Using models

Critical thinking is really important when one derives results from a model. They are behind so much of modern day decision-making. Whether it is a decision to invest (financial models) or policy-making (economic models or models calculating social impacts); they generate a false sense of precision and scientific-ness in the process. There is of course the interdisciplinary subject of decision science that tries to be eclectic in drawing out tools and resources from various disciplines to help support decision-making.

I recall at one point, Dr Goh Keng Swee talked about how economics is not necessarily going to help us get things right but it does help to eliminate almost 99% of the options which are necessarily wrong. In the same spirit, I think modelling should be a way to eliminate the fringe cases and allow us to work within scenarios that make sense rather than give us a view of the future.

Forecasting should not so much be seen as ‘what will happen’; but to help us cast out the ‘what will not happen’. Decision-making, on the other hand, is choosing between eventually the options that are plausible within what was not eliminated. To that extent, we need to use models extremely critically – even after we have spent lots of time and money building a model. We cannot say to ourselves, ‘if we spent all the resources building this model and not using the results, it is a waste‘.

The model is wrong

When I was labouring away in my economics classes at LSE more than 10 years ago, there was a lot of debates around accuracy of models we were using to understand the economy. And the agreement was that all models were ‘wrong’ because they are (over)simplified versions of reality.

But simplification was necessary for us to understand something that was complex. Incorporating the complexity into our models may not help us very much. To give a concrete example, in economics, we claim that all purchases which were the realisations of demand for all goods were driven by individual preferences. But in reality, there are also goods which were gifts and because you are buying it for someone, it is not about the preference for the underlying goods but something more complex. Yet if you need to start working out a model where the demand for a good is driven not by preferences for it but cultural perception of the signals around the gifting of a good, it is not so generalisable and would not be useful.

Today, models are getting more complex, and we are building out more and more models in order to perform sophisticated calculations and help support decisions. We create metrics to test our models and they tend to be around how ‘right’ the models are with ‘predicting’ results we already have. The challenge is no longer oversimplification but a problem we call ‘overfitting’, which is where we are trying to create models that is able to fit the data we have so well that it is not generalisable. This is actually the problem above – just because we are capable of building more and more complex models, we think it is better when it isn’t.

Wasting time

What is time-wasting to you? I realise that perspectiv matters a lot when it comes to this. But as this article in The Economist suggests, there are some perhaps universal time-wasters in the modern day office worker’s life: logging in, mistyping, deleting emails, scheduling meetings that eventually gets cancelled or rescheduled, looking for available meeting rooms. All of these are often ridiculous. Most of the time, technology plays an important role in both time-wasting and time-saving.

I spend time to write for this blog daily – is that a waste of time? Perhaps so to some people in my circle, including some loved ones. But for me, it’s an investment, a training that I sorely need, and the development of a positive habit. On the other hand, I think that time spent making small talk to ease into a meeting is a waste of time but I’m too culturally attuned to do otherwise, plus it doesn’t help I happen to be naturally curious and happy to make conversations.

As I enter a stage of life when time becomes so much more precious, I need to guard it more carefully, and make sure I’m not wasting time. But that’s only possible when I know what are my objectives.

What is Goodwill?

In accounting, goodwill is when a business has somehow paid the past owners a price over the book price of the original business and now capitalises this premium in the books of the acquired business. At the same time, we may say we do things out of goodwill, basically for free or token, as an act of kindness towards people. Most of the time these are towards strangers, or clients, customers. It may or may not involve expectations for reciprocation.

Now the last part of the previous paragraph is the part that I think is the most tricky thing about goodwill. There’s a sense, in our modern world where there is always a chance of repeated interaction, that goodwill is worthwhile and also worth multiplying. At some point or in some way, it gets reciprocated in profound ways. Some might think of it as Karma – or at least just the positive sort of it.

What I think is strange is that the use of the term goodwill in accounting or business may have contaminated our sense of what it really is. I personally identify the non-business ‘goodwill’ to be something in a spirit of generosity and giving, whereas in business and on commercial basis, goodwill is treated like an asset, something that is supposed to bring value – therefore the returns that reciprocation of a kind gesture might bring.

Maybe it’s me thinking too much about semantics – but it matters.

Honest Tea

I was listening to the first part of Barry Nalebuff’s interview on ‘People I mostly admire’ and it turned out to be pretty cool and insightful, particularly that very rapid sharing of his thinking that developed Honest Tea. It reflect how important simple ideas were when taken seriously and scaled up. And it also helped to demonstrate how an economics (and strategy) professor use his intellect to take calculated risks in entrepreneurship.

He was probably oversimplifying but considering Honest Tea as a product that basically makes use of three simple economic principles:

  • Diminishing marginal returns/benefits (on sugar or the taste of sweetness)
  • Principle of maximising the value of the content of a fixed cost container in order to maximise the overall value of the bottled drink
  • Navigating trade-offs on the marginal utility curve: Convincing people to trade off the lower sugar for the fact that the drink had lower calories

That is pretty brilliant as a way of thinking about a market and a product; those ideas are simple and yet profound precisely because the world had not evolved solutions around a combination of these ideas prior to Honest Tea.

I highly recommend you give the podcast a listen.

What a coach does

For new readers, you might not have realised that I have a coaching practice. I call it career coaching but it could well have been performance coaching, or work coaching, or whatever you might call it. I’m now working with an coach to help me with English for business but I’m essentially being coached to align my messages more with my communication objectives. At the heart of coaching, is the ability to help our clients identify and crystalize their objectives, and then focus their attention and resources on meeting them.

Meeting our objectives often require us to take a series of actions or adopt certain behaviours to maximize the chances of the outcomes we desire. We may not be too sure ourselves and so we hedge our bets; we prefer not trying than to try and fail. Coaches help to reduce incidence of that thought by helping us reframe and focus our attention on the work that needs to be done rather than fretting over the outcome that we cannot control directly.

So it is on my career coaching practice; I work with you to identify and crystallise your career objectives and then work out what actions or behaviours are necessary to get there. We then try to focus on developing those behaviours and undertake the actions that maximises the chances of you getting there. Even when you might think it could be a waste of time, or if you’re afraid the investment of effort would not pay off. It’s not about the immediate returns on your investment, but recognising that investment in yourself is a case where the returns come through from yourself rather than from the job you find. In fact the job or role you eventually take on, is merely a means by which you contribute your value to this world.

Incomes, and savings

When I was studying in London and the States, I always thought that working and earning an income in those countries beat being in Singapore and earning the low salaries that starting graduates were given. In fact, I was paid so much in my gross salary during my internship at a bank in London that on market exchange rate basis, I only got back to that same level of monthly salary in the 5th year of my scholarship bond. Even if my salary was stagnant for 6 years at the bank and I was paid like an intern, I would have earned more.

But would I have been able to earn more in terms of disposable income? How about disposable income minus the critical expenditures like rent and the premium for food that I didn’t have to pay in Singapore? How about the high level of taxes in those countries? Now, people may say that after doing the Math, they realised that as a percentage of the total income, the cost works out to be roughly the same, and so you save the same percentage of your income.

Yet that is not exactly the same. The same percentage of a higher income at market exchange rates implies that you do have a higher amount of absolute savings. And this is where it starts to matter because capital markets are largely global and the pricing is consistent across the world. This means that if you’re able to amass a higher absolute amount of savings at market exchange, you have greater purchasing power for public securities and other financial products. The advantage of being able to enjoy lower costs of living does not outstrip the disadvantage of a lower absolute savings.

Top Gun

Probably the last thing I imagine myself writing about on my blog is a movie I just watched but I’m going to do just that. Given my track record for reading movie synopses in lieu of watching them, it might be surprising that I actually enjoy movies very much. Perhaps it is precisely because I’m such a critic that I don’t want to waste my time on a movie that is not worth the while.

Which brings me to Top Gun: Maverick. Honestly, it was done so well. The script was well written, the words exchanged carefully thought out, and the emotional content was properly executed through the movie even as the fighter jet cockpit scenes created so much tension as you watch the fighter pilots move through simulated navigation across the landscape. It was one of those movies where the story honestly did not matter as much as the manner the situation and characters were portrayed.

Entertainment have become so much of a staple in our modern lives we sometimes get desensitized and forget the art behind it. Top Gun: Maverick reminds me of it very strongly. Those days when I actually studied film critique and consider various aspects of what a film is about.

Deficit thinking

Thomas Curran researches elements of psychological impact of our society’s perfectionism. While we tend to admire people who are perfectionists and pushing themselves up higher and higher standards. In his interview with Adam Grant in the WorkLife Podcast, he talks about the deficit thinking of us being inadequate is consuming us and damaging us.

In his talk at TED MED in 2018, he criticized the dangers of performance metrics which pushes people to do better but also foster that sense of inadequacy that characterises so many of out high potential youths today.

I think this problem plagues the Singapore society especially; the creation of insecurity, amplification of imperfection and continual emphasis on appearing perfect. Our search for mental wellness must address this obsession with perfectionism that we as a society has been nurturing, or it is doomed to fail.

Making things measurable

One of the most powerful ways for people to influence others to do something about certain causes is just to measure it. The most successful example being the creation of GDP as a concept to measure the economy. Suddenly, it displaced the more traditional metrics of population or military might (which involved more quantities than just number of troops involved).

There are always issues with measurements created. They do not perfectly measure the underlying thing we’re trying to quantify for two reasons:

  • The measurement is inaccurate due to poor instruments used (proxies, poor surveyors etc)
  • The measurement does not reflect the actual underlying concept we are trying to quantify.

The first point can be improved over time. The measurement accuracy would not be perfect but over time, as long as the measurement required is well-defined, we would be able to capture the quantity or at least get really close to it.

The second point is trickier and it is going to always be imperfect. And herein lies the danger of trying to make things measureable. The Goodhart law features an important observation we ought to be constantly reminded of as we’re bombarded with figures like GDP growth, inflation etc. It doesn’t mean they are false! But the key is to be able to distinguish the measure from the underlying concept of what the measure is supposed to imply.