Numbers on the Brain

The human brain is interesting to me. It is the ultimate parallel computing machine. So much is distributed and adaptable. For instance, numbers. Numbers have a place in our evolved brains, but really numbers that are tangible. Numbers that are more abstract must be taught. Jim Holt wrote a piece for The New Yorker called Numbers Guy and it goes into the subject with greater attention.

A few highlights that I found interesting:

The human brain can interpret up to three objects without having to individualize them. There is a natural sense for the these small numbers. So instead of saying 1 plus 1 plus 1 is three with lightening quick reasoning, the brain can just see three objects and know the total. Maybe it relates to how many you can carry. But once you get to four, the brain has to kick in and rationalize this difference.

Your brain doesn’t really have a math center. Parts of your math ability are spread across your whole mind. For example, some are tied to other evolutionary segments in the brain like squeezing your right hand or music.

The human brain is structured to be associative. Meaning we learn better through stories. That is why stories are such a great medium to remember. Numbers and bullet points tend to be more easily forgotten; only living in short term memory.

Just about everyone, regardless of their education level, can answer the question “which is the higher number 15 or 60?” But some people can’t answer a question like this: Which is a higher number 75 or 78.

Cost of Business Going Up

I started commenting on the economic slow down in October of last year (2007). What I highlighted was that people are buying cheaper staples. Sales of pasta and peanut butter were up. The job report held pretty steady until December of 2007. Although I think September, October, and November were suspect in their number collections. The independent household survey was down for those months too. So as the housing slump is waiting to hit the bottom (we are in a stare down situation now between the potential buyers and sellers) inflation is up. This is mainly a result of energy prices infiltrating the cost to produce everything else.

To combat times of recession business tends to have promotions to motivate potential buyers to buy. Sometimes that is the reduction of price. That cuts into profit margins, but increases revenue and keeps the cash flow positive. But if profit margins are already priced out due to the increase in resource costs then what do you do to stay in business? You fear something I think we are on the cusp of, a sharp pull back in buying. People are starting to budget for $4.00 gallon of gas. People are not expecting their raise to be greater than inflation.

Here are some stats I pulled from an article by Tami Luhby called Pain in the Pocketbook.

  • Gasoline costs as of today 2/27/08 is $3.15
  • January had a Consumer Price Index increase of 0.4% – higher than expected
  • The Consumer Price Index over the last twelve months is 4.8% (higher than most raise increases)
    • Food and beverages increased by 4.8%
    • Transportation went up by 9.4%
  • The cost of a bushel corn was $5.12 in January. That is up 41% from a year ago.
    • So the cost of corn itself is up, but corn is also used to feed cows, pigs, and the like, which increases the cost of those products.

Ken Chenault 2007 versus 2006 Compensation

The is a follow up article on regarding Ken Chenault and America Express. The article is called American Express CEO Gets Big Pay Boost.

Here is a link to my prior post:

AmEx Pays Ken Chenault After They Pay Their Shareholders

I pulled some stats from the CNNMoney article:

Compensated $53.2 million in 2007
Compensated $27.3 million in 2006

Of the 2007 $53.2 million, $42.8 million was rewarded as stock awards for performance in 2007 and a special incentive stock option grant, so this still must be realized against the stipulations.

This is in comparison to 2006 when Chenault’s performance netted stock awards valued at $16.9 million

(more numbers are in the article)

When Salaries are Exposed

John Case over at wrote a piece called When Salaries aren’t Secret. He throws out a hypothetical situation where a vindictive employee publishes all the salary data to the other employees. It exposes the inequalities that tend to exist. Here are some of the behaviors that HR departments demonstrate:

  • Using pay as the sole means to attract talent
  • Having a compensation system that has no input from the employees
  • Implementing a performance based compensation structure without fully educating the employees what each role is worth and the value of the accomplishments

Here are some thoughts regarding the benefits of salary exposure:

For the first bullet, pay tends to be the tool used to knock over potential candidates. It uses the cliche that everyone has their price. But if you look at Fortune magazine’s recent The 100 Best Companies to Work For article, you will see that the list varies dramatically on the pay side, but it doesn’t vary much on the fringe benefits. They all offer some sort of fun in the job. Of course fun is a hard thing to nail down, so Google leaves it to their employees to decide and mandates that each employee dedicates 20% of their time to pet projects.

The second bullet is probably more at the heart of the uneasiness surrounding pay. If employees are involved in the process it could lead to a self serving escalation of pay structures, but I don’t think it would. I think most people are fair. If you have routine periodic reviews of the compensation market by the employees and adjust appropriately (based on the third bullet) and create a system of bands to place roles into, then you’d have less churn. Why? Because expectations are set and the job becomes more about the work and less about what is fair.

Now for the bad news – bullet three. Performance based compensation must be implemented in a transparent model. If you assume everyone is already earning what their role dictates then having a performance based system makes complete sense, but say one person is earning well above the range for their role and another person is earning well below. If that is the case then a performance based system can continue to skew the equity of the employees. And then it plays back to the first bullet, for your competitors. A final influencing factor is the professional and social network of those doing the hiring. It is well known that the best way to get a job is to know someone. If that is the case then you will occasionally get people that aren’t exactly the best candidate. But what this person does offer is beyond the daily work. This person is an asset to the network. So their pay and performance might not reflect their real value to the person that hired them. To reiterate, I’m not saying this is the majority or the rule, just that it happens. So is it fair? In a way it is. Everyone has the ability to build their network out. If you benefit from it on one occasion then it was worth the effort. This is just a reality in the world of highly social and sometime irrational people.

In summary, I suggest making compensation more known to the employees. I support employees participating in the development of the ranges and I think performance based models need very clear and priced accomplishments to be effective. Finally, lets not assume we live in a world that is completely fair. 

What Really Makes The Best Company to Work For

Fortune Magazine has recently released its annual rankings of the best companies to work for. The practice is similar to the US News and World Report rankings of universities. It is good to be at the top but that doesn’t mean the top is the only place to be.

So why do these rankings? There is really only one reason – the rankings sell magazines. But for the sake of argument I’ll explore of the other reasons.
The optimist would say that the best companies get the best employees who in turn continue to provide a competitive advantage to the company. A pessimist might think of all the waste to have these programs. I guess I lean more toward the optimist. I look at it like a celebration. Google (#1 this year) employees know a secret that we don’t know. It plays on the emotion of envy (the grass is greener on the other side), except we are complicit in the envy. Its like a horror film, you like to be scared a little. Another angle to take is the psychologist view. Do the employees need external motivation to do a good job or are they intrinsically motivated? Do these perks offer long term commitment or are they short term delighters? Would a negative change to the company sponsored healthcare program offset all the other benefits associated with the company?

But I think they missed the overwhelming number one of this year and any other year – the best company to work for is your own.

Long Term Unemployed Stress

There are two related posts that I discovered today.

Low Jobless Rate Masks Problems by Kevin G. Hall
Poverty Mars the Formation of Infants Brains by Clive Cookson

The first article discusses a recent statistical change in the US labor market – long term unemployment is rising. It is currently 18% of those unemployed are without work for 27 weeks or more. To be fair, these numbers are reflective of certain states (Wisconsin, Illinois, Michigan, Louisiana, Mississippi, Missouri, New York, Ohio and South Carolina) skewing the stats a touch, but that doesn’t mean they don’t count. They absolutely do. Long term unemployment is very bad for the economy because it means savings and insurance options are used up. These people are now dependent on social programs and the stresses that come with that.

The second article is from the Financial Times and it is about collected studies by the American Association for the Advancement of Science that found that children in poverty and low social status situations are exposed to unhealthy levels of stress hormones. This can impair neural development, especially for memory and language. The article says that between the ages of six months and three years are vital to combat the effects of poverty on children. It goes on to say there are means to effectively deal with these situations and not permanently place the child at a developmental disadvantage and those means are related to communications in the family and behavior management.

Now suppose you are out of work for more than 26 weeks. You have a toddler and a home payment. You are very close to using up your entire savings and credit. Are you stressed? Sure. Will those emotions be transfered to the toddler? Probably. Will states like South Carolina and Ohio have long term education and social ills as a result? I would guess yes. Will the costs of meeting the future needs of these people be more than working with the unemployed now? It is logical.

So next time you see the jobs report, take a look at the long term unemployment numbers.

Creative Implications

Many entrepreneurs start small. Their idea for a business is based on a new or a better way to solve a problem or fill a need. Some stay small. Others don’t. Some entrepreneurs, either through planning or luck, plant seminal seeds.
This example isn’t based on an entrepreneur but on the creation of the United States of America. It is thought that the defining moment was the writing of the Declaration of Independence by Thomas Jefferson. However, the process started years earlier and came to a crescendo in May of 1776. This is when the Continental Congress, under the leadership of John Adams, asked each colony to write its own constitution. The effect of this is ultimately rebellion and secession from British rule. As the Continental Congress started to prepare for the coming war with Britain, it was left to Thomas Jefferson to scribe the official proclamation. Most people don’t know this, but the document was edited by the Continental Congress, but one part wasn’t touched. At the time, no one thought much of its impact. That part is:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty, and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from consent of the governed.

It is understood that Thomas Jefferson was inspired by John Locke who arranged a similar sentiment, but Jefferson took the meaning to an abstract level and imparted in the annuls of the new America.

But at the time, the Continental Congress didn’t view the wording to be so inspiring. They were already making plans for the next phase of independence. However, those 55 words have become a shining light for what has become the US empire.

Entrepreneurs can take this as a lesson as to how important the little things are. Planting seeds for greatness must happen even with the tactical operations absorbing so much time. They might seem so inconsequential at times, but the payoff can be so immense. And look at Thomas Jefferson, if someone (Locke) already has soil and water for your idea then by all means use it.

Teachers Who Have Creative Freedom to Teach

I envy teachers. I’ve touched on something I’ve read about in an assortment of books like Made to Stick, it’s the curse of knowledge. Once you know something, it is hard to imagine not knowing it. Here is a cut from the book Made to Stick:

And that brings us to the villain of our book: The Curse of Knowledge. Lots of research in economics and psychology shows that when we know something, it becomes hard for us to imagine not knowing it. As a result, we become lousy communicators. Think of a lawyer who can’t give you a straight, comprehensible answer to a legal question. His vast knowledge and experience renders him unable to fathom how little you know. So when he talks to you, he talks in abstractions that you can’t follow. And we’re all like the lawyer in our own domain of expertise.

Here’s the great cruelty of the Curse of Knowledge: The better we get at generating great ideas—new insights and novel solutions—in our field of expertise, the more unnatural it becomes for us to communicate those ideas clearly. That’s why knowledge is a curse. But notice we said “unnatural,” not “impossible.” Experts just need to devote a little time to applying the basic principles of stickiness.

JFK dodged the Curse [with “put a man on the moon in a decade”]. If he’d been a modern-day politician or CEO, he’d probably have said, “Our mission is to become the international leader in the space industry, using our capacity for technological innovation to build a bridge towards humanity’s future.” That might have set a moon walk back fifteen years.

That brings me back to teachers. Teachers have to imagine what it is like to not know something every day. Maybe it is their love of kids that creates such empathy. What concerns me is when people who are not teachers set goals for learning. Obviously a good education system is the backbone to any good society, but what constitutes a good education system? For the federal government it is the no child left behind policies. It’s a good idea spoiled by exacting execution. As I’ve said in other posts, I’d rather see children demonstrate knowledge by applying it rather than test scores.

But suppose I’m a teacher and I don’t have the freedom to allow my students to sink their teeth into subject area? What do I teach then? I teach to pass a test; a test that these students will never encounter in the real world. What is great about the real world is that every day is different. Everyone problem solves for a new set of problems as soon as they wake up in the morning. What helps me is that I did it the day before. I have experience.

What I propose is an increase in creative freedom for teachers so they can develop some sort of experience generation in the class room. What I would like to see is a student or team of students take on a task that is reflective of creating something that improves their immediate environment (I don’t mean environment in the sense of birds and trees, but their local area in a figurative sense).

The payoff is three fold:

  1. The student(s) become masters of the knowledge area and not intimidated by unexpected challenges
  2. The local environment benefits from the students addition and potential future additions (because now the students, which have demonstrated competency, can focus on efficiencies)
  3. Observing the students overcome, because of the teacher provided guidance, will infuse higher levels of pride in each teacher.

Simple Question – Difficult Answer

What is social networking?

A Few Opinions on the US Economy

Robert Reich, the former Secretary of Labor under President Bill Clinton, wrote an opinion piece for the NY Times today. It is called Totally Spent.

Here are some of the points I agree with from the piece:

WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.

Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.

The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent.

Here are some of the points I disagree with from the piece:

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

Reich is vastly underestimating the value of the entrepreneur in the US economy. Many entrepreneurs are middle class with a limited amount of buying power, but everyone knows they make up the lion share of goods and services sold. Will an increase to the wage of the lower class and lower middle class really help entrepreneurs? Perhaps, but the incentive to be successful is reduced ever so slightly because the raise in wage of the lower and lower middle class is subsidized by the very items they are buying.

What Reich should have focused on instead of tax relief is local investment incentives. For instance, angel investors should get a tax break if and when their investment matures, if the investment was local in nature. What I mean by that is if the investment improved the situation for the average consumer. It could be an infrastructure improvement company or a social based company or a targeted communication mechanism. What is important is that it is end user focused and relatively local in utilization.

Another area where Reich is not looking is at innovation. Many great innovations come from entrepreneurial companies. An area of particular excitement is in the green energy technologies. As efforts in this space begin to coalesce a productivity surge will result. Why? Because the savings in energy use will get shifted from a cost item to a revenue generation item. That isn’t to intentionally ignore the gold rush that will result in the development of many parallel green solutions, but the media will not appreciate a story that has no definitive green energy winner. But that will be the case – no one winner but many tiered successes. The US will not necessarily lead this revolution, but it will play a crucial role particularly because the economies of scale require a US consumer adoption.

Finally, Reich misses the ball on the Baby Boomers. He fails to mention their clout in the economy. He says “Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.” But what happens when their health begins to show signs of deterioration? Will they try to buy years, months, days they don’t have? Will health care spending increase as a result of the rich reaching retirement? I believe so and I think it will result in another form of productivity increases as new medical innovations are implemented.

So to summarize, Reich is in favor of rebalancing the tax of the US population, improving unions, improving schools. I suggest we reward local investment in entrepreneurs by not taxing the gains as the US currently does. I believe that green energy technologies are close to relevancy and I believe health care is the one area a rich person will spend at the same percentage rate as a poor man.