How good are you at estimating?

Strategic decision-making often requires you to estimate current and future quantities. Here’s a quiz to see how good you are at it.

For each quantity below (2009 data unless noted otherwise), make your best guess. Don’t try to find the answers, just guess.

  1. World camel population
  2. Annual consumption of popped popcorn in the US (quarts)
  3. GNP of Belgium ($M)
  4. Number of cats in the US
  5. Population of Romania, 2007
  6. Amount of dog feces produced each day in the UK (tons)
  7. 2007 US corn production (thousand bushels)
  8. Value of all the tea in China (annual production) ($)
  9. Total amount of gold ever refined (kg)
  10. Acres planted in cotton in the US, 2006 (thousands)

Now how confident are you in your answer? Give a high and a low guess so that you are 90% certain that the true answer lies between high and low.

Don’t check the answers below until you’ve done this!

Businessman with Question

 

 

 

 

 

 

 

alternatives

 

 

 

 

 

 

 

 

 

 

Here are the answers. Give yourself a point for any question where the answer was between your high and low.

1          World camel population         18,871,000

2          Annual consumption of popped popcorn in the US (quarts)            16 billion

3          GNP of Belgium ($M)            $264,000

4          Number of cats in the US       76,430,000

5          Population of Romania, 2007 22,276,056

6          Amount of dog feces produced each day in the UK (tons)    992

7          2007 US corn production (thousand bushels)            13,073,893

8          Value of all the tea in China (annual production) ($)  $1,590,653,400

9          Total amount of gold ever refined (kg)           154,400,000

10        Acres planted in cotton in the US, 2006 (thousands)            15,274

 

How did you do? If you really were 90% certain, you’d expect to get a score of about 9.

I’ve never had anybody get that much. Most people will score maybe 1 or 2. Why is that? It’s the overconfidence bias. We tend to think we know more than we really do. We tend to lock into an answer and then have trouble thinking much beyond it. This is a natural human bias that stifles our imaginations and leaves us unprepared for inevitable changes.

You probably didn’t know the answers to any of these questions. Admit it! Give yourself a wide latitude for the possibilities. Have you ever been caught by the overconfidence bias, or seen others get caught up in it?

Are small schools better?

small schoolCan you get fooled by random events? You bet you can. Here’s an interesting example, recounted by Daniel Kahneman in his book Thinking Fast and Slow.

A survey of average student test scores at over 1600 schools focused in on the top 50. One item stood out. Of the 50 best schools, 6 were small. This was surprising since there were very few small schools in the study. In fact, the small schools were overrepresented among the best by a factor of 4. This started the small school movement, supported by the major foundations and the US Department of Education.

Yet, if you looked at the bottom 50 among the same schools, you would see small schools overrepresented there as well. If the study had focused on fixing bad schools rather than emulating good schools, they might have seen this data and concluded that bigger is better. What’s going on here?

There’s a simple explanation that shows that this anomaly is not only possible, but to be expected. It’s all explained by the Central Limit Theorem, which says that the more items you average, the smaller the variation from one average to the next. If you look at the test scores of individual students, you will see the full range, including both some very poor and very good students. These individual differences swamp any educational differences. You won’t see this spread in the average test scores for a school, since there will usually be a mix of very good and very poor students, who average each other out. In fact, a very large school will closely match the general population, and so will have average test scores very close to those of the general population. In other words, the big schools will all have about the same average test scores. On the other hand, a small school may by chance have a few very good or very poor students who swing the average, so the average scores at the small schools will show more variability than those at the large schools.

Now when we look at the very tails of the distributions, we find small schools, not because they’re better or worse, but simply because their average scores are more variable. So which is better? We really won’t know until someone does an analysis that includes all the schools.

What is…? or What if…?

???????Which would you rather know, where you are now compared to where you were last month, or where you might be in the future? Personally, I’ll take the view of the future. What might change and how can I prepare? Are there threats? Opportunities? What might I do to make progress and how well might it work?

Yet much business analysis focuses on month-to-month status. This is especially true of the ubiquitous dashboards that seem to be the major product of Microsoft Excel these days—a beautiful, but static, view of the moment.

Forget the dashboard that compares where you are to where you were. In the current environment, you need analysis to tell you where you should be going. Use the dynamic and interactive powers of Microsoft Excel to visualize the future, compare your options, set requirements to lead you to your goals, find what will drive success, understand your risks, and more. Ask “what if,” not “what is.”

A couple of posts back I gave a spreadsheet to figure out whether you should marry a millionaire. Even if you don’t have such an opportunity (few of us do), you could use the exact same spreadsheet to figure out how much you can afford to spend in retirement, or how much you need to save to support a comfortable retirement. It looks into the future and compares your expected savings with your expected expenditures, year-by-year. It’s not beautiful, but it gives you answers. You can ask “what if” about things you can’t control. What if inflation goes nuts? What if my investments stagnate? You can ask “what if” about things you can control. What if I start with more money? What if I spend less? Change the assumption, see the result. No pretty graphs, no fancy graphics, just instant insights.

Which costs less the $130 or the $1700 coffee maker?

Coffee MachineThe answer is obvious, you say? Stick with me here.

I wanted to buy a coffee maker that would make one fresh cup at a time, fully automatic and self-cleaning. The obvious choice is the popular Keurig machine, which Amazon is selling for $126.50. Insert a K-cup, push the button and that’s it. The extravagant option is a Jura-Capresso C9, an impressive machine that makes espresso drinks as well, discounted on Amazon for (gulp!) $1,698. It holds a good stock of beans and water. Push the button and it grinds, tamps, brews and cleans up after itself.

I really need to figure in the cost of the coffee to get a reasonable cost comparison for this purchase decision. I drink at least three cups of coffee per day and keep a coffee machine at least five years. That comes out to 5,475 cups of coffee over the five-year period (Yowee!). I put together a spreadsheet to calculate the cost of each machine, including the coffee, over this five-year period. Here it is, coffeecompare. You can change the numbers in blue if you drink more or less coffee per day or keep a machine a longer or shorter time. That will give you your own total cost.

I like Starbucks Verona blend, so I used that for the comparison. The best price on the K-cups on Amazon is $67.98 for a package of 96 K-cups, which comes out to $.71 per cup. The cost per cup of coffee beans was a little trickier. Starbucks claims 64 cups per pound, which works out to 4 cups per ounce. The best price on Verona beans on Amazon was $37.99 for three 12-ounce bags. That’s 36 ounces at 4 cups per ounce, or 144 cups of coffee. That works out to $0.26 per cup. Finally, I added the cost of the machine and the cost of all the coffee and got the true cost of each machine over five years.

coffee compareThe expensive machine saved hundreds of dollars! The five-year cost of the Keurig would be $4003 and the Jura-Capresso would be $3142. Try the spreadsheet with your own numbers and see what you get. The more coffee you drink, the better the Jura-Capresso (or any other machine that uses bulk coffee) will look. If you don’t drink much coffee, the Keurig is the better deal.

This is an example of how the answer can change radically if you consider what’s called life-cycle costs, all those ongoing expenses that we tend not to think about, things like monthly service or toner cartridges.

By the way, cost is not the only factor in this choice. You may choose the Keurig because you enjoy a variety of coffee roasts and flavors. You may choose the Jura-Capresso because you like an occasional cappuccino. In fact, I used to be in the habit of getting a cappuccino at Starbucks several evenings a week. I estimated the cost of doing this for five years, and that turned out to cost even more than either of the coffee makers. Yes, my old Jura-Capresso, which I thought was an outrageous splurge, paid for itself a couple of years ago and is now making me coffee for 26 cents a cup.

Imagine that! And that and that and…there’s your answer

viz alts

What on earth does imagination have to do with decision-making? Yes, it helps you come up with more alternatives, goals and constraints. But then, it’s just a matter of evaluating each of your alternatives against your goals and making a reasoned choice, right?

Actually, this is the one step in the decision process in which imagination is most needed. Evaluation of alternatives is tricky, since it’s all about what happens in the future. What will the new job be like? How will I like the new house? How will the customer respond to the ad? What will the competition do? Have you ever made a choice and later thought, “Well, this isn’t at all what I expected”? I know I have. Some of this is unavoidable, of course, but visualizing the future and playing it against your goals and constraints helps to guide you to a happy choice.

Let’s say you’re planning a vacation, deciding where to go. You’re considering Maui and Paris. You’re interested in adventure and scenery, but want to minimize cost and hassle. To help you think about it all, lay out a grid with your options across the top, including staying home. (Remember that doing nothing is always an option). Run your goals and constraints down the side.

Now take each alternative in turn. Imagine that the alternative has been selected and carried out. What are you doing? How well is it working? What have you given up? What have you gained? What have your stakeholders gained or lost? Describe vividly and as precisely as possible. Are there further (unintended) consequences? Note anything you’re unsure about.

Start with Maui. How do you get there? How long does it take? How much does it cost? How much vacation do you take and how is your job covered while you’re gone? What do you eat and where? What do you do for entertainment? Imagine snorkeling in clear waters. See the scenery in your mind. Imagine the luau with the hula show. Feel it. How do you enjoy it? How does your traveling companion enjoy it? What’s fun? What’s a hassle? Now make notes in the Maui column for each of your goals and constraints. Was there anything significant that you imagined that should have been a goal or constraint? Consider adding it to your list.

Now do the same with Paris. Finally, imagine staying home. What do you do with the money you save? What do you do with your time at home? Is it a vacation or do you finish some projects?

See the sample table above. The question marks highlight where you need to learn more. You need to find out more about costs for both trips (hotels, airfare, local transportation). Fill in those holes, then compare across the rows. Maui seems to win in the last two rows. If we’d listed art and cuisine as goals, Paris would have won, but we didn’t. It’s all about matching the solution to the key goals. Staying home wins for the two constraints. Now balance. Is the adventure and scenery worth the cost and hassle? Yes? Maui it is.

You may get an answer using these simple text assessments, or you may want or need to dig deeper. In future posts, I’ll give some techniques for making a choice when you have multiple, conflicting goals.

Do you have any techniques for making choices when you have multiple goals?

Go for the goal! No, it’s too big!

Open air paintingGoals are often so lofty that they overwhelm us. The choices seem to be all-out pursuit or nothing. Often we take the “nothing” option rather than face the enormity of the task. Here are some ideas for a broader list of alternatives.  As I’ve said before, you always have more than two options. Try these.

Go for it completely
Go for a more accessible version of it
Go for an intermediate goal
Go for a different goal with similar satisfaction
Do a trial run without committing
Do nothing

Let’s look at these more closely. As an example, imagine you have a good job, but you always wanted to be an artist. What can you do about that goal?

—Go for it completely

One obvious choice is to pursue the goal fully, setting aside everything else. 

  • —  Quit your job, rent a studio and devote your life to your art

—Go for a more accessible version of it

Is there a scaled-down version of your goal that gives almost the same amount of satisfaction without the sacrifice? Yes, I know this goes against all the motivational speakers and writers who tell you to shoot for the moon. But do you really want to give up many of the other important aspects of your life to work toward something you may never reach? In our example, rather than working toward becoming an internationally acclaimed artist for the ages, it might be almost as good to get a local following.

  • —  Keep your job and devote your weekends to your art
  • —  Get to know the local galleries

—Go for an intermediate goal

Your first action in achieving the goal may be to reach a key step along the way. Think about what you will need to do to reach your goal. Any of these may be satisfying goals in their own right. In our example, to become a great artist you will need to hone your technique, produce art and get it seen.

  • —  Take art classes in the evenings or on weekends
  • —  Seek out places to get your work seen by the public
  • —  Devote your weekends to producing art

—Go for a different goal with similar satisfaction

Think about what it is that you find attractive about your goal. Can you get that same satisfaction some other way without disrupting your life? In our example, you may be able to steer your current job in a direction that better uses your artistic capabilities.

  • —  Seek a transfer into the graphics department of your current company

Do a trial run without committing

Rather than jumping into the goal with both feet, you may want to put your toe in the water first. Go after the goal, but make sure you can get back to where you were, if it does not turn out as you would like.

  • —  Take a six-month leave of absence from work to pursue your art

—Do nothing

No matter what all those motivational speakers will tell you, this should always be on your list of alternatives. You have a choice. You may have moved on since you set that goal. In our example, perhaps you now have a family and find spending time with them more enjoyable and rewarding than creating art. It’s OK to choose a new goal over an old goal. People will accuse you of letting your dreams pass you by. Let them. You know you’ve made a deliberate choice by comparing the costs and rewards of going for the goal. Free yourself from old or unreasonable goals.

Opportunity knocks. What do you do?

Sign this contractPeople faced with an opportunity usually figure they have simply a decision of yes or no, take it or don’t. The challenge here is to come up with a richer list of alternatives, built around the opportunity and variations of it. As with all decisions, there may be even better options out there if you open your mind to them. Before you try to choose, give yourself a rich list of choices. Here are some ideas to get you started when you have an opportunity.

—Run with it

Taking the opportunity exactly as offered is clearly always an option. Here’s an example. You’re an independent consultant and you enjoy the flexibility and the chance to work in a variety of industries. Susan has just offered you a full-time, permanent job with a financial institution. You have one clear alternative:

  • —  Accept the job offer as is.

—Use part of it

Are there pieces of the opportunity that are attractive, without committing to the whole thing? Perhaps you see a little nugget in the larger opportunity. Perhaps there are parts of the opportunity that you’d prefer not to pursue.

In our example, maybe you’d like to pursue the job, but maintain your independent status and the chance to work in other areas.

  • —  Accept a part-time, temporary or on-call position

—Negotiate a variation

Is the opportunity all you want? If anything is lacking, can it be added? See if the opportunity can be enhanced to meet all your needs.

In our example, you may seek more money to compensate for giving up your consulting practice, or you may wish to maintain the amount of vacation you have been giving yourself.

  • —  Accept the job if Susan meets your salary demands.
  • —  Accept the job if Susan gives you five weeks a year of vacation.

—Pass it on

If you decide that you have no interest in pursuing the opportunity, would it be of interest to someone else? Someone else might find it the perfect opportunity and you would be doing her a favor to tell her about it.

  • —  Tell one of your colleagues about the job opening

—Do something related

Does this opportunity suggest other opportunities that might be even better? If this opportunity comes from a surprising direction or an unexpected area, what else is out there? You may want to do some exploring before you commit. In our example, you may never have considered financial work.

  • —  Seek out consulting in the financial field

Do something with a similar payoff

What is it that you find attractive about the opportunity? Are there other ways you can get it? Think about each attractive aspect in turn.

In the example, you may not have considered full-time work before. It’s attractive because of the steady paycheck and administrative and marketing support.

  • —  Investigate other full-time, permanent positions

— Use it as a springboard to other opportunities

Even if you don’t take the opportunity, it may lead to further opportunities. In our example, Susan has contacts who may be interested in hiring a consultant. She clearly respects your work and so could put in a good word for you.

  • —  Thank Susan and ask her to let you know if she hears about any consulting opportunities

— Do nothing

Ignoring the opportunity is always an option. Make it a conscious choice. There’s a huge difference between failing to seize an opportunity and actively choosing to let it go. The first case indicates laziness, cowardice or obliviousness. The second shows that you’ve taken charge of the decision and determined that the drawbacks outweigh the benefits. In the first case you may feel regret or helplessness or that the world is passing you by. In the second you feel empowered.

There is an important reason to include the do-nothing option as an alternative in any decision. Every choice has drawbacks and that often makes people afraid to make a choice. Considering doing nothing as a choice forces you to examine the drawbacks of the current status and pushes you toward action.

  • —  Turn down the job offer

What else?

What other options can you think of for taking advantage of an opportunity?