Lies, Damn Lies and Statistics

This week we started talking about probability. Well, fellow mathletes, I see an opening to geek out, and completely blow your minds!

We all think we have a sense of probability. If I flip a coin, there are equal odds for each side. If I roll a die, I have a 1 in 6 chance of each number. Easy right?

What if I flipped a coin 10 times, getting heads 10 times in a row (a 1 in 1024 chance, by the way)? Then, I asked you what the odds are of getting heads on the next flip. The answer: 50% chance. This is a situation that trips up a lot of people, because it seems crazy to see such an improbable case. However, if you’ve already seen the crazy, improbable case, then this doesn’t control future probability. There is a big difference between the above scenario and just asking the probability of 11 heads in a row from the start.

We started to see this in the decision trees. And, I really like the layout conceptually, because it avoids the unintuitive thinking. If I take option A, then the overall expected value can completely change, because I can throw away all of option B. In the coin flip problem, this is like having a huge decision tree and taking option A 10 times, leaving just a 50/50 chance of getting one more option A.

Decision Tree of 2 consecutive coin flips

There is a reason I geek out on statistics a little- it’s probably (see what I did there?) the most useful branch of mathematics. We run into statistics every day without noticing. That’s because statistics is dealing with unknowns, of which we’re surrounded by. In contrast, when was the last time you can think of using calculus in any meaningful way? I can’t, and I’m a freakin engineer! Calculus has its place for sure, but it’s far more successful in just getting high school students to hate math. As it turns out, I’m not alone, there’s even a TED talk on this: http://www.ted.com/talks/arthur_benjamin_s_formula_for_changing_math_education.html

But, I digress. Back to my point on unintuitive statistics…

Ok, statistics is at the heart of gambling, so I will bet that there are two people with the same birthday in COR520 (students and faculty). There are 52 of us by my count. Are you up to it? What do you think the odds are of this? If you’re up to it, please stop reading and email me now.

To pass the time, here is a video of dogs playing in the snow.

Welcome back, I graciously accept your bet.  I want to say up front that there is certainly a chance that no 2 people in class have the same birthday. But, what are the odds? The first time I was given this puzzle, I thought, “easy, it’s just 52 people divided by 365 days.” Or, there is a roughly 14% chance that we have a duplicate birthday. As it turns out, there is roughly a 98% chance of a duplicate birthday.

I don’t know about you, but my mind was blown when hearing that. How can that be when we don’t even come close to filling every day of the year with birthdays?!

Consider this. Assume that everyone has a unique birthday. (Yay, we all get our own special day!) Next quarter we get an additional TA. Besides a collective sigh of relief from the TAs, how would that affect the duplicate birthday problem? This new TA, let’s call him Gary, would have to avoid 52 birthdays for the unique trend to continue, so he has a 14% chance of ruining someone’s day. But that’s not a 1/365 chance; it’s way more. Because you have to avoid all the other birthdays to remain unique, the odds of everyone accomplishing this drop very fast as you add people. 

Also, keep in mind that I didn’t say who would have the duplicate birthday, just that there are 2 somewhere. This is the difference between saying, “I will win the lottery” and “Someone will win the lottery”. Very different odds. Unfortunately.

If you managed to stick with me through all that, I’m truly grateful. I know it’s dry, technical crap that is no fun for anyone. But, in class we are applying statistics to some very real world problems. The point of this post wasn’t to drown anyone in a bunch of math theory, it was to point out that statistics can be very misleading, where subtle differences in scenarios leading to wildly different outcomes.

In class Wednesday, we talked about a problem where we were given sales amounts and probabilities. We made a big and potentially dangerous assumption in this problem: sales year-to-year are completely independent (i.e. a given year has no probability determined by the previous year). If we consider the sales numbers year over year as having a correlation, this problem changes dramatically, and is far more complex. Unfortunately for the math haters, this is a much more accurate statistical model.

You’ve been case studied

When it comes to start-ups, all our reading can be summed up in two words: speed and iteration. For sure, this is a little reductionist, but that’s the gist. You need to be fast, and you can’t assume you know what will be successful, so you have to try, try and try again until you figure it out. A start-up is a business case search, not a business case execution.

Wow, I just regained consciousness. Did I write that? I’ve been brainwashed. Well, may as well make the best of some entrepreneurial indoctrination…

During the last intensive (that’s when we all get together once a month to you non-BGIers), I presented an app to a handful of fellow students. My intention was twofold: get feedback on what everyone thinks of it and perform a practice experiment with a product “start-up.” (Ok, there’s a happy coincidence with a third goal: produce blog material).

The result of this experiment is quite encouraging, and also an early success story. Everyone was incredibly positive and encouraging. Many were very excited to see what this simple app could do and I heard a million and one ideas for new features. That feedback was invaluable because it’s incredibly hard to take a step back and objectively assess your own work.

This also provided some interesting insight when thinking about launching this app as a start-up (of sorts). Getting this thing in the hands of customers students is difficult to do fast. When I started writing this thing, I thought the biggest time sink would be just in the actual code development. After all, I was am completely unfamiliar with developing an app for iOS. But, working through the difficulties of app approval, enterprise licensing and finding all the internal stakeholders in BGI, that has been a much bigger hurdle and delay to launch.

Lesson one: you aren’t done until you’re done; i.e. when your product is actually in the hands of customers.

A surprising issue came up during the intensive: the buzz/hype/excitement blew up out of my control. Initially, it was great to hear it all. However, this is kind of scary at the same time. There were open questions to the entire community such as, “weren’t we supposed to have an app by now?” I wasn’t trying to keep this a secret, but I wasn’t evangelizing it quite yet either, and it seems everyone knew about it. Yikes. In the software business, an exciting product that never shows up is called vaporware, and is not a place you want to be.

Duke Nukem Forever: A video game that was in development for nearly 10 years, and was largely considered the quintessential definition of "vaporware."  

Lesson two: Public awareness can get out of hand in a hurry, and can easily outpace your schedule.

That seems to go back to speed and iteration. I would rather get this app published even if it is full of issues so everyone can see the progress. I need more speed, and I thought I was already going plenty fast!

From the few students and faculty who did see my app, I have a laundry list of awesome feature ideas. This was super exciting, and I want to tackle all of them, but I’m truly trying to stick to the minimum effective product for now. That’s really hard to do, because a lot of these things are small additions. I can see why this is valuable though. My biggest blocking issues have nothing to do with the app’s functionality, and if I don’t focus on all those other issues, it will never get shipped. So, no changes for now no matter how much I want to spend my efforts there.

Also, it’s surprisingly hard to get a truly minimum effective product. My initial goals were several times more than what I’ve written so far. It took some thought to figure out what the actual minimum was. Without focusing on reducing the initial feature set, I’d probably be buried in code and have nothing functional to show for it. (Now that’s something I have experience with at work).

Lesson three: Minimum effective product. No, really. Is it trivial? No? Then it’s not minimum enough [sic].

One final thought. As I read through the 3 lessons I’ve learned through this process, I’m nowhere near actually adhering or internalizing them. I’m not a voice of authority on these matters. I will likely have to revisit this, reread and relearn.

Changing Behavior

I just got back from a wonderful vacation with my family to St. Maarten. This is the third “warm weather” trip we’ve organized in lieu of all gathering in Ohio. I have to say that it’s been quite the improvement.

This trip, I talked a lot about school because, well, that’s all I’m really up to these days. We talked in depth about my team project- analyzing the problems around disposable plastic water bottles. This would have been a nice academic conversation had it not been for the cooler full of said bottles that we took to the beach each day.

Before you scold me for not addressing this with them, let me clear that up. If there’s one part of the sustainability movement that I think is incredibly counter-productive, it’s trying to guilt people who don’t care into changing. Such measures work on some people, but to everyone else it’s a giant nuisance. After a while, that nuisance gets people to shut their ears completely.

However, it was enlightening to me to talk to them about why. It was interesting seeing what drove their behavior. And in most cases, very sensible patterns came to light.

When someone wanted water at our rental house (where tap water couldn’t be more convenient), I asked why grab the bottled water in the fridge? “Well, this bottled water is colder,” came the response. Fair enough, so I looked for a pitcher to fill for the fridge, unsuccessfully.

To the beach, where there is no source of tap water. I filled a (reusable) water bottle, no one followed suit. To a restaurant, where if you ask specifically for tap water, you generally get a dirty look or don’t get the option because it’s not really ok for the to charge for it (this was especially true in French St. Martin). Walking down the street- no option other than bottled water. Never mind that on top of all this, any mention of tap water usually got a response like, “tap water isn’t safe in other countries.” (Given that St. Maarten is a giant tourist destination, I beg to differ). 

It seemed like wherever I turned, the world was against me just having tap water. So, I can’t really get all guilt-trippy with my family when it’s so difficult. Changing behavior here is definitely going to be a battle!

Let’s not forget that there are still plenty of problems looming. Given the global trends for decreased freshwater supply, behavior is going to have to change. Recently, Waterless, makers of a waterless urinal, and the GAO report water shortage predictions all over the place.

But, my team is up to the challenge, and there are a lot of companies out there doing the same. As we look for companies to study, it’s amazing to see all the possibilities out there. Of course, there are the big bottled water supplies like Nestle, PepsiCo, CocaCola. Admittedly, none of these companies seem completely oblivious to the problems surrounding fresh water, but also there needs to be a behavioral change in consumers to really get them to move.

Next up, there are bottle manufacturers like Nalgene. These companies are interested in replacing the bottles altogether. I think the jury’s still out on their effectiveness. How long does someone have to hang on to one of these bottles to make it worthwhile? From a waste perspective, it may be quite hard to have much impact.

In another direction are the filter companies like Brita. These companies try to be the provider of premium drinking water without the (single use) bottle. There are a lot of interesting technologies in this space, and some really compelling company structures.

Fundamentally, the biggest way to make a change is to change behavior. Doing so by guilt is not likely to work, and may in fact backfire. So, we need to make the entire drinking water system more convenient for all players. On vacation, there was an economy around just having bottled water, including a bunch of convenience and comfort-drive consumers. How do we incentivize all those to be less wasteful?

This is a hard question, and one that I don’t have a good answer for. What do you think? It seems to me that there are a lot of pieces that need to be improved all at once to actually change behavior.

The Status Quo Is On Notice

Over the last quarter, I’ve talked about several economic issues. I discussed the financial crisis in I Got Mugged OnWall Street, how Oligopolies Can Be As Bad As Monopolies, why measuring presidential performance shouldn’t be measured by the unemployment rate, looked corporate lobbying in The EconomicAquarium, and work life balance in I’m Too Busy To Be Happy.

Embedded in all these posts are my opinions on various issues. Looking back, I see a major theme: how the powerful are able to retain power and maintain the status quo. The powerful entities around us have several tools at their disposal, and they’ve designed the system to be very hard to change. But, change is in the air, and not admitting it will be detrimental to these entities.

There are several examples to illustrate this. Toyota is a market leader in hybrid cars. They didn’t get there out of luck; they had the foresight to develop this technology before it was popular. In contrast, GM put no effort or value into hybrid technology, even as it was emerging from Japan. This lack of foresight cost them and they’re just now getting competitive in this space. Instead of fighting fuel economy standards and ignoring the inevitable rising trend in fuel prices, they stuck their collective fingers in their ears and lobbied against more aggressive fuel economy standards.

We’re seeing history repeat itself today with solar technology. Germany and China are becoming world leaders in solar panel production. Solar technology just at the beginning of becoming a huge industry, and these countries are positioning themselves to be leaders. It appears that China is even undercutting themselves now to gain market share- a move that shows they see the long term gain to be had. The US is probably going to regret passing on this opportunity.

A potential game changer in the financial industry is the Rolling Jubilee. This has the potential to break the financial system. Today, debt is bought and sold with no thought to the terms of the underlying mortgage contract that provides the income stream. There’s no reason you can’t buy some debt (in many cases for far less than its original cost). The Rolling Jubilee buys some of the worst debt, for the cheapest cost, and simply relieves the debt.

Now imagine that this takes off in a big way. This could fundamentally break the mortgage market. This is because the incentive to pay a mortgage goes away if not paying is rewarded with the debt being erased. It may seem far-fetched today, but if this movement gains traction, the banking industry would be wise to take notice.

The modern sustainability moment is a game changer in a big way and anyone or thing that doesn’t recognize it is going to regret it. Those that deny this change will be left behind like GM was to Toyota and Honda.

I'm too busy to be happy

We Americans work ourselves to death. We work over 1800 hours a year (http://www.bloomberg.com/news/2011-11-03/americans-work-too-much-for-their-own-good-de-graaf-and-batker.html). That’s only amounts to 36 hours per week if you assume everyone gets a 2-week vacation. But, that’s 28% more time than our counterparts over in The Netherlands. That’s insane! Imagine if you got an extra 400 hours of time off a year. If I had that, I think my parents might not mind my living so far away.

Obligatory picture of a windmill that must accompany any mention of Holland.

So, why do we do this to ourselves? Well, it seems to have something to do with the American Dream. We, collectively, seem to be focused on improving on our individual situations for our kids. The weird thing is there are plenty of us where that doesn’t apply.

 Portland: where young people go to retire. It’s funny because it’s absurd. But, is it really?

The irony here is that the country’s direction is more present minded than ever before. The government is actively doing things that benefit the present at the expense of the future. As an example, we have no interest (politically) in actually fixing our nation’s infrastructure that is crumbling before our eyes. http://abnormalecon.blogspot.com/2012/11/investing-in-future-is-no-longer-part.html

Minnesota I-35W bridge collapse. One theory: all Michael Bay’s fault.

I think many of us kill ourselves for a career because we’ve never thought to do anything else. After all, financial success is life success. Or, so we’re told. How else are we expected to produce a better life for our kids, who can be expected to work themselves to death on their own?

Maybe we just need to chill out, and follow the sage advice of one Farris Beuller:

“Life moves pretty fast. You don’t stop and look around once and a while, you could miss it”. –Ferris Beuller

My point here is the focus on financial success. Because it is the measure of success, we have optimized our lives around that metric. I don’t know many people who are truly satisfied with the result. Ask around and find someone who is perfectly content working as many hours as possible with no regard for their personal life.

Clearly, our measure of success isn’t really making us happy. Even worse, it seems that a focus on financial success causes unhappiness. This report (http://www.usnews.com/news/articles/2012/05/22/americans-are-the-wealthiest-but-not-the-happiest) shows that even though Americans are indeed the wealthiest on average, the Better Life Index shows that we’re in the middle of the pack when it comes to happiness.

Let’s be fair that finances play a part. It’s hard to feel like you have a good life if your main daily concern is getting enough food to live. Or less extreme, just making enough (from working all waking hours) to barely provide for yourself or your family. What I’m saying is that it’s just not the only metric that should be considered.

The Better Life Index is one alternative measure to financial success. But, what should we look at? Let’s assume that we can pick a new metric, but whatever we pick will be obsessed about to the point that we will give up any other goal in its pursuit. I think it’s a safe assumption; after all, that’s why we have the least amount of time off and are expected to work to almost 70 years old. http://www.nytimes.com/2012/07/22/opinion/sunday/our-ridiculous-approach-to-retirement.html?_r=0

I submit that we need to at least consider income disparity when measuring national success. We can claim the highest average income of all industrialized nations, but almost everyone is under that average. This is because those at the top can have a very strong pull on the average upward. We have one of the highest income inequalities in the industrialized world (http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States#International_comparisons). This means that we see more people per capita struggling at the bottom than many other countries. So, even though we have the absolute income crown, most of us don’t benefit from that. What’s worse, this measure is trending in the wrong direction.

Gini coelfficient of the US historically, a common metric for income inequality (higher is more inequality).

Ideally, we'd more directly measure happiness. Because, well, isn't that what we're ultimately after anyway? Money doesn't buy happiness, but happiness does. This is a tricky proposition, because it's ultimately subjective and much harder to see a direct cause and effect. But, at least it'd be a step toward paying attention to a metric that benefits everyone.

The Economic Aquarium

In a previous post, I talked about how corporations are like “sharks with freakin laser beams attached to their heads.” I explained that this was due to a shark’s nature as a very efficient predator in its environment.

The reason I say that corporations take this a step further (with lasers) is because of their market power in our global economy. Weeks ago, we studied the difference between efficient free markets and monopolistic markets of different types.

I would imagine that most Americans are in strong favor of a free market economy. It turns out that, while it’s true that a majority of Americans do indeed feel this way, it’s not a strong majority (around 60%) and it’s declining.

Source: globalscan.com

 In a truly free (and completely theoretical) market, the price of any good should eventually be it’s cost. That is to say, market competition drives the price down to the point where there is no profit. Clearly, in many areas of our economy, that isn’t happening. It’s clear because we’re seeing record profits year over year for several companies, many of which should be competing against each other and we should see the opposite trend.

That suggests to me two things. One, that major parts of our economy operate in a more monopolistic/oligopolistic manner than a free market manner. And two, that when Americans are asked about how they feel about free markets, that they are really opining on the monopolistic side of the market because it’s the more visible and discussed part of the economy.

Suffice it to say, we are seeing a large part of our economy with market power instead of without it (the definition of a monopolistic market). However, if it ended there, I would call that a shark, not a shark with lasers. That’s because a shark can have market power, fighting off all competition easily, but it doesn’t do this by manipulating its environment. It’s just really good and working with the environment it lives in.

However, nowadays we’re seeing corporations flexing a lot of market power in the policy arena.  Between lobbying and campaign contributions, we’re seeing billions of dollars spent on openly persuading our government. The oil industry alone spends hundreds of millions of dollars on lobbying.

This is what I’d call sharks with lasers. The sharks are trying to get those that control the environment to give them an advantage. They aren't content with being the biggest and best in the economic waters; they need to actively (and in a sense artificially) manipulate their environment to be even better.

If the government is what defines the economic environment, I’m not saying it should be blind to the creatures living in it. The government needs to be aware of all the creatures in the economic pool, and produce an environment that keeps all them as healthy as possible. It’s easy to pay attention to the big things in the tank, but to maintain a healthy ecosystem, you have to pay more attention to the bottom of the food chain.

There's more than sharks in the water. (www.newyorksocialdiary.com) 

What gets measured gets managed. The government (and the punditocracy) measure economic health by GDP. The flaws in this method are widely discussed and debated, but the idea in this metric is to try to measure the overall health of the economic environment. And, given that it’s the most visible metric we use, it’s no surprise that the government et all pay attention to it. And, if you want to change the GDP number as fast as possible, it’s probably best to focus on where you can make the biggest difference. So, it’s not surprising that the biggest entities in the economy are targeted first- they’re the lowest hanging fruit (and I’m going for a record number of mixed analogies). Ensuring that giant corporations are successful is a clear leverage point, but it's probably not the most effective one.

This is where I think we need an economic policy change. In the economic food chain, it’s more effective to feed the plants and let the rest of the ecosystem work naturally than it is to feed the sharks directly. Feeding the sharks is trickle down economics (don’t try to visualize that one), where as feeding the plants would be trickle up economics (and there has to be a better term for that).

I believe the reason trickle down economic policies worked under Reagan is because there was huge leverage. The government was able to reduce the highest income tax rates by roughly half. So, this had a positive effect because of the shear size of the amounts involved. However, that leverage is far more limited now. Because the effective tax rates are so much lower today than they were at the beginning of Reagan’s presidency, we can’t create as big of an effect with the same policy (and certainly can’t afford it either!).

Huge drop for the top earners, and it worked... once. (Source: Wikipedia)

In addition, claiming that the top taxpayer’s pay more than their fair share (a common claim from conservatives) falls flat with me because income inequality is increasing. The people with the most money are the experts and amassing it, even when they have to pay more than their fair share. So, let’s use their keen ability to amass wealth to everyone’s advantage. To stimulate the economy, let’s give a break to those that are worst at amassing wealth and let the experts do their thing. While economic nature takes its course, those dollars will go round and round the economy, pushing that all important GDP up.

Trickle down today. (Source: Tumblr)

 And, just so you don’t think I’m not aware of what I’ve just done with the shark analogy:

Source: Everyday Theology