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Views from the Prairie

June 16

Gambling vs Data

In a recent article, Michael Milken mentioned that some highly touted investors don't do a lick of research into the ventures they are presented with. They make the investment decision on if they feel lucky that day. That is not investing. That is gambling. While most people make gut decisions, the real question is whether or not we "educate our gut". So, are you managing by gambling or are you a management investor?

Many a raffle contest of guessing how many items are in a jar is won by someone guessing. In many cases, there is someone who measures the jar and computes a very good number but comes in second. Most people guessing do not win.

Unlike most contests, in business there can be multiple winners. So, while the contest winner is someone who guessed, more consistent business results are gotten by looking at the data. Whenever there can be multiple winners, it is better to go with the data than with a guess.

In business, consistently coming in second in predicting would yield a very good profit margin. Whereas over time, gambling winds up with less than average results. (And if you wondered why that hot shot money manager wasn't returning good results this year, it is more likely that he was just lucky last year.)

When we are managing through gambling, we go with our gut feelings or even "invest when our team wins". We neglect the hard work of getting the available data and figure out what is real information and what is "noise". Just like an amateur gambler placing large bets to show off, we make big decisions based on how being successful would make us look instead of whether or not it is a good decision.

This type of management has led to bulking up teams when the market for that product or service wasn't there. It has led to trying to dominate a market that is about to disappear. It has put billions into companies that do not have good business fundamentals, but are media darlings.

In order to make a good profit, we only need to have good approximations of what the values are. Yes, it hurts when the numbers and our approximations are far apart, but when they are close, that is often good enough to profit.

One key datum is the cost of failure. Failure can come in many different forms. But gambling is an activity where it is very easy to lose everything. The same is true with management by gambling. There are many, many companies that have started off on a gut feel that a market is there but have crashed when that market proved to not exist. The reality of the small to non-existent shared economy is starting to affect a number of the startups in that field.

As human beings, we can never get away from making gut level decisions. However, we can "educate" our gut by seeking out what data we can get. The more information, the more our gut decisions will benefit us.

Fill that spot with a warm body

How many managers have stated words like that? Way too many. Hiring the wrong person isn't just a financial mistake. It can adversely affect the whole company. Hiring is often the most important decision by any manager. It is better to not hire than to hire just to fill a position. The best companies attempt to always improve the company with each new hire.

Over the years, there have been many cases where a person made really bad public mistakes and gotten fired for it. In many of these cases, the person was the wrong person for that job and it would have been better for the company to have hired someone else from the beginning.

Bad hiring decisions have major financial costs. It is easy to find web sites listing such costs. But the hidden costs of a bad hire can reverberate throughout a company with good people leaving or morale plummeting. The indirect costs of a bad hire can exceed the direct costs often by several multiples.

Companies that trust their workers need to make sure that the workers are the correct people in each job. That means spending a lot of effort to get the correct people at the start. Many companies are building extensive hiring practices in order to slow the process down so that the managers are thinking in depth about each hire and that the prospect can properly see if they fit.

Nearly every hire made in desperation has been regretted later.

With the newer federal reporting and insurance mandates, it is far better to take time to hire properly than to make bad hire after bad hire.

Risky World

Part of the River Thames in England was called "Isis" in past centuries. Many nearby places have names including the word "Isis". Recently, PayPal tried to cut off the Islamic State by refusing transactions from any entity that contained the word "Isis" which meant that people in those places could not use PayPal either. The tyranny of simple computer algorithms.


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