What Are You Incenting?

When I was first introduced to economics, I found that I enjoyed the history of economic thought – the great writers such as Adam Smith, John Stuart Mill, Keynes, Galbraith, etc.  But then my econ classes turned more toward math and graphs. I eventually lost my original enthusiasm for the field but gained some appreciation for why it can be referred to as “the dismal science”.

Economics has once again become interesting to me as a number of excellent books have been published that approach economics from the standpoint of psychology and incentives. The study of incentives has always been key to economic thought – that isn’t anything new. However, it feels to me that there has been a lot of fresh writing in this area – examples include everything from Malcolm Gladwell to Daniel Kahneman to the Freakonomics books, Dan Ariely’s writings, and others. Truly, whatever behavior you subsidize or incent you will get more of.

Since I’m confounded by the morass of the American healthcare system and what passes for “debate” on this issue in Washington, I have a tendency to pick up books that help me understand different points of view on the problem. Books that fit this category include Catastrophic Care by David Goldhill and America’s Bitter Pill by Steven Brill (for the essay that launched Brill’s book, go here).

I just finished An American Sickness by Dr Elisabeth Rosenthal, a new and powerful book that I highly recommend. Keep in mind that I’m not recommending it because it’s always fun to read. Since Dr. Rosenthal relates a number of stories about people being caught in a web of overcharges and diminishing competition, it reads more like a horror novel than some of the Stephen King books I’ve read. I almost had to sleep with the light on.

Since this is a blog about leadership, innovation and personal effectiveness, I’ll leave the healthcare debate aside. However, this one section caught my attention:

“Cataracts can be detected during an eye exam long before they become a real bother to patients, so there is much discretion about when to perform surgery. Studies have shown that the rates of cataract surgery are highly dependent on how much doctors are paid to do the procedure. In one study in St. Louis, the number of cataract surgeries performed dropped 45 percent six months after a group of doctors went on salary and were no longer paid per surgery.”

I don’t know about you, but I find that to be a bit alarming. It’s a pretty good indicator that doctors who are incented to do cataract surgeries will do borderline cases to pump up their income.  And this got me to thinking about incentives in general.

Can You Go Around a Leaf?

Among the greatest innovations over the past few decades – greater perhaps than Pumpkin Spice Latte – are the rise of animated movies that provide lessons for children and adults alike. The movie Toy Story sticks out in my mind as the movie that changed it all. Pixar (now part of Walt Disney) created movies that were fun for kids but also provided great gags that sailed over the heads of the little ones but got a laugh from Mom and Dad.

One of those movies is A Bug’s Life, which gives Aesop’s fable The Ant and the Grasshopper the full Pixar treatment. I have always loved A Bug’s Life because it intersperses profound lessons about hard work and innovation with some hilarious scenes.

The ants in the movie are diligent in their efforts to collect enough food for the grasshoppers, who are bullies demanding ever-greater production from the ant colony (pause here to consider themes of slavery and mafia “protection” rackets). The ants work hard, as ants do, but aren’t particularly innovative – that is, until a self-styled innovator and rugged individualist ant named Flick decides to look at the grasshopper/ant divide through a different lens.

Although Flick isn’t featured in this scene, it represents a hilarious metaphor for those of us who panic when our normal routines are interrupted by the unexpected obstacle. Enjoy….

Desert Storm, Or: How I Learned to Stop Worrying and Love the Lentil

As I write this I am eating a bowl of lentil soup, which reminds me of a story. Let me set the stage….

It’s winter of 1991, and I’m in Kuwait City. As you recall, this is when coalition forces entered Kuwait City as part of a multinational effort to evict Saddam Hussein’s forces from the city – aka “Desert Storm”. Although few US forces actually entered into the city itself, there were some unique US troops running around the city during/after the short ground war. I was in Civil Affairs – the part of the Army that is a liaison between local civilians and governments. Our much cooler colleagues from Special Forces served as liaisons between our military and the local military elements on the ground.

I was part of “Task Force Freedom“, a small task force set up to work through the complex – and impossible to anticipate – challenges that arose during the operation. As the ground war quickly came to an end, our mission turned to getting Kuwait City on the road to recovery.

Our immediate concerns related to basics like security, sanitation and food distribution. The previous months of Iraqi occupation of Kuwait City had been hard on some city residents, so in the early days, along with our other missions, we were in the city making sure large trucks filled with food were distributed to neighborhoods as requested by the Kuwaiti government.

The Era of Benevolent Deception

New technology can be great for customers – sometimes too great. In an era when companies strive to “amaze” and “delight” their customers, they sometimes are forced to de-amaze and un-delight the user experience because their customers have a hard time adjusting to the change.  Consider….

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Turbo Tax is able to return results in a fraction of a second. That would be awesome, except it turns out that people don’t trust something that is that awesome. I mean, how do you calculate taxes that quickly? There must have been a mistake.

So the Turbo Tax developers created a series of animations that tell users that the program is “look(ing) over every detail” while an animation shows a tax form lighting up line after line.  The animation is really bogus – its only reason for existence is to make you feel confident in the results. As the animation plays, you think to yourself: “look at that animation – this Turbo Tax thing is working hard!”.

This is a form of “benevolent deception“, a term coined by University of Michigan researcher Eytan Adar and his co-researchers from Microsoft, which is a practice of designing experiences that “deceive” users but leave them better off in the process.

Here’s another story, courtesy of my friend John.

Two Different Ways to Lose $1.6B

I admit it: it’s unlikely that you’re trying to figure out different ways to lose $1.6B. After all, you have to have a lot of money to lose that much money in the first place. Billions.

I ran across two unrelated stories in the retail space where that sum was central, so I thought I’d call your attention to them. At the very least, there’s a symmetry and a lesson in these stories.

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The first story is here. It talks about how physical retailers are getting fleeced by shoplifters – to the tune of about $30B.  So where’s the $1.6B number?  Read on:

“Oh, and just in case you’re sitting there shedding zero tears for the Targets of the world — this affects all of us.

Since large-scale shoplifting can drive up prices for both the manufacturer and retailer, the US loses roughly $1.6B in sales tax revenue per year (money that could be spent on parks and schools) thanks to ORC (Organize Retail Crime).”

This story was in my head when I read an amazing statistic about Amazon.

The Power of Applied Hope

If you read my About Me page, you will see that it ends with this:  “Finally, I am an optimist.  It’s an exciting time to be alive”.

I thought that now would be the perfect time to revisit optimism – not just as a way of viewing external events and avoiding despair, but as a way to impact events.  Let’s start with three well-known characters:  Bill Gates, Melinda Gates, and Warren Buffet.

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Last week, the Gates Foundation released their annual letter. Since Warren Buffet gave the bulk of his wealth – $30B or so – to the Gates Foundation in 2006, Bill and Melinda addressed this year’s letter directly to Warren. I recommend you read through the letter in its entirety.

In one part of the letter they touch upon why they remain optimistic about many of the major health challenges facing the world.  This optimism runs contrary to rampant pessimism. For instance the statistic below:

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Bill puts it well here:

“One of my favorite books is Steven Pinker’s  The Better Angels of Our Nature. It shows how violence has dropped dramatically over time. That’s startling news to people, because they tend to think things are not improving as much as they are. Actually, in significant ways, the world is a better place to live than it has ever been. Global poverty is going down, childhood deaths are dropping, literacy is rising, the status of women and minorities around the world is improving.”

Optimism (and pessimism) perpetuates itself. While the political world has become practiced in leveraging fear, that approach doesn’t work as well in the private sector, where leaders create outcomes based upon the shared belief and passion of their teams.

Which leads me to a related point: the importance of active optimism, or “applied hope”.  Before I get into the provenance of this phrase, let me drop one last (telling) quote from the Gates letter, this line specifically from Melinda:

The Dangers of the Golden Story

In the past, I have written about the importance of storytelling. Companies often tell the same stories over and over to signal what is important to the company and why it exists. But I want to provide one bit of caution around something I call the “Golden Story”.

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I have worked for a number of high-growth software companies – most of them private companies that were working against the odds every day, trying to secure more customers and new financing. One of the things we would be desperate for was some external validation that our product/market fit was on point. “Product/Market Fit” means that there was a 1) demonstrably large market with a particular problem, 2) that market was providing indicators that it was willing to spend money to address that problem, and 3) participants in the market had selected our product and used it to successfully address the problem.

Since a lot is riding on a young company proving product/market fit, we treated any story that validated our product like gold – and inevitably, we would hear such a story.  Perhaps a customer had a great outcome when they used our software exactly as designed, or maybe a major customer had licensed our technology at a high price. It’s natural to love stories like these and to re-tell them.

But in retrospect, sometimes these stories can be false signals, and false signals can lead to bad events. Here are some indicators that the Golden Story you’re telling is a false signal in disguise:

  1. The recurrence of the story is limited.  You keep telling the same story over and over. It is rarely supplanted by new versions.
  2. The sample size is minuscule. It’s one company out of a thousand. It’s one user out of a million. You make it seem bigger.
  3. You’re overly elated. It quiets your doubts, but if you’re honest, you’re pretty surprised.

Poker, Bifocals, and You

Every now and again I like to provide examples of cool things that are happening.  Without further ado, let’s dive in….

This might be my 3rd grade picture

This might be my 3rd grade picture

Say No to BifocalsThe reason people don’t usually see me with eyeglasses isn’t because I have perfect eyesight. It’s because I wear contact lenses made for the preposterously near-sighted. Lately however I’ve been wearing reading glasses in restaurants, my theory being that restaurants have recently decreased both their lighting and the font size used in their menu and receipts. It must be their fault, somehow. 
 
Researchers at the University of Utah have developed eyeglasses that can sense when you’re looking at something close or far and adjust the lens strength accordingly.  They do this with a little infrared sensor embedded in the bridge of the glasses to detect where your eye is focusing and the glasses can alter the lens correction within 14 milliseconds.
 
One potential advantage is that users will only need to change their settings as their prescriptions change.
 
The trick here is not so much the Big Discovery, but turning the innovation into a mass-market product. Despite my poor eyesight, I see this as inevitable.  
 
(Hat tip to The Hustle for the info, which you can read here).
 
Poker Players Fold. Software developed at Carnegie Mellon was able to recently trounce a group of world-class poker players at Texas Hold ‘EmIn the era of Watson/Jeopardy and Deep Blue/Chess victories, this might not pass as shocking news anymore.
 
But the big breakthrough here is that unlike chess, poker is a game where participants have imperfect information. You only know your hand – not the other person’s.  The resulting computing task is therefore more difficult. (Fun fact: the developers leveraged the game-theory work of Nobel laureate John Nash, he of the Beautiful Mind movie).
 
The speed of this breakthrough stunned even the experts. Said one scientist: “Such an event was prognosticated to be at least a decade away.”
 
(Hat tip to The Powersheet for the info).

Narrate Your Presentation!

How many times has this happened to you?

There’s a group of people in a conference room, and someone is presenting to that group on a plan that they are proposing.  You are not in that conference room. You are on the phone.

This is you on a conference call

This is you on a conference call

During the presentation, the presenter says things like this:

  • “As you can see, this number indicates that we should move these things right here over to this part of the operation.”
  • “Look at this number here!  Quite surprising!” 
  • “As you can from this area, we have some work to do.”

Meanwhile, you’re not exactly sure which slide they’re on.

I have been on the receiving end of these presentations throughout my career.  As a result, I’ve become pretty focused on doing the following.  For the sake of your presentation’s success, I recommend you try to adopt these same practices, if you don’t already.

Zume: Silicon, Sausage, and Pizza Automation

As we hear about automation changing the face of work, consider the future for the neighborhood pizza worker.

I'd also like a glass of Chianti with that...

I’d also like a glass of Chianti with that…

Zume Pizza, a startup in Mountain View, CA, is imagining a different future for how your pizza will be made and delivered.

According to this article, Zume is a pizza chain startup that is envisioning a future where machines and robotic arms press the dough, spread the sauce in “near perfect circles”, add the ingredients, and slide the pie into an 800 degree oven for the first few minutes of baking. The pie is then transferred to a delivery vehicle that will finish the baking process in on-board ovens on it’s way to your house – a baking process timed to complete exactly as the vehicle arrives at your location.

Suddenly I’m getting hungry….

As you might imagine, Zume currently spends far less on labor costs than Dominos or McDonalds. They are currently leveraging that lower cost basis to provide higher pay and full benefits to their fewer employees, but I suspect that sort of California idealism won’t last long as the model expands in the market and new competitors enter. In just the past few months McDonalds has increased their roll-out of automated ordering kiosks, which many (including McDonalds executives) say is a response to the recent efforts to increase the minimum wage to $15 in various cities.

Given the rise of driverless cars and trucks, I absolutely envision the day when we will order our pizzas using convenient mobile apps or voice assistants, get an alert when the truck is in front of our house, walk to the (driverless) truck to tap in the code that appeared with the alert, and get the boxed, piping hot pizza we ordered right there.