Friday, January 01, 2010

Design Thinking and your Personal Finance

Ok, 2010 is going to be a new year. One of the things we're going to see this year is that this blog will have more regular updates. Because I read about 3-4 non-fiction books a week, a short article trying to apply the new concepts I picked up will be enough to keep you guys occupied for the year.

Let's start 2010 with something on design thinking.

Design thinking for business by Roger Martin is a nice work on rethinking about businesses and validates the importance of intuition and patience in product and business model design.

The most important in this book for is the concept of a knowledge funnel.

Knowledge always begins as a mystery to all of us. Then scientists and artists will attempt to convert these mysteries into heuristics or rules of thumb, which defines some patterns behind these mysteries. This process requires a lot of guesswork and can be very expensive to perform. Once a steady set of heuristics arise to define the mystery, engineers and accountants will attempt to turn these heuristics into algorithms. This process unlocks tremendous value and profit, but once an algorithm is built, competitive advantage is lost as algorithms run with reliable results.

The book acknowledges that many old business models run on reliability, which is to turn heuristics into algorithms but do not have an emphasis on validity, which is to craft heuristics from the mysteries around us.

The primary value of this book refines my own personal philosophy about seeking good work in the corporate world. I always encourage readers to seek jobs as symbolic analysts and move away from skills involving technique towards interpretation. The last thing you want to do is to stick around to invoke standard operating procedures everyday instead of crafting them for a living.

Maximal profits in this working world will be concentrated in two kinds of workers.

a) Symbolic analysts who have the power to convert heuristics into a reliable algorithm. This may employ Six Sigma, PMI to meet business results.
b) Designers and economists who predict the future by making guesses about how the future will be shaped and designing new models and products creating new markets altogether.

The next important value is that in the financial world, a lot of energy is spent coming up with new algorithms to consistently make money which eventually fail as markets gain a whole new level of efficiency. Finance is a special playground where there will always be mysteries and a good working heuristic and algorithm cannot be sustainable for too long. Just look at all the books on high frequency trading and hedge funds today.

A good investor thus, will always be trying to interpret the wisdom of financial markets with well crafted hypotheses, transforming them into an investment plan and then employing the feedback to understand the market wisdom further.

An investor is never infallible. An investor is an artist, scientist, engineer and accountant all rolled into one and he will still lose money to the markets every now and then.


1 comment:

ElroyTLanphear said...
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