BizThoughts

Larry Wall, the author of the programming language Perl, once made the following insightful remark:

…the three great virtues of a programmer [are] laziness, impatience, and hubris.

He penned this line in his book Programming Perl, which also included the following glossary definitions:

Laziness

The quality that makes you go to great effort to reduce overall energy expenditure. It makes you write labor-saving programs that other people will find useful, and document what you wrote so you don't have to answer so many questions about it. Hence, the first great virtue of a programmer. Also hence, this book.

Impatience

The anger you feel when the computer is being lazy. This makes you write programs that don't just react to your needs, but actually anticipate them. Or at least pretend to. Hence, the second great virtue of a programmer.

Hubris

Excessive pride, the sort of thing Zeus zaps you for. Also the quality that makes you write (and maintain) programs that other people won't want to say bad things about. Hence, the third great virtue of a programmer.

These virtues aren't just for programmers. They apply to businesses as well. With that thought, I submit the following definitions:

Laziness

"The quality that makes you go to great effort to reduce overall energy expenditure." It makes you create labor-saving processes and efficient practices. If it takes your employees 10 hours to create 1 product, imagine how much you'll save if you can reduce that to 5 hours for 1 product. The best path to working less isn't sitting on your ass, it's working smarter.

Impatience

Get to the market quickly. If you have a great idea, don't waste any time - build it. The market isn't going to wait for you, neither are your competitors or your customers. This applies even if it's just a prototype; the sooner you can get customer feedback, the better. While being the first-to-market isn't a guarantee of success, being the first means getting customer feedback before anyone else.

Hubris

Take pride in your business. Don't give anyone a chance to say bad things about it. If you treat your customers and employees with the utmost respect, build only high-quality products and services, and conduct your business with honesty and integrity, you'll be able to hold your head high every day.

Yesterday, I wrote about why most people are more afraid of terrorist bombings than car accidents. It's because of how the brain (and more specifically, the amygdala and the neocortex) deals with risk.

That got me thinking. How does this effect investors and entrepreneurs, both of whom have to deal with risk in order to be successful?

Investors who can control their emotional responses are most successful, according to John Buckingham's article in Forbes Magazine, "Warren Buffett: Functional Psychopath?" The article includes the following statement from Warren Buffet's preface in Benjamin Graham's The Intelligent Investor:

To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.

"The ability to keep emotions from corroding the framework." Now there's an argument for the neocortex if I ever heard one. A paper co-authored by faculty at Stanford University, Carnegie Mellon University and the University of Iowa even showed that "people with [emotionally impaired] brain damage make better financial decisions than normal people" because they're able to rationally weigh the facts and take calculated risks.

Same goes for entrepreneurs. Taking risks is a major part of entrepreneurship. Rather, taking risks for potential rewards, as Paul Graham writes in his essay, "Inequality and Risk":

Startups are intrinsically risky. … It seems only about 1 in 10 startups succeeds.

The fact that you're investing time doesn't change the relationship between risk and reward. If you're going to invest your time in something with a small chance of succeeding, you'll only do it if there is a proportionately large payoff.

Since risk and reward are equivalent, decreasing potential rewards automatically decreases people's appetite for risk. Startups are intrinsically risky. Without the prospect of rewards proportionate to the risk, founders will not invest their time in a startup.

So if our brains can't effectively calculate risk, unless we're brain damaged, how can we expect to invest wisely or be an entrepreneur?

The answer is to raise your emotional intelligence (thereby, presumably, strengthening your neocortex). This may not be possible though, according to John Mayer, one of the authors of the Mayer-Salovey-Caruso Emotional Intelligence Test (MSCEIT), a commercial product that measures emotional intelligence (which is just one out of many other products out there). When asked point-blank, "Can emotional knowledge be improved?", he answers:

No well-conducted, published studies have been reported in regard to raising emotional intelligence to date. Up to now, however, with a few exceptions, emotional intelligence has behaved much like other intelligences, and it seems very unlikely that it could be easily raised. Still, as very little research exists on the topic, it remains an open question.

That's not a definite No, however. Goleman suggests understanding your emotions first as a step towards better managing them. He also offers this high-level guidance:

1. Know your emotions - People who know their feelings are better pilots of their lives.
2. Manage your emotions - People who are effective in managing their emotions can cope better with life's adversities and can bounce back faster than those who are poor in managing their feelings.
3. Motivate yourself - People without emotional intelligence lack self-restraint and would just do whatever their impulses suggest. Emotional self-control, delaying gratification and stifling impulsiveness underlies accomplishment of every sort.
4. Recognize emotions in others - Emotional self-awareness is the first step to empathic sensitivity. In other words, if we are in touch with our own feelings, then we can empathise with others and sense their needs.
5. Handle relationships - The art of relating to others includes the skill in managing emotions in others. For example, the ability to calm distressing emotions in others can help resolve many conflicts.

These guidelines sort of fit the studies done on subjective well-being too, which have shown that people who are happier tend to be more successful investors (and entrepreneurs too, perhaps). A higher level of emotional intelligence would seem to lead to a higher level of happiness.

So does a greater control over one's emotions lead to a greater control over one's response to risk? All of these reports seem to indicate so, though much of this science is still new. In my opinion, raising one's emotional intelligence (if possible) is a good thing for any investor or entrepreneur, even if it doesn't effect one's perception of risk.

You're probably more afraid of a terrorist bombing than a car accident. Which, statistically speaking, isn't logical because car accidents happen much more frequently than terrorist bombings.

You can thank your brain for this. In Bruce Schneier's book Beyond Fear, he writes about how the human mind analyzes risk. Basically, we worry too much over minor risks and not enough over major ones. Schneier distills this into five common observations:

• People exaggerate spectacular but rare risks and downplay common risks.
• People have trouble estimating risks for anything not exactly like their normal situation.
• Personified risks are perceived to be greater than anonymous risks.
• People underestimate risks they willingly take and overestimate risks in situations they can't control.
• Last, people overestimate risks that are being talked about and remain an object of public scrutiny.

Why is that? Daniel Goleman explains how two parts of your brain offer competing interpretations of events around you in his book Emotional Intelligence. The amygdala gleams the raw emotions within any given event while the neocortex analyzes the facts to determine a more logical reaction.

These don't exactly work in parallel, however. Your body's sensory information (sights, sounds, smells, sensations, tastes) travels along two connections. The connection to the amygdala is shorter, causing your brain to process the emotional content of an event before it can process the logical content. The amygdala also works faster than the neocortex.

In many cases, the neocortex can override the amygdala - you can override an illogical emotional reaction and behave rationally. But sometimes, the amygdala reacts so strongly that you act before you can think; Goleman calls this "emotional hijacking."

There's a good evolutionary purpose for this. If a saber-toothed tiger is chasing you, you don't want to stop and process the facts. You want to run like heck. This is your fight-or-flight response.

In his essay "The Psychology of Security", Schneier adds that running away from saber-toothed tigers is no longer a reality (unless you're Fred Flinstone). The events of today's society are actually better handled not by reacting emotionally, but by reacting logically. Like negotiating a raise with your manager; you might feel fear and be told by your amygdala to run, but unless you listen to your neocortex, you're not going to get that raise.

Unfortunately, your brain retains the memory of past emotional experiences and uses them to judge risk in future events. Schneier quotes a good example of this from Steven Johnson's book Mind Wide Open:

But ever since that June storm, a new fear has entered the mix for me: the sound of wind whistling through a window. I know now that our window blew in because it had been installed improperly… I am entirely convinced that the window we have now is installed correctly, and I trust our superintendent when he says that it is designed to withstand hurricane-force winds. In the five years since that June, we have weathered dozens of storms that produced gusts comparable to the one that blew it in, and the window has performed flawlessly.

I know all these facts–and yet when the wind kicks up, and I hear that whistling sound, I can feel my adrenaline levels rise… Part of my brain–the part that feels most me-like, the part that has opinions about the world and decides how to act on those opinions in a rational way–knows that the windows are safe… But another part of my brain wants to barricade myself in the bathroom all over again.

Essentially, a memory can emotionally hijack your perception if a risk, especially if the memory is a significant one. Again, back when there were saber-toothed tigers, this was an evolutionary advantage. ("Oh no, it's another saber-tooth! Run before he sees us!")

In today's society, it causes us to exaggerate spectacular but rare risks and downplay common ones. That's why terrorist bombings seem so much scarier than car accidents.

Many others seem to agree too: CNBC's Million Dollar Portfolio Challenge is kinda lame. Here's why:

The contest's primary audience, I believe, are individual investors who watch CNBC's investor productions, like Mad Money and Fast Money. They're probably hoping this contest will strengthen the community behind such shows. However, their contest is not an exact replica of the market. It sets artificial restrictions, which are probably meant to prevent contestants from gaming the system (even though it still happens). These restrictions are (straight from their FAQ):

• "There are two ways to earn bonus dollars in this contest." Trivia Questions & Refer-A-Friend.
• "To be eligible for trading in the Contest, stocks must have a market capitalization of at least Five Hundred Million Dollars ($500,000,000) as of the close of the markets on March 2, 2007."
• "Limit orders, open orders, short selling, margin buying, and the trading of derivatives, options, bonds, mutual funds, exchange traded funds or other securities is not permitted."
• "Participants can enter trades seven days per week, at any time except during the period each day, if any, when maintenance is being performed on the Site." (And maintenance seems to occur rather frequently on their site.)
• "No commissions will be charged for trades."
• "Each participant can make a maximum of fifty (50) trades per day."
• "Trades submitted on trading days (Monday through Friday, other than market holidays) prior to 3:59:59 p.m. will be priced at the stock’s closing price for such day."
• "Dividends, whether stock or cash, will not be processed or reflected in the Contest."

And probably one of biggest and most influential deviations from reality is how success is measured:

• "The Participant with the highest percentage gain in his/her total portfolio value during such week will be declared the weekly winner for that week."

What does this mean?

You don't have to make the most money, you just have to make the highest percentage gain. According to Jon Markman of MSN Money, this can be done "by simply picking the 10 lowest-priced stocks that the contest allows, with absolutely no other criteria." Then, according to Project Stocks: "Only buy 1 or 2 stocks at a time. Put a million bucks in 1 stock or put $500,000 in each of 2 stocks." (Project Stocks also includes more great tips on playing this game.)

After you've done that, create a bunch of accounts, a la the Nancy Beamount Controversy. While this was denounced as cheating, CNBC's official stance is that it's perfectly acceptable. Says CNBC's Mark Koba: "I can tell you all that–YES–it is perfectly all right and within the rules to have multiple portfolios, and that no one is breaking the rules by doing so."

Does this contest speak to their core audience: the individual investors? Though it's mostly ancedotal evidence, it seems that many individual investors started playing the contest the way I did (trading as if it's a real market) and aren't doing well - or at least aren't up on the leaderboard. Which is probably why many of them are unhappy & complaining right now.

So what am I going to do with my CNBC portfolio? Consolidate all of my money into one or two stocks, then create a bunch of other accounts. This contest isn't about real investing & trading, it's just a betting game: Which low-priced stock do you think will increase the most week-over-week, percentage-wise?

P. S. Rats, where did that Refer-A-Friend link go? Anyone know?

A friend recently asked, "What's the best way to get people to my new web store?" Like many small business owners, he's web savvy enough to start a web store, but doesn't spend a lot of time following the online marketing industry.

"I hate spam like everyone else," he continued, "but I've heard that it can be cost-effective. Should I purchase an email list somewhere?"

After I gagged, I pulled up an article from eMarketer.com entitled, "What Works, and What Doesn't, in Online Marketing" (subscription required). If you're a professional marketer, some of this will be obvious to you, hopefully.

The top most effective online marketing techniques are:

1. Search engine marketing (paying for ads on search engines)
2. Opt-in email lists (having customers choose to get email from you)
3. Search engine optimization (making your site appear in relevant search results)
4. Behavioral targeting (buying ads on sites that can target you towards potentially interested customers)

And what were the least effective techniques?

1. Rented email lists (spam)
2. Pop-up/under ads

ROI was used as the metric for effectiveness.

Most online marketers know this already. But we haven't reached the point where this is common knowledge. Every once in a while, another small business builds a web store and believes the myth that spam, while vile & evil, is a cost-effective marketing solution. Shudder. Don't believe the hype!

This just in from Techmeme.com: Topix.net Buys .Com Domain For $1 Million; Worries On Google Juice After Move. This article was written by Rafat Ali for paidContent.org. One item in the story caught my attention (emphasis theirs):

The company thinks Google should have a better way to help sites/companies manage domain change and the search results that get affected as a result. To which Google says that sites shouldn't become overly reliant on traffic from searches and should find other ways to get visitors, such as by setting up user forums.

Does Google (GOOG) really believe this? I hope not. It's pretty short-sighted and ignorant if they do. For most web sites - maybe all but the top twenty - search engines are the primary way they're discovered. Just watch an average web surfer for a few minutes to see for yourself. One of the first things they do is fire up a search engine. How in the world is setting up user forums supposed to replace this?

I haven't been able to verify that actually Google said this. A related article, as noted on Techmeme.com ("How Search-Engine Rules Cause Sites to Go Missing"), goes into depth about Topix.net's struggle with this domain change and their search results listings. It makes no mention of Google's above statement.

Anyone know if Ali reported this correctly, or just made an assumption based on incomplete details?

Uh oh, looks like someone's gaming the system. Nancy Beaumont from California is all over the Leaderboard this morning.

Unless she's discovered the key to cloning or has sisters all over the state (with, um, the same name), Nancy has created multiple accounts with a bunch of different strategies. 800 accounts, apparently. With 800 different stocks (one stock to an account).

Just who is this Nancy Beaumont? I don't know, but if you make some anagrams of her name, you get:

• Mean Bunny Coat
• Anyone but Cam N.
• Bouncy Tame Ann
• Bum-acne Antony

Hmmm.

In the book Organizational Behavior, the column "Managers Can Create Satisfied Employees" caught my eye. It's a Point vs Counterpoint column that follows a chapter on job satisfaction and how it effects productivity, turnover, and even customers.

The Point read:

A review of the evidence has identified four factors conducive to high levels of employee job satisfaction: mentally challenging work, equitable rewards, supportive working conditions, and supportive colleagues. Importantly, each of these factors is controllable by management.

The Counterpoint read:

Unfortunately there is a growing body of evidence that challenges the notion that managers control the factors that influence employee job satisfaction. The most recent findings indicate that employee job satisfaction is largely genetically determined. … Given these findings, there is probably little that most managers can do to influence employee satisfaction. … The only place where managers will have any significant influence will be through their control of the selection process.

In my experience, I've found that both are necessary for an effective team; it's not an either-or argument. By effective, I mean satisfied and productive.

There are people who naturally seek challenges, are always learning new things, and have a hopeful, positive outlook on their future. A rare few are even able to self-motivate. If you hire only such people (assuming they fulfill your other requirements), you'll no doubt have a satisfied team initially.

But if you don't actively keep them engaged with challenging work, appropriate rewards, and a supportive environment, a competitor will easily lure them away. As a manager, you have the ability to reshape the environment. If you don't create a healthy one, a competitor will.

Effective organizations are the ones that can hire the right kinds of people -and- keep them satisfied & productive.