Wednesday, December 26, 2012

What the "broken window" fallacy means for you

Broken Window Fallacy
Broken Window Fallacy (Photo credit: KAZVorpal)
CBS News
By Robert Pagliarini /
MoneyWatch/ December 13, 2012, 6:55 AM

"Freakonomics", "Consider the Lobster", "Gary Benchley, Rock Star" and "Everything Bad is Good for You" (Photo credit: mudge)
(MoneyWatch) Have you heard the parable of the broken window? It's a wonderful example of unintended consequences that applies not only to businesses activity and government regulations, but to individuals as well. Fans of the book "Freakonomics" are given a front row seat to watch the dramatic and always surprising (they are "unintended" after all) effects of unintended consequences. …

The broken window fallacy, as it is often called, was introduced by French economist Frederic Bastiat in 1850 in his essay, "That Which is Seen and That Which is Unseen." The parable is about a shopkeeper's boy who accidentally breaks a window at his father's store. A bystander commiserates with the shopkeeper, but explains that the broken window is actually a blessing because now the window replacement company gets to earn money replacing the pane.

As a result, the window repair man will make some money, and he may celebrate by stopping off at the local cafe and ordering a round of espressos for his crew for their good work fixing the shopkeeper's window. In other words, a solitary broken window has created a windfall for the community. People are working, money is exchanging hands and everyone benefits from the boy's carelessness.

This, as Bastiat alludes in his essay title, is what is "seen." It's also the point where most of us stop in our analysis. …

But what is not seen in this little town with the broken window? … What if the shopkeeper had planned on buying a new pair of shoes for his wife, but now because of the expense of fixing the broken window, he can't afford to? Who loses here? Well, the wife for one, but also the shoemaker. The money that would have been gone to the shoemaker now is being spent somewhere else. … The broken window helps the window repairman -- this is quite visible -- but the struggling shoemaker doesn't know what he lost.

Of course, nobody would be dumb enough to celebrate a broken window, would they? Sadly, yes. In wake of Hurricane Sandy (and every other natural disaster or calamity), experts sound off on TV and in newspapers about how the storm will be good for the economy. "Think about all the reconstruction and jobs this will create!" they gleefully chirp.

… And what's even more surprising is that even well respected Nobel Prize-winning economists get this wrong. In a New York Time's column written just a few days after the Sept. 11, 2001, terrorist attacks, Nobel laureate Paul Krugman wrote that "the terror attack could even do some economic good." It's deja vu all over again.

So what does the broken window fallacy have to do with you? … I'm guessing that there is a great deal of evolutionary value in paying full attention to what's immediately in front of us … and less benefit from contemplating what is not as obvious. But regardless of why we become blinded to the future, it can have devastating consequences in our lives.

Unintended consequences show up in all areas of our lives and especially when it comes to laws and politics. Says Yaron Brook, co-author of "Free Market Revolution: How Ayn Rand's Ideas Can End Big Government," "Policymakers seldom foresee the destructive consequences of their interventionist government policies because they seldom understand how markets work. If you're going to pass laws that affect the economy, you have a moral obligation to know economics."

… What decisions and behaviors do you engage in that are producing unintended consequences? Consider the ramifications of your actions that are unseen today, or maybe even a week, month or year from now, and that will ultimately affect your happiness, health and relationships.

Watch John Stossel debunk the broken window fallacy.

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Robert Pagliarini is obsessed with inspiring others to create and empowering them to live life to the fullest by radically changing the way they invest their time and energy. He is the founder of Richer Life, a community of passionate people who want to learn and achieve more in life and at work. He is a Certified Financial Planner and the president of Pacifica Wealth Advisors, a boutique wealth management firm serving sudden wealth recipients and affluent individuals. He has appeared as a financial expert on 20/20, Good Morning America, Dr. Phil, Dr. Drew's Lifechangers and many others.
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Thursday, December 6, 2012

Do Less, Achieve More: The Beauty Of Effective Delegation

Fast Company:
Fast Company (magazine)
Fast Company (magazine) (Photo credit: Wikipedia)

Are you swamped at work? Here's how to delegate effectively and increase your productivity.

[Image: Flickr user Henti Smith]
As company owner, you need to focus only on the items that add the most value to your organization. In general, these are the things that you, and only you, are capable of doing. You should delegate the rest.

Pareto principle
Pareto principle (Photo credit: BEUTELTIERE)
Of course, you need a way to determine what the key things are on which you should be spending your time. Consider the Pareto Principle, or the 80/20 rule, ... In the case of your focus, the Pareto Principle says that 20 percent of your efforts yield 80 percent of the results you achieve. Therefore, the key is to identify what this 20 percent of your work is and do more of it (and delegate the 80 percent).
Identifying Your Top 20 Percent
Pareto Principle Option 2
Pareto Principle Option 2 (Photo credit: Sleepy Valley)
The first way to determine which 20 percent of work you do yields 80 percent of the results is to think back. What were the most important projects you completed last year that propelled your company forward? Your answers will include the types of projects that belong in your top 20 percent and which you should continue to do.
The second way to determine your top tasks to perform is to review your to-do list and consider the following questions when reviewing each item:
  • Does that activity really add value to your company?
  • Are you really great at performing that task?
  • Is there somebody else who can do better, as well as, or nearly as well as you at completing the task?
Time Management
Time Management (Photo credit: Intersection Consulting)
Finally, a great way to determine which tasks are not in your top 20 percent is to keep a running list of low-value tasks. ... For example, you can’t do work yourself that you could hire someone to do for $10 an hour. As you go through your days, write down all tasks you perform that fall into this category.
The next step in the process is to delegate the lowest value uses to others.
Five Steps to Effectively Delegate
It is often hard at first for some entrepreneurs and business owners to delegate because they want to control everything themselves. However, to achieve your end vision, you must delegate. ...
The fact is this: Delegating tasks to others can save you a great deal of time and allow you to focus that time on the highest value-added tasks. However, when done incorrectly, delegating results in things not getting done or getting done poorly, which is when you end up expending more time and energy than you have.
This is why it’s critical to delegate properly. Using the following steps will help you do so.
1. Identify the Right Person for Delegation
...The right person is the one who has the requisite skill set to do the task and the ability to complete the project within the appropriate timeline.
Your employees should maintain daily and weekly to-do lists. This way, you can review those lists to identify which employees have the ability to tackle the project to be delegated.
2. Clearly Define the Project
The next step is clearly to define the task, the deliverables, the completion date, and why the project needs to be done. ...
3. Discuss the Plan of Action or How the Task Can Be Accomplished
Next, you need to discuss the plan of action: Specifically, how the person charged with completing the task can accomplish it.
Of key importance here is that you don’t want to delegate a task (e.g., fax this report today), but rather a process (e.g., fax all the reports I have for now on). Therefore, even when delegating a seemingly simple task such as sending faxes, you need to discuss the plan. For example, how often do you need reports faxed? How quickly must they be faxed once you create them? What must be done after sending the fax? (Confirm receipt? Shred document?) ...
4. Have Them Repeat Back the Plan
Next, have the person to whom you delegate repeat the task and deliverables back to you to ensure their complete comprehension. ... Have the person repeat all of your directions back to you until the directions are right.
5. Monitor Progress and Provide Feedback (Longer-Term Tasks)
When you delegate a task that will take more than one or two days, you need to monitor its progress and provide feedback. Ideally, you identified project milestones or checkpoints to ensure the project stays on track when initially discussing the plan.
To ensure projects are completed properly, mark those milestones on your calendar and monitor that results are delivered on time. If they are not, be sure to immediately alert the worker that he or she has fallen behind. Meet with the worker periodically to provide feedback and guidance.
6. Evaluate Performance
The final step to effective delegation is to evaluate performance. ... Here’s why: If somebody does a B1 job the first time they perform a task that you delegate, ... the next time they will do a B1 or lower job because they think that their B1 job is good enough. This is why providing feedback and evaluating performance allows you to get the best results from those to whom you delegate.
English: Pareto / 1/2 Edgeworth-Box
English: Pareto / 1/2 Edgeworth-Box (Photo credit: Wikipedia)
Even if they did a great job, you need to explain why they did a great job so that they know how to repeat this performance in the future. You need to explain if there was room for improvement. People generally appreciate slightly negative feedback versus no feedback at all. ...
Finally, you need to understand and accept that it will often take at least twice as long to delegate a repeating task the first time as it would to do it yourself. However, once you delegate something successfully, it will be off your plate forever.
You must also accept that many delegated tasks may not get done as well as if you did them yourself. Although this isn’t acceptable for some areas of your business (e.g., providing a service to a customer), for others (e.g., reordering supplies, completing paperwork), good enough is good enough.
Effective delegation makes you replaceable, ... this is what you want. It allows you to spend time growing--rather than simply maintaining--your business. You can spend less time working and take real vacations. It also makes your business attractive to buyers, which is particularly important if your end vision is to sell your company.
Find more ways to increase your productivity by subscribing to the Fast Company newsletter.
Excerpted with permission of the publisher, Wiley, from Start at the End: How Companies Can Grow Bigger and Faster by Reversing Their Business Plan by David Lavinsky. Copyright 2012 by David Lavinsky. This book is available at all bookstores and online booksellers.
Author Dave Lavinsky is the cofounder of Growthink, a consultancy that helps entrepreneurs and business owners identify and pursue new opportunities, develop new business plans, raise capital, and build growth strategies.

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