important threats to their companies and to persist with doomed strategies. But it can be extremely difficult to uncover—especially if those proposing a strategy are strong role models. We are easily influenced by dominant individuals and seek to emulate them. This can be a force for good if the role models are positive. But negative ones can prove an irresistible source of strategic error.

Many of the worst financial-services strategies can be attributed to over-dominant individuals. …

The dangers of false consensus can be minimized in several ways:
  1. Create a culture of challenge. As part of the strategic debate, management teams should value open and constructive criticism. … CEOs and strategic advisers should understand criticisms of their strategies, seek contrary views on industry trends, and, if in doubt, take steps to assure themselves that opposing views have been well researched. They shouldn’t automatically ascribe to critics bad intentions or a lack of understanding.
  2. Ensure that strong checks and balances control the dominant role models. A CEO should be particularly wary of dominant individuals who dismiss challenges to their own strategic proposals; the CEO should insist that these proposals undergo an independent review by respected experts. The board should be equally wary of a domineering CEO.
  3. Don’t "lead the witness." Instead of asking for a validation of your strategy, ask for a detailed refutation. … Establish a "challenger team" to identify the flaws in the strategy being proposed by the strategy team.
An awareness of the brain’s flaws can help strategists steer around them. All strategists should understand the insights of behavioral economics just as much as they understand those of other fields of the "dismal science." Such an understanding won’t put an end to bad strategy; greed, arrogance, and sloppy analysis will continue to provide plenty of textbook cases of it. Understanding some of the flaws built into our thinking processes, however, may help reduce the chances of good executives backing bad strategies.

About the Author

Charles Roxburgh is a director in McKinsey’s London office.


1See Rita Carter, Mapping the Mind, London: Phoenix, 2000.
2See, for example, J. Edward Russo and Paul J. H. Schoemaker, Decision Traps: The Ten Barriers to Brilliant Decision-Making and How to Overcome Them, New York: Fireside, 1990; and John S. Hammond III, Ralph L. Keeney, and Howard Raiffa, "The hidden traps in decision making," Harvard Business Review, September–October 1998, pp. 47–57.
3See Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them, New York: Simon and Schuster, 1999.
4This is far from a complete list of all the flaws in the way we make decisions. For a full description of the irrational biases in decision making, see Jonathan Baron, Thinking and Deciding, New York: Cambridge University Press, 1994.
5In a 1981 survey, for example, 90 percent of Swedes described themselves as above-average drivers.
6See Pierre Wack’s two-part article, "Scenarios: Uncharted waters ahead," Harvard Business Review, September–October 1985, pp. 73–89; and "Scenarios: Shooting the rapids," Harvard Business Review, November–December 1985, pp. 139–50.
7This rule of thumb was suggested by Belsky and Gilovich in Why Smart People Make Big Money Mistakes and How to Correct Them.
8See Belsky and Gilovich.
9This is a simplified account of an experiment conducted by William Samuelson and Richard Zeck-hauser, described in "Status-quo bias in decision making," Journal of Risk and Uncertainty, 1, March 1988, pp. 7–59.
10See Lee Dranikoff, Tim Koller, and Antoon Schneider, "Divestiture: Strategy’s missing link," Harvard Business Review, May–June 2002, pp. 75–83; and Richard N. Foster and Sarah Kaplan, Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them, New York: Currency/Doubleday, 2001.
11See Eric D. Beinhocker, "Robust adaptive strategies," Sloan Management Review, spring 1999, pp. 95–106; Hugh Courtney, Jane Kirkland, and Patrick Viguerie, "Strategy under uncertainty," Harvard Business Review, November–December 1997, pp. 67–79; and Lowell L. Bryan, "Just-in-time strategy for a turbulent world," The McKinsey Quarterly, 2002 Number 2 special edition: Risk and resilience, pp. 16–27.
12See Belsky and Gilovich.
13Warren Buffett, "Letter from the chairman," Berkshire Hathaway Annual Report, 1984.
14See Philipp M. Nattermann, "Best practice ? best strategy," The McKinsey Quarterly, 2000 Number 2, pp. 22–31.
15See Foster and Kaplan.
16Famously described in Irving Lester Janis’s study of the Bay of Pigs and Cuban missile crises, among others. See his book Groupthink: Psychological Studies of Policy Decisions and Fiascoes, Boston: Houghton Mifflin, June 1982.
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Vacations Are Good For Business!


Cambodian fishermen row their boats on the Mek...

Elena Baj, Contributor
Founder and CEO of
Black Monthly Schedule Planner
Black Monthly Schedule Planner (Photo credits:
Last summer I went on holiday, but I didn’t take a vacation.  I continued firefighting and stayed connected to the office in this crazy, 24/7 working world we inhabit.  ... I never recharged physically or mentally.
... This year will be different.  I am resolved to take a vacation…as in unplug, disconnect, chill. And I am encouraging my employees – “thoroughbreds” all who race until they drop — to do the same.  Vacations are good for my business.   Here’s why…
1)   Anticipating Departure Increases Productivity:  Call it the “superman”/ ”superwoman” syndrome, but as my departure date looms I find I am possessed with getting things done — crossing things off my to-do list, tying up loose ends…attending to projects that have suffered sorely from neglect.  ...
Main health effects of sleep deprivation (See ...
Main health effects of sleep deprivation (See Wikipedia:Sleep deprivation). Model: Mikael Häggström. To discuss image, please see Template talk:Häggström diagrams (Photo credit: Wikipedia)
2)   Unplugging Unclutters the Mind: On vacation, after banishing sleep deprivation with solid sleep and hours of gloriously unscheduled time, the cobwebs evaporate and my mental clarity returns.  ... On vacation I am able to think strategically about my business’s future because I’ve given myself the gift of a peaceful mind. The strategic insights I gain are invaluable and allow me to set new goals and plans for the upcoming period.
English: Flowchart for problem solving.
English: Flowchart for problem solving. (Photo credit: Wikipedia)
3)   Downtime “Elsewhere” Brings Fresh Perspectives:  ... Maybe it’s new and different foods, or hearing different languages, or just experiencing life at a different rhythm, but these new perspectives often inspire more flexible thinking and creative problem solving. Often times during my vacations, solutions emerge to issues I might have been tackling for months before my trip.
4)   And Back at the “Ranch”, the Team Rises to the Occasion: When I am away, or my employees take vacation, the absence creates opportunities for the “Left Behinds” to stretch and grow professionally, covering new functions and solving different problems.
5)   Vacationers Return Rested, Re-charged and Ready to Rock:  When I’ve given myself the gift of a real vacation, I return rejuvenated and re-energized and ready to dive in again.  The same goes for my team.  We are able to buckle down to thinking, creating and problem solving with much greater efficiency.
6)   And, Work is Fun (Again…): I know when I return from a vacation I am overflowing with good will and a positive outlook.  I’ve got my “spark” back.  And the good will and positivism is highly contagious.
I am a fully reformed vacationer with a zealot’s belief in the need for vacations – Vacations ARE good for business.  Happy Travels!

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Health care reform: What do business owners need to know?

Greensboro - The Business Journal

by Catherine Carlock
Special Reports/Publications Writer
Date: Friday, August 10, 2012, 2:55pm EDT - Last Modified: Friday, August 10, 2012, 3:05pm EDT

The panelists who spoke at The Business Journal's health care reform discussion, from left to right: Allyson Labban, an attorney with Smith Moore Leatherwood’s health care practice group; Dr. Grace Terrell, president and CEO of Cornerstone Health Care; an

Katie Arcieri/The Business Journal

The panelists who spoke at The Business Journal's health care reform discussion, from left to right: Allyson Labban, an attorney with Smith Moore Leatherwood’s health care practice group; Dr. Grace Terrell, president and CEO of Cornerstone Health Care; and Todd Yates, managing partner of employee benefits services firm Hill, Chesson & Woody.

The Supreme Court’s decision to uphold the Affordable Care Act has left many employers with a lot of questions about health care reform.

Maximum Out-of-Pocket Premium Payments Under PPACA
Maximum Out-of-Pocket Premium Payments Under PPACA (Photo credit: Wikipedia)
The legislation itself provides a framework but gives little guidance as to the implementation of its requirements.

So just what do employers need to know? The Business Journal brought together experts to help answer that question Friday morning at the Airport Marriott in Greensboro.

The panelists were Allyson Labban, an attorney with Smith Moore Leatherwood’s health care practice group; Dr. Grace Terrell, president and CEO of Cornerstone Health Care; and Todd Yates, managing partner of employee benefits services firm Hill, Chesson & Woody. …

… Here’s some of what was discussed:

What’s the date I need to know? 2014. That's when both the employer and individual mandate will take effect.

Health care systems and universal health care
Health care systems and universal health care (Photo credit: Wikipedia)
What’s the threshold? Employers with 50 or more employees will be required to provide health insurance to their workers or pay a penalty. Firms with fewer than 50 employees are not required to provide coverage, but could elect to do so through state or federal exchanges being established. However, all individuals will be required to have some form of health insurance.

Do companies with more than 50 employees have a choice to pay or play? Yes. Businesses with more than 50 employees need to decide if it makes financial sense for their company to pay the penalty and let employees purchase their own insurance. On the flip side, many studies show that offering benefits is a good way to attract and retain talented workers. “We’re encouraging folks to crunch those numbers now and think ahead,” Yates said.

  What’s the penalty per employee? Terrell said for larger employers that choose not to provide insurance, the average fine per employee would be about $2,300. Part-time and seasonal employees are exempt, Yates said. For more specific information regarding employer penalties per employee, Labban suggested reading the “Summary of Potential Employer Penalties Under the Patient Protection and Affordable Care Act,” a report from the Congressional Research Service.

Who’s levying the penalty? Just like any other tax penalty, the Internal Revenue Service will be the enforcing body behind the penalty. …

Is the penalty tax-deductible? No.

Can my existing health care benefits plan be grandfathered in? Yes, as long as it meets certain requirements.

What about the exchanges? It’s not clear yet whether North Carolina will accept federal funding to organize its own electronic insurance exchange, or if the federal government will step up to the plate. …

What if individual companies, each with fewer than 50 employees, have the same owner? That owner will be responsible for providing benefits. If there are multiple companies under the same control group, they’ll be considered one, Yates said.
Catherine Carlock reports and writes for special reports and special publications. Contact her at (336) 370-2918
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