Friday, March 27, 2020

Facing Change around a Force Majeure

“The only sense that is common in the long run, is the sense of change—and
we all instinctively avoid it.”  -- author E.B. White

Force Majeure:  Extreme circumstances that prevent fulfilling expectations and contracts

Change at its best is what we want to do when we choose it – when the outcomes are seen as positive and productive.  Whereas when change is forced on us, as with the pandemic we are now coping with, we are resistant and fearful.  Change taps into our fear of uncertainty as circumstances shift hour to hour.  As closings step up and markets worsen, independence and autonomy are challenged in the US as nowhere else, because Americans hold autonomy as our ultimate right--and loss aversion sets in.

No matter how autonomous we think we are, there is nothing like a universal health crisis to make socialists of us all.  When groupthink is unavoidable, we can adapt — for awhile.  So what is the tolerable timeframe for the world’s largest quarantine effort ever?  Since the scale of this effort is first-time, and enforcement has been inconsistent, no one really can tell.  Britain tried to limit it by age to 70-plus, but the prime minister was persuaded that this wasn’t going to be enough.  The whole Indian nation, however, at 1.3 billion, was considered manageable.  In the US, closing down Disneyland can be considered the watershed response. 

Cultural aspects
Which is why it is time, after some weeks of this worldwide endurance test, to consider the cultural dimensions of change, especially the forced kind.  “Sheltering at home” has a comforting sound – but this looming crisis has made such a policy feel more like a relaxed house arrest.  The intimidating safety measures everywhere have forced brutally complex decisions to be made on fast-shifting platforms.  Emergent problems—many third or fourth-level side effects—have yet to clarify just which changes will morph accustomed ways of living into a different system altogether for reevaluating assessments and choices, both private and public.  

The mental effort to grapple with these decisions in the fallout of lockdown will stand as the foremost momentous moment of change so far for this century.  For openers, among the issues forced by “medical law” are human rights to assembly and against restraint of trade, and more generally, weighing the value of prevention as calculated against the infection and death toll of the disease.

As social primates, we are built to connect to each other in group life and community.  We found out long ago that solitary confinement is a grim punishment.  In 1829 Philadelphia’s Eastern State Penitentiary introduced solitary confinement rather than packing prisoners into mass cells, as was the historic custom. The theory was that the solitary penitent (hence “penitentiary”) would use solitude to think about the error of his ways and repent.  Far from being cured, however, prisoners went mad in their forced isolation.

As Americans,we aren’t used to limits to our freedom.  When we seek out private time, it’s because it’s our idea, not the government’s.  Not since the Spanish flu pandemic of 1918 has anything like the current quarantine even been attempted, making 2020 the world’s broadest experiment in mass behavior.  These mandates make anti-smoking campaign and seat-belt laws look like ineffectual prodding.  In its sheer scope and broad-band effects, this is the perfect “AQ test” – Adaptability Quotient – Harvard Business Review’s term for the “new competitive advantage” of adaptability to change needed to thrive in a fast-changing environment. 

Following the view of the future by William Gibson, the science fiction writer, as already here, change is not evenly distributed.

It’s a science fiction scenario. If Susan Sontag were still alive, she would add the viral lifestyle to her “imagination of disaster” scenarios as our latest toxic action chain.  In the 21st century, fear and panic took over as a microscopic lifeform emerged, killing first Chinese, then Italians, then New Yorkers—any and all others it could.  It forced friends and family apart, ended religious congregation, tanked the stock market, erased businesses and jobs.  This is no alien invader .  This is more like a home invasion from a virulent strain of the flu right here on earth, disrupting every aspect of life as we know it. 

Humans had to decide how to manage the trade-offs between the unintended consequences of prevention efforts and a devastating percentage of deaths following contact. In H. G. Wells’ classic science fiction novel The War of the Worlds (1897) it was not military might that defeated the invading Martians in their fearsome war machines.  Instead the final defense was tiny earthly microbes, to which humans had developed herd immunity over centuries.

In today’s scenario, we are the Martians.  

White Squirrel
This magnitude of change is therefore not so much an exotic black swan, but the more domestic backyard squirrel – a white one that can’t be trapped or easily killed, a metaphor by our business-school colleague Bill Costa at New Hampshire’s Franklin Pierce University.  As the uncertainty sinks in deeper, even your own home, center of comfort and reassurance, starts to look somehow alien, as if it could any moment fade away.  The image of the future begins to loosen and float uneasily as dozens of scenarios – mostly unsettling—edge in to fill the space of stability and habit.  So much change in the course of days and weeks, rather than years or decades, is mentally and emotionally devastating, and will continue to twist any semblance of normalcy.  Rarely has humanity been so put upon to examine basic operating assumptions, concepts, and practices no one had to think about pre-2020. 

We don’t mind change itself—we just don’t want change forced upon us. We resist problems arriving too fast, too many, too fear-driven, and too global.  Attending a school far from home, getting married, moving to a new home, a new job or career…always appear with a level of stress, but they are also experienced as upward moves that meet our goals.  Positive changes involve choices that enable our dreams and talents, keeping us in control so that we can handle the outcomes.  But negative changes driven by fear, uncertainty, and doubt are net losses.  They leave us unable to determine what has changed and what has not, what is temporary and what permanent, about the new normal.
The aftermath: most long-term implications are across the board and won’t be apparent for months or years to come, the perfect storm of uncertainty and loss aversion for making policy, or deciding to buy or sell a house, finish college, or even travel.  The viral crisis is the perfect object lesson in change with thousands of data points – not the result of disease itself but caused by the massive effort to anticipate and modify its occurrence.  In its destructive high tide, it raises terrible questions about the cost of prevention to the lives of billions versus letting the disease take its course and cause distress for millions, then death for 10% of that number.   Without the ability to analyze a vast number of variables—many of them interactive—no rational decision-making is feasible.  When everything stabilizes, there will be plenty of work in sorting through the options to even know what ways of thinking and acting will still be functional, and which will dry up, never to emerge again.

Perhaps we can begin to ask a series of “CIS” questions, short for “Can I still …” Stay with my 2019 plans? Take a new job?  Retire?  Change careers?  Continue with my start-up campaign?  Have children?  Move, remodel, or rent my house?  Count on which things to be different, and which to stay more or less the same?  Have a future anything like the one I could count on – up to now?  Understand how my entire circle of relationships might have regrouped because of the epidemic’s fallout?  And, of course, prepare for the next issue of pandemic.  

The knock-off decision-making crisis will be based on how many options will require deep analysis, and which can be made as we make 90% of choices: by cultural (shared-values) intuition.  This will require a new mindset anchored to the continuity of cultural ideals, while following a new trajectory shaped by the most widespread health crisis in history.

Sunday, February 23, 2020

Loss Aversion

Psychologists long thought that people were risk-averse, which is pretty ridiculous in historical hindsight, since taking risks is what put us on the top of the food chain. On the other hand, we are loss averse.

We will go to great lengths to avoid a loss, far more than we will work to gain something.  This is the reason people hold on to their poorly performing stocks and sell off their well-performing stocks. It’s the same motivation – you don’t sell your poorly performing stocks because you hope they will go up and avoid a loss. You do sell your well-performing stocks if they go up quickly--to avoid a loss in case they go down again.  Professional investors don’t do this, but they make a lot of money on those who do.

Every year there are approximately 60 million patients on Medicare. Every year during the months of October to December, everyone with a Medicare plan has a chance to pick a new health insurance provider.  This sounds like a good thing—choice is one of our rights as Americans to make our own futures.  However, the reality is not that simple. 

This is a perfect example of “information asymmetry,” in which of the parties involved, the providers have overwhelming advantage in understanding how the system works in practice. The consumer doesn’t understand the limits of their policy until they become a reality.  (Because the “Evidence of Coverage” is a document written by lawyers, for lawyers, in the healthcare industry.)
The customer has the impossible task of reviewing and comparing and choosing one out of dozens of plans across specialties, none of which they truly understand. There is the additional gotcha of unforeseen illness (such as cancer) or injury.  As Barry Schwartz puts it on his book The Paradox of Choice (2004), “Bottom line – the options we consider usually suffer from comparisons with other options.”  Why?  Because we focus on what we will be giving up far more than on what we will gain. 

So each year, millions face the choice of 1) keeping their existing supplementary insurance company; or 2) switching to a different insurance provider who they hope may provide the same or better benefits.  This process can consume hundreds of hours, further complicated by the legalize difficult even for professionals to understand. Customer service is lengthy and agents can be uncertain about how things work.  Even when it appears that one can get a better plan (without an actionable definition of what “better” means), the quality of this decision will be unclear--until there’s a medical need.

Loss aversion is immediately apparent in this dilemma.  To switch, the consumer needs assurance that it makes more sense to switch than to stay put, and that the complexity cost to execute the switch is not a loss.  Things get even more complex when there have been issues with the current plan – would a new plan be any better, or just the same, or even worse?  Plans change their Evidence of Coverage every year (even on minor points), so that the consumer contract is in annual flux.  Loss aversion becomes uncertainty avoidance when it is just too much aggravation to enter the switching process.  Health insurance is one of most highly technical areas of consumer choice, combining medical science with the law, both highly trained – with pricing consequences in the hundreds of thousands of dollars.  And whatever the gain, it must be balanced off at twice the perceived loss for making a change in order for its value to be felt.

The bottom line is this:  Rather than risk a loss outcome, customers will take a passive loss (by inaction) by failing to make changes to their insurance provider—even when they are having significant problems. (Rather the devil you know than one you don’t.)  And dental insurance is even more difficult to gauge as a good or bad product, along with pet insurance, burial insurance, cancer and accident coverage, and long-term care, which never permeated more than a quarter of the market.  A plan that offered kidnap insurance, complete with ex-FBI agents, went out of business because no parent could calculate the odds versus the cost with any confidence. The Medicare consumer needs assurance that it makes more sense to switch than to stay put, and that the complexity cost (along with just the hours required) to execute the switch is not a net loss. 
Loss aversion logic also explains why people stay in bad relationships, bad jobs, and poor-prospect careers, explaining interpersonal conflict, poverty, and underachievement in general.  It explains why people hang onto under-performing stocks and sell their performers.  Why do people not take good advice that might free them from these behaviors?  Because following advice requires giving up behaviors and situations that are perceived as normal, and the energy and organization required are disruptive changes seen as a net loss. 

In other words, if you have to choose between two or more options, each with a potential for loss, when there is no significant advantage among them, most people will do nothing.

A second interesting example of loss aversion is the big-ticket purchase of college education, second-only in scale to a home purchase.  College is one of the most poorly defined decisions, along with other key life choices: car, career, and spouse.  For the college decision, the investment in college, once a no-brainer since graduates make twice the income of nongraduates, has become problematic as school costs have risen by a factor of 14 since the late 1970s.  At the same time, the return on investment –the wealth premium—has dropped from 247% in the 1930s to 42% in 2019 (wealth assets—Fed Reserve study), which figures in the student debt crisis as a national economic issue.  Degree inflation, in which the basic work-ready degree has raised the bar from high school to college, adds to consumer pressure to find more affordable channels.  These loss factors make the college decision far more problematic and uncertain than for previous generations.  To add to the complexity, there are more school types today than ever, including the for-profit sector. 

The two-car dilemma
Another case study of loss aversion is the two-car example. You are looking to buy a new car and you visit dealerships to narrow it down to two. Each one has different features you would like to have, neither has all of them, but these are the two cars you’ve narrowed your search to.
In other words, each car has something you would like to have – in your mind they have equal value, and you need a car, so you have to pick one. They are both cars you like, so you choose one.
You like the one you chose. But you also liked the other car - so you spend the next few weeks wondering if you should have chosen the other car. because when you make a choice, you gain one car but you lose the other – and we respond more to avoiding loss than we do to gain.  All of which sets us up for buyer’s remorse in any big-ticket purchase decision. 

So for business, your thinking as well as marketing should focus on avoiding a loss as well as gaining something.

Tuesday, January 21, 2020

Symbolic Thinking: The Mindset of Culture

 In Prehistoric Art and Civilization (1998), Denis Vialou summarizes the history of mankind:

More than two million years ago, Homo habilis invented the tool.  Next, Homo erectus made use of fire; then Homo sapiens conquered the world.  In just a few millennia, in the era we call the Palaeolithic, human beings, walking upright and with tools in each hand, imposed a new knowledge and a new way of life on the world.

Human inventiveness began with the discovery of tools 1.76 million years ago from the first knapped hand ax, fire 400 millennia ago, the invention of language at least 200,000 years ago, artistic expression, and written language only 5,000 years ago.  From these long-ago origins came computing and artificial intelligence, the moon landing, and exploration of other solar systems and a Mars mission in the wings.  In fact, all technology includes the very first inventions from the ancient world and prehistory, including the stringent mental exercise of mathematics, and were basic to all the applied science of the 20th and 21st centuries and their advances in bioscience, genetics, computing, the global space program, and others based on Big Data.  Symbols are a type of tool that keeps on developing the mindset as ideas multiply and find expression in problem solving.

Indispensable to all these stunning achievements is the longest-running of them all: the aggregate development of culture by thousands of human generations whose lifetimes worked nonstop to improve and adapt the myriad ways in which we can think, behave, and make decisions, both as collective minds in groups and as solo individuals working out the problems of the universe as well as our next cup of coffee.  The strength and plasticity of culture, as well as the human brain, makes us the world’s most adaptable and successful species—through the collective brain and creativity of humankind. 

Symbolic thinking

Our unique human ability to imagine, manufacture, and put to use symbols is an act of absolute liberation from the material world and from the present moment, allowing us to see beyond what is in front of us, backwards into the past, and forward into the rich potential of the future.  Emerging evidence from archeology is showcasing that symbolism began to emerge as part of a great cognitive revolution in the form of art (now beyond 40,000 years ago) and mathematics at 30,000.  While the flowering of mathematics in applied problem solving goes back only 500 years to the Scientific Revolution, its origins are ancient and worldwide as a symbolic language of its own that developed independently as a trained skill, from simple computation to defining infinity. 

However great the potential of abstract thinking, engineering still must fit the numbers and concepts to the human form.  The operations researcher must fit the design of space vehicles like the LEM to the dimensions of the human body and brain.  Animal traps and weapons ballistics had to fit what humans could fashion, carry, and track.   In this way, our own inventions must work for us.  Culture, as the Ur-invention, became the invisible force driving our brains, bodies, and behavior both as individuals and groups (thinking, learning, expression, and problem solving), from our first survival on the African plains to the sophistication of urban life on-earth and off.  On the Internet and in subcultures, using technological acumen and prolixity---cultural intelligence underlies and animates everything human, yet is certainly the least understood of anything humans have produced. 


Culture could not begin its own invention without our species' ability to think symbolically.  This mindset began in the Paleolithic, the early phase of the Stone Age, about 2.5 million years in duration, marked by stone, wood, and bone tools, and cave art starting with the monumental act of leaving handprints created by our prehistoric relatives.  These handprints in red ochre have moved back in time from the Maltravieso cave in Spain, dated back 64,000 years and painted by a Neanderthal, well before Altimiria’s bison of 16,000 to 9,000 BCE, the “Sistine Chapel of Paleolithic Art.”  Discoveries in the Blombos cave in South Africa then moved the clock back on art-making with a 100,000-year-old pre-European animal-bone paintbrush and palettes, abalone shells for mixing red ochre paint, and sea-snail shells with holes for stringing and wearing as jewelry. 

In his article on symbolic thought (New York Times, Dec. 5, 2014), Ferris Jabr notes the significance of a simple handprint:  “The suggestion of a human hand on a cave wall, a nation’s flag, even a Rothko—each is a powerful mental heuristic designed to conjure a particular emotion, a memory, an idea.”  The elegance of symbols, Jabr says, is that they bypass the issues of changing the world in the act of changing the way we perceive it, enlarging its possibilities by acts of thought alone.  That is, by the power of ideas.


Evidence of language is also moving backwards on the timescale of human evolution.  Like art and jewelry, speech is intimately involved in conceptual and imaginative thinking.  Recent research points to language development as occurring millions of years ago rather than the benchmark of just 200,000 (Sawallis et al., 2019).  Two forces, first, the reshaping of the human throat, and second, syntax, the way words work together in sequential order to convey linguistic meaning, are considered the critical events in the body and brain that make symbolic communication possible. Unfortunately, linguistic evolution, unlike physical development, doesn’t have much data to work with because soft tissue doesn’t leave fossil evidence.  But speech is not just a physical and muscular act made possible by laryngeal descent—our lowered larynx compared to other primates.  It is a mental capacity that is at once intensely social and inherently symbolic. 


The oldest known mathematical artifact is the Wolf Bone of Czechoslovakia, with 55 notches in two groupings, dated at 30,000 years ago; the second-oldest is the Ishango bone discovered in Zaire, dated 10,000 years earlier, with three columns of marks suggesting computation either as a tally or a calendar.  Hunter-gatherer societies used number systems, and the names for numbers can be tracked as they gradually increased in independent lexicons over time. 

The earliest mathematical texts are Egyptian and Babylonian dating to 2,000 BCE, covering arithmetic, geometry, and the Pythagorean theorem, continuing in ancient Greece.  The Greeks introduced deductive reasoning and formal proofs to conceptual thinking about math.  The Romans applied math to surveying, structural and mechanical engineering, bookkeeping, lunar and solar calendars, and the arts.  The Chinese added place value and negative numbers.  The Hindu-Arabic numeral system is in worldwide use today, coming from India in the first thousand years BCE.  From the Maya of Mexico and Central America came the most critical concept to computation – the zero, a triumph of abstract cognition.