The world is not governed by logic

“lessons you wouldn’t learn in business school – 03″

In our day-to-day lives we tend to make several business decisions. The decision making process has had enough attention by researchers. Many studies types of decision making and the circumstances around the decision and the consequences of each type of decision made.

Other than decisions we also make forecasts. Based on those forecasts we plan our actions or reactions.

I wouldn’t want to discuss what is right or what is wrong in decision making. For me, the only guideline is that the decision should lead to best achievable result considering the cost of alternatives and the information in hand.

What I want to focus on in this article is forecasts or expectations. We tend to make a lot of logical expectations about the state of the market, sales activities, market segment requirements, and so on. The thing is markets are rarely predictable. Recent events in the global economy are a good proof of this. Who could foresee a barrel of oil skyrocket to 140$ in less than 6 month and “free fall” back to the 40ies in about the same timeframe.

There are two (of many reasons) for the unpredictability of the markets:

• Herding

Many studied the herding behavior of the market. Most recently the International Monetary Fund – IMF made a study on financial markets reaching the conclusion that the status of the market may not be an exact reflection of the true state of the fundamentals. According to their research, people tend to take buying decisions not based on actual information they have but according to other people’s actions.

• The emotional factor

Many researchers have made the point that when taking “hot” decisions (that is a decision in a short timeframe with no adequate time for research) people tend to be more emotional than rational. And they tend to be influenced emotional factors rather than by information they already have in hand.

Lessons you wouldn’t learn in business school:

• Dig deep in the study of the market and the culture. Learn the people and how they take decisions in the market segment you are targeting. It is very dangerous to think you know what you really don’t know.
• Do not take business decisions based on what others are doing.

• Build an emotional relationship with your customer. You will most probably win even if your competitor has better options.

This Article is part of the series “Lessons you wouldn’t learn in business schools”. Previous Articles:

Circles of business knowledge

The Danger of Average

The Danger of Average

“lessons you wouldn’t learn in business school – 02″

The average of two numbers is the total of those numbers divided by two. But is it that simple?

Business managers use the average function in countless places around the daily process. We average sales per week, output number of products per day, cost per piece, average time consumed, etc. Some key performance indicators (KPI) are also an average. It is used so frequently because it is a useful simple way to get a general idea about a certain situation. But it comes with a price.

It has two main dangers:

1. we tend to make quick averages which are not always correct mathematically

For example: you have a car which go a distance of 60km up the hill with a speed of 60km/h and descends the same hill with a speed of 120km/h. what is the average speed of the car for the whole journey? You may be tempted (I did) to sum the two speeds and divide by 2 getting an average speed of 100km/h.

The correct way to calculate the average speed is: total distance divided by the total time. The total distance is 120 km and the total time is 1.5 hours. So the average speed is 120 / 1.5 = 80km/h.

Result: values are two types: simple values and compound values. Be careful when you want to average compound values.

1. The average is an indicator which does not represent its components

Let’s say that a company decides to operate a plane to a certain destination. The flight departs with the following passenger number on board each month (percentage to actual number of seats):

Week 1	50%
Week 2	25%
Week 3	60%
Week 4	100%
Week 5	80%

The average fullness of the plane is 63%. But does this number give any idea about any of the individual months?

Many business leaders get lost analyzing the 63% fullness (or 37% emptiness) and they forget about the month where they may have lost passengers because there are no seats; or those days where the flight left nearly empty.

We have the same result of 63% which may make sense if you are studying the cost for example. But if you want to analyze the traffic, you have two wholly different scenario (and results). One approach is to study the 63%; another is to study the monthly break down. And guess which result would be more accurate?

Lessons you wouldn’t learn in business schools:

• KPIs are good, but it’s always good to get down to details (of course only to the level of significant details)
• Stop at every step of your analysis and recheck. You may have made an incorrect average (or a bad assumption). It gets dangerous when other results or assumption are based on this one.

This Article is part of the series “Lessons you wouldn’t learn in business schools”. Previous Articles:

Circles of business knowledge