Randy Park will appear on Global TV in Toronto talking about New Year's Resolutions.

Read More......

The Market Momentum Myth

It's a mistake to ascribe property of physics to human behaviour
With last week's drop of stock markets, has the market momentum "stalled?" Randy Park, author of “The Prediction Trap - and how to avoid it” (and a physicist) says that question is silly.
"Markets, or political fortunes, or other human behaviours don't have momentum - they don't have physical characteristics," says Park. "Where people are involved, ‘momentum’ cannot be used to predict the future."
When people talk about momentum, they are referring to something more accurately described as a herd mentality. "It's more than a matter of semantics," says Park. "Think of the behavioural differences between avalanches and antelopes." By ascribing momentum to human behaviour, people mislead themselves and use extrapolation to predict that situations will continue as they have in the past. This leads to decisions based on bad assumptions, as we have seen in both economics and politics.
While herds may have strong tendencies to continue in the same direction, a small surprise can cause an almost instant change in direction. What's more, if the same stimulus is repeated, it may cause a totally different response the next time.
Where does this inclination come from? "Whether you look at the evolutionary picture, or the development through childhood, people see momentum and extrapolation in everyday situations. A rolling ball continues in a straight line." People see this physical behaviour and incorrectly apply it to other situations.
Some argue that human behaviour can be predicted, and in some ways it can, if the important factors are exactly the same. Yet markets and political campaigns have so many complex, interacting variables, that the situation is never the same. And even if it were, people never see the same situation twice - the second time they have experience, which will modify their decisions.
The other key danger with using metaphors like momentum is the effect they have on our decision making process. "When people have an expectation in their head, they filter incoming information and look for information that supports their point of view," says Park. He listed some of the key differences in the thinking process when predicting a single future versus anticipating different possible futures:
Predicting - closed minded, only looking for supporting information, ignore facts, miss both obstacles and opportunities. Anticipating - more open minded, open to all evidence, see opportunities as well as obstacles.
A major newspaper provided an example of the danger of prediction just yesterday. With the recent release of economic data showing essentially flat economic performance, two articles appeared, both analyzing the information and presenting rational, logical arguments for their predictions. The problem was they were predicting opposite things!
"There are practical approaches that can be used to improve decision making and avoid these thinking traps," says Park. For business, he describes the use of System Dynamics, an approach which examines the structure of situations, including feedback loops, delays in information, and hidden influences. System Dynamics then uses mathematics to model the behaviour of the system. "System Dynamics can give a window into current and future performance, but its more valuable use is to reveal assumptions, and enhance communications and understanding in a group," says Park. System Dynamics can also provide input into exploring future scenarios.
Recently, Park was in Ottawa working with a group discussing the future of traffic management in the city. There were 30 people in the room. Now what would be the most important factor affecting future transportation? Gasoline prices. Yet everyone had different expectation of where gas prices would be fifteen years from now.
"We all operate with pictures in our head. When we communicate, we use words like 'up' and 'possibly'. Yet we each have our own interpretation of what these words mean. And even our own interpretation may change from day to day."

Read More......

Where is the world economy headed?

Where is the world economy headed? This is the first post of a series designed to investigate (not try to answer- see The Prediction Trap at http://www.thinkingforresults.com/thepredictiontrap.htm) this question.
We are frequently hearing phrases like "recovery", "back to normal", "green shoots" but will the world economy recover in a way similar to past recoveries?
Many people are hoping this will happen. In North America especially, we have had it pretty good for the last two decades. Most people hope that (as was the case in the last couple of recessions) we'll see some pain for a few months, then things will get back to "normal." In fact, the majority of the government money that has gone to stimulate the economy is based on this hope.
I'm not convinced that this time we will see that type of recovery. There are many signs that this time things will be different. Upcoming posts will be about why I think this way, and how to prepare for the uncertainty (and there is more information available at the Thinking for Results web site.)
For now, I want to focus on the issue of expectations and assumptions.
My first book "Thinking for Results - Success Strategies" and my recent book "The Prediction Trap - and how to avoid it" both examine the effect of our filters on our thinking. The recent financial crisis was exasperated by many instances where planning and strategic decisions were made using heavily filtered information. A striking example was the number of people who assumed - an assumption being a part of someone's filter - that housing prices would always go up. (In actual fact, I expect that in addition to the few who were warning publicly that this was an unsafe assumption, there were more who thought it privately, but who realized they could profit from others' assumptions even if the assumptions weren't true.)
In the current environment, many people assume that there must be a recovery. It has always happened before. But this time around, many things are different.
For one, there is the issue of Peak Oil and energy decline that I have been speaking and writing about for several years now. Well known economist Jeff Rubin has just written a book specifically on this topic called "Why your world is about to get a whole lot smaller." He argues that energy decline, and the corresponding rise in the price of oil last year, was a significant contributor to the economic turmoil. This is not an entirely new argument, but at this point in time it is receiving a lot of publicity, for good reason.
After last year's dramatic rise in oil prices, the economic contraction led to a drop in oil consumption, leading to an equally dramatic drop in prices. But now, even though demand has yet to rise again, oil prices have doubled since their low point. Since old oil production will continue to decline, and planned new production has been put on hold in many cases, any uptick in demand will lead to an increase in prices. So right off the bat, any industry dependent on oil - for example air travel and shipping - will see costs rise if demand rises. Not exactly the "back to normal" they would like.
Here's a question for you: in your situation, at work and at home, what will be different this time around?

Read More......

Obama's speech is still worth a listen...

It has been a couple of weeks since President Obama's speech in Egypt, but if you didn't read or better yet listen to the speech, it is still worth having a look:
http://ping.fm/HuwG7
There are several reasons why I think examining what he did in this speech can be instructive.
First, his speech was designed to connect with his audience by understanding where they were coming from, and meeting them there. He used references to their history and religion, indicating both respect and that he had done his homework. When you are talking with other people of different backgrounds, do you do this?
Second, he avoided "tainted language." He never used the word terrorist, but rather used the word "extremist." He understood that while the dictionary meaning of the word terrorist may be clear, there are other common interpretations which are not helpful when building bridges.
Third, he spoke of the common humanity. An exercise I use in my workshops is to have people independently come up with two different words, and then find what is common. This usually involves looking at the bigger picture to find their shared characteristics, as Obama did here.
Fourth, the goal of building bridges itself. Obama recognizes (and this is well described in Game Theory) that more can be accomplished by beginning with cooperation, and only resorting to confrontation if the other players insist on not cooperating. How do you approach negotiations?
Fifth, he acknowledges that large issues take a long time to resolve. He is realistic - a key characteristic in Thinking for Results.
Sixth, he made a reasonable request from the other side. After approaching from a place of cooperation, he asked for cooperation in return. He rejected stereotypes of Islam, and they asked that Muslims reject stereotypes of the U.S.
Seventh, he acknowledged mistakes, and though they were committed before he arrived, he did not blame others for the mistakes, but focused on how they could be rectified.
Finally, he had a powerful and inspiring closing to his speech.
So please have a look, or even better, spend 55 minutes to listen to the speech. Irrespective of his position as the U.S. President, Obama is a model of leadership.

Read More......

The Prime Minister's choices

I recently appeared on Business News Network, discussing the strategic choices facing Stephen Harper as he prepares the upcoming budget. Here is some of the background thinking:

Why Stephen Harper may not cooperate
Tactically, it is not in his best interest

We will likely never know whether Stephen Harper failed to anticipate the formation of the opposition coalition in December, or whether he anticipated the scenario but gave it a low probability of occurring. Either way, examining his strategic decisions from the past give us insights into what he might do on January 27.

Popular opinion seems to be that since his stumble in December, Stephen Harper will be forced to tone down his approach, make concessions, and cooperate with the opposition. But there are sound reasons for exactly the opposite course. Moreover, Harper's retreat in December can be seen as sound tactical thinking, not cooperative politics.

I mapped out the strategic choices that faced Harper after his October reelection to a minority government. The first choice was whether to confront as he had in the past, or cooperate given the election result of yet another minority government.

Although his initial tone was one of cooperation, the December economic statement was obviously confrontational. He made one mistake - he expected the opposition to roll over as they had in the past.

Once the coalition formed, continuing to a confidence vote was too risky, since Harper had inadequate information to make a good tactical decision. He wasn't sure of the public mood, since the economic statement was obviously a direct provocation of the opposition. It wasn't certain the Governor General would call an election (whose outcome was also uncertain.) His first tactical choice was to try to appease the opposition by backing down on several fronts.

But the opposition didn't quit. Since Harper still didn't know the public mood, he prorogued parliament. Proroguing allowed the Conservatives time to gauge public opinion and paint the coalition as 'un-democratic'. Though there was some risk to proroguing, it was much less that the risk of making decisions without good information.

As we approach January 27, Harper once again faces the choices of cooperation or confrontation, this time with better information. The "obvious" course is to introduce a budget which the opposition Liberals will support. But if that happens, the benefits all go to the Liberals.

If the Conservatives introduce a budget that the Liberals willingly support, several benefits accrue to the Liberals. They can put the unpopular coalition on the back burner; they can take credit for forcing Harper to respond to the economic crisis; they can claim they have the best interests of Canadians in mind; it gives Michael Ignatieff time to build his profile; and last but not least the Conservatives will remain in power during the tough economic times.
On the other hand, if Harper introduces a budget unfriendly to the Liberals, the Liberals have two tough choices. They can hold their noses and vote in favour of the budget, allowing the Conservatives to paint Ignatieff as being the same type of leader as Dion. This also passes the budget that the Conservatives want. The Liberals' other choice is to oppose the budget, leading down several uncertain paths ending up in coalitions or elections.

In these scenarios it is likely the Conservatives would stress that Ignatieff is an unelected leader. If the coalition was re-formed, the Liberals would be constrained in what they could do. It is also uncertain whether the Governor General would allow the coalition to form a government. And if an election is called immediately (either with or without the coalition), it would likely be an unpopular election.

Stephen Harper has shown he will play hardball, in situations where his tactical choices are not nearly as clear as they are now. Those who expect a new, cooperative Harper on January 27 may be in for a surprise.

The lessons for you? Things may not be as obvious as they appear; good strategic decisions depend on good information; and it is important to think things through before jumping to conclusions.

Read More......