Strategist Post

01 December 2024

Why Averages Are Misleading

"The average investor buys high and sells low."

--Ray Dalio

The chairman of Vector Economics, Sam Savage, shares the story of a statistician who drowns while fording a river that he calculates is, on average, three feet deep. "If he were alive to tell the tale, he would expound on the 'flaw of averages,' which simply states that plans based on assumptions about average conditions usually go wrong."

Mr. Savage, who also lectures at Stanford and Cambridge on risk modeling, says, "This unseen flaw shows up everywhere, distorting accounts, undermining forecasts, and dooming well-considered projects to disappointing results."

A problem with averages

A former client, Brad Hewitt, then CEO of Minneapolis-based Thrivent, first brought the problem of averages to our attention. He recently explained it this way:

"I was a math (statistics) major in college. One part of that coursework was a section on how to tell if someone was lying using statistics. It was eye-opening, and averages were among the best ways to mislead. A professor would say, 'If you put one foot in ice cold water and the other foot in boiling water on average, it would be just right.'

"Averages (means, modes, arithmetic, etc) are valuable, but one must look carefully at what they say. Unfortunately, people often have a point of view, and statistics are simply a way to prove their point, not help them gain insight into data," Hewitt concluded.

What specifically should concern us about averages?

The problem with averages is that they can easily obscure the reality of the situation.

"While averages can provide a simple summary of complex data, they can also distort reality, hiding important variations and nuances with the data," writes Reagan Pannell, CEO of Leanscape. "Averages can be useful for providing a quick snapshot, but they mustn't be the sole metric relied upon for decision-making or understanding a situation," he adds.

Some examples

Think of baseball batting averages, which Sabermetrics considers a weak performance measure. On-base plus Slugging (OPS) may be a better way to judge a batter's value to their team, but do fans know what that stat means? Do they even care?

Consumers rely on average annual rainfall amounts from their local meteorologists (54 inches in Florida) because they are simple to compute and understand. Yet those averages are only sometimes reliable, failing to account for inconsistent patterns within a year (like hurricane or dry seasons).

Average is a mathematical term, and research suggests it should be so confined. You can't average people (only numbers of people) or concepts or opinions. One person suggested using the word "typical" as an alternative.

Does that mean the average person is a myth?

This is likely since that definition relies on a single 'average' value and can ignore individual differences and complexities.

Beware these conditions

Circumstances to avoid:

Using averages to compare different groups.
Applying group behavior to individuals.
Allowing extreme results to influence averages.
Fixating on a single number--which is an oversimplified view of reality.

One way around these pitfalls is to consider probability distributions instead of single numbers. A histogram is a simple way to view a distribution. (linkedin.com/pulse/deceptive-art-using-averages-unveiling-statistical-tricks)

What can we learn?

Consultant Pennell believes we should look beyond averages.

"Consider data distribution, the outliers, and other measures like median and mean. Understanding the range and variance can also provide insights into the spread and inconsistency of data."

Pennell balances the scale:

1. Averages are not inherently bad. They do offer a quick snapshot of data and simplify complex datasets.

2. Use averages as a starting point, but explore other statistical measures.

3. Beware of outliers, as they can significantly skew your average and create a misleading data representation.

4. Tools like AI can provide valuable insights beyond the average, though you should never remove the human mind when analyzing data.

Coin of the realm

Sam Savage, whom we quoted initially, is also the author of The Flaw of Averages. Instead of saying, "Give me a number for my report," he believes every executive should say, "Give me a distribution for my simulation."

If followed, Savage's advice could improve planning and outcomes and establish a more credible standard of leadership.

Strategist.com

01 November 2024

Keeping Middle-Class Philanthropy Alive

"The charity that is trifle to us can be precious to others."

—Homer

Who are the most generous financial givers?

The short answer is individuals.

Giving USA's Annual Report on charitable contributions, published in June of this year (for 2023), shows that of the $557.16 billion given, 67 percent, or $374.40 billion, came from individuals, an increase of 1.9 percent over 2022.

Next are foundations, which gave 19 percent, or $103.53 billion, up 1.7 percent from the previous year. Bequests, at 8 percent, or 42.68 billion, gained 4.8 percent, and finally, corporations, with 7 percent, or $36.55 billion, increased by 3.0 percent over 2022.

These are current dollars as overall inflation-adjusted giving declined 2.1 percent for the year. Individual giving as a share of disposable income was only 1.9 percent—close to the all-time low of 1.7 percent in 2022.

The top three recipients were religion*, which received $145.81 billion; human services, $88.84 billion; and education, $87.69 billion.

In 2023, an outpouring of generosity produced record-high giving from resilient but changing donors.

Generosity—an expression of faith

"In study after study, says Karl Zinsmeister, author of The Almanac of American Philanthropy, "religious practice is the behavioral variable with the strongest and most consistent association with generous giving."

Here are Internet headlines from the past few years that underscore that point:

"The Gospel of Generosity: Study finds Scripture-engaged Americans are among the most generous"

"People who attend church regularly are more likely to donate to charities"

"The more people go to church, the more they give to church, study shows"

While those stories reflect American findings, Gallup surveys conducted from 2005 to 2009 in 145 countries revealed that these same religious practices held true internationally.

In an article in Philanthropy, Zinsmeister offers the following insights:

Among Americans who attend services weekly and pray daily, 45% had volunteered during the previous week.
Two-thirds of people who worship at least twice a month give to secular causes, compared to half of non-attenders.
Seven of ten weekly church attenders told Pew Research they consider "work to help the needy" an "essential part" of their faith.
Religion annually contributes an estimated $1.2 trillion of socio-economic value to the U.S. economy. That total is more than the combined revenue of America's ten biggest tech giants and the total economy of all but 14 nations.

A new study by Indiana University and the University of Notre Dame found that charitable giving fell by about $20 billion in 2018 after the Tax Cuts and Jobs Act was passed by the U.S. Congress.

However, according to that same study, the TCJA's increase in the standard (vs. itemized) deduction, which 90 percent of filers took in 2021 and is being raised for the 2024 tax season, had little to no effect on giving to houses of worship.

In another article, "Less God, Less Giving?" Karl Zinsmeister notes:

"It's clear that America's unusual religiosity and extraordinary generosity are closely linked. As faith spirals downward, voluntary giving is very likely to follow. An obvious question for philanthropists is whether the causation arrow can be reversed."

Blinking lights

What's happening in charitable giving over the donor spectrum, particularly middle-class philanthropy?

1. Giving is increasing because of large gifts from wealthy donors. Smaller and mid-level donors are slowly disappearing across the broad range of nonprofits. This impacts local charities like food pantries, YMCAs, and libraries. Large gifts tend to go to medical centers and museums. (See Dr. Ruth Gottesman's $1 billion gift to the Albert Einstein School of Medicine, Bronx, New York.)

2. The number of giving households is decreasing from all economic strata. Volunteerism is also in decline.

3. One-time donors giving less than $500 and $100 are collapsing. These are 98 percent of all givers.

4. Retention rates are declining among all donor categories.

5. Inflation is a thief but doesn't completely explain certain sectors' decline. Last year, considerable sums were spent on consumer goods, travel, and entertainment in the U.S.

6. The percentage of Americans who gave to religious causes is decreasing with attendance at worship services.

The Great Recession (2007-2009) made it difficult for some younger Americans to establish a habit of giving. Only one-third of households aged 40 and under gave to charities in 2018.

What factors motivate them to give, especially if they don't attend worship services or belong to networks encouraging giving?

Communicating well

Some observers believe that decreases in giving are often attributable to communication lapses and ineffective messages, as donors are looking for reasons to give.

"People give to causes they consider important regardless of their income and expenses," reports the American Bible Society in their annual study of giving. "The spirit of generosity in the U.S. remains strong," said Michael Tomlinson, president of the BDI Fundraising Agency.

How do those with expertise suggest improving donor relationships and successfully sharing the worthiness of your cause?

By doubling down on building trust with donors and inviting others into the fold. Transparency and accountability are paramount.

Demonstrating the impact of donor investment.

Crafting content with engagement in mind. What would that look like?

Telling great stories and harnessing technology to support people in need. The premium is on stories that speak to the heart and mind.

When it comes to bequests, don't overlook smaller or mid-size donors, as they may be able to make a larger gift someday.

And don't forget to say "thank you" for even the smallest contributions.

*Giving to religion, as defined by Giving USA, includes churches and mission organizations.

Sources: Indiana University Lilly School of Philanthropy; BDI; Mission Wired; The Chronicle of Philanthropy; Philanthropy Roundtable; New York Times; American Bible Society; Boomerang; and The Wall Street Journal.

Strategist.com

01 October 2024

Every Organization Is Sinkable

"Contrary to popular mythology, Titanic was never described as 'unsinkable' without qualification until after she sank."

—Richard Howells

Did an iceberg in the North Atlantic cause the RMS Titanic, the world's largest vessel, to begin sinking around 11:40 p.m. on April 14, 1912, off Newfoundland? Less than three hours later, the ship plunged 12,500 feet or 2.5 miles at a speed of 35 to 40 knots (40 to 46 mph), leaving an impact on the sea floor that is still visible today.

Of the 2,224 passengers and crew, nearly 1,500 died in that preventable tragedy.

Damaged from the inside out

Or maybe it was something else, such as a broken organizational culture at Harland & Wolf, the Titanic's Belfast builder, or the White Star Line headquartered in Liverpool, England, which owned and operated the luxurious ocean liner.

"The Titanic was doomed from the start due to a flawed corporate culture," concluded Darry Wright, a senior global executive with EY Canada who studied the accident.

"It was not the iceberg that led to the downfall of the ship; rather, it was a culture of overconfidence, narrow-mindedness—and a lack of balance between innovation and risk. Leaders who did not acknowledge the intrinsic flaws (rivet failure and open portholes) in the ship's design," Wright added.

How dangerous is it to overestimate our abilities or knowledge when needing more expertise in a particular area? Very. (Dunning-Kruger effect)

The Titanic's crew and modern management have this in common—the practice of ignoring legitimate warnings.

On April 14, 1912, a British merchant ship, the SS Mesaba, sent a radio warning about an ice field with large icebergs and heavy icepacks. That message never reached the bridge. At 10:55 p.m., the SS California radioed the Titanic, saying it was stopped and "fully surrounded by ice." The Californian's crew later misinterpreted Titanic's calls for help.

Before leaving Southampton, Captain Edward Smith knew the drift ice field was larger and further south than in previous years.

At the time of the accident, the Titanic was sailing at 22 knots (25 mph), two knots below its maximum speed.

The Titanic Syndrome lecture links an overreliance on past success to the night's complications. The captain and crew were experienced at sea under normal sailing conditions. But how can a spotter see afar with the binoculars missing in the Crow's Nest? Or what does a captain do after hitting an iceberg with insufficient liferafts onboard?

Organizational icebergs

The International Ice Patrol says an iceberg is a piece of freshwater ice over 15 meters or 16 yards long that has broken off a glacier or ice shelf and is floating freely in the water. Icebergs vary considerably in size and shape.

According to the Polar Times, the largest iceberg on record was sighted by the USS Glacier on November 12, 1956, west of Scott Island in the South Pacific Ocean. At 335 by 97 kilometers (208 by 60 miles), it was larger than Belgium. A study by The Ohio State University suggests that about one-tenth of the volume of an iceberg is above water and follows Archimedes' Principle of Buoyancy.

Two of the biggest icebergs threatening businesses and nonprofits are the absence of mutual trust among colleagues and an inability to recognize emerging internal and external realities. Both contribute to strenuous transitions when changes are needed with people, products, or services.

Broken cultures sink strategies.

MIT research shows that it takes more than a narrative to repair cultures, as there is often a gap between what is said and what is done. That study says 88% of employees report a lack of organizational preparedness in facing new challenges.

Repairing the damage includes finding the glue to hold everyone together, clearing out the noise overtaking vital communication, and clarifying what is unique and special about the enterprise.

Saying it, talking about it, and writing it down doesn't make it so.

Small holes—sizeable destruction

A 1996 exploration of scientists and engineers underwritten by the Discovery Channel found six thin openings across the Titanic's starboard hull, which were likely the cause of its physical demise. The total area of damage is 12-13 square feet or less than the area of two sidewalk squares.

"It was not the size but the placement of the openings across six watertight holds," says William H. Garzke Jr, a naval architect. "Everything that could go wrong did. Those half-dozen slits let in 39,000 tons of water, sinking the Titanic," the investigators wrote.

Would there have been less damage at slower speeds? The experts say yes.

Under the right conditions, any ship can sink.

Paying respects

On June 18, 2023, a month before our Transatlantic Crossing on Cunard's Queen Mary 2 from Brooklyn, New York, to Southampton, England, the Titan submersible imploded while on an exploration of the Titanic site. All five on board were killed. Stockton Chase, CEO of OceanGate, Titan's owner, was among those who lost their lives that day.

Warnings about the Titan's safety were widely shared but not addressed.

As the QM2 approaches the coast of Newfoundland heading eastbound, the Titanic site is displayed on a screen in the cabin. Captain Andrew Hall announced on this trip that the QM2 would sail north of the Titanic site. The horns will blast to pay respects to those whose lives were lost on that fateful voyage 111 years ago.

At the Sunday worship service sponsored by the QM2, the congregation sings the British hymn, "Eternal Father, Strong to Save." Written in 1860 by William Whiting, the anthem was inspired by the dangers of the sea described in Psalms 107.

The last word

The BBC reported that one of the Titan submersible crew's final messages was, "All good here."

The surviving second officer on the Titanic, Charles Lightoller, was quoted in the film A Night to Remember as saying, "We were so sure."

This is a tale of two unique vessels, one very large and the other very small, whose fates were determined not from the outside but from the inside out.

As you go about your work, keep that life-saving lesson in mind.

www.strategist.com

01 September 2024

When Customers Leave and They Don't Say Why

Getting Images

"The true test of business's customer service fitness is not when things are going right--but rather what it does when things go wrong."

--Steve Ferrante

One of the more overlooked aspects of growing a business is retaining customers, especially in competitive markets like retail, dining, and travel. A good way to achieve that is to pay attention to what Dr. Albert O. Hirschman calls "repairable lapses."

Every company, nonprofit organization, professional services firm, and house of worship sometimes needs to catch up.

Yet, the goal is not perfection but consistency, honesty, and integrity in our dealings on both sides of the counter. That behavioral trio is essential for trustworthy relationships and loyalty. Best efforts are like an insurance policy for when bad days happen--and they do.

Let's say upfront that viability and profitability require new and retained customers. It's not one or the other, but both. However, the September Post is about the work needed to build customer satisfaction by keeping products or services in good order and fixing them when they fall below acceptable performance levels.

That means when something goes wrong and is brought to management's attention, even by associates, action should be taken to get things back on course as soon as possible. Sometimes, it's as simple as apologizing and making matters right--on the spot. Ritz Carlton Hotels gives frontline workers the authority to do just that. Well-managed restaurants do the same with servers.

Expressing sincere regret with concrete steps is an effective way to disarm unhappy buyers. Immediate responses help restore reputations as positive word spreads among business, social, and family networks.

This principle of repairability is important because it allows corrections within a reasonable period and cost. As with health, the point is not to let small problems become life-threatening through neglect.

Departure closes the door

Dr. Hirschman, author of Exit, Voice, and Loyalty (Harvard University Press), suggests a reliable way to identify operational decline is through "exit." Customers leaving, especially in measurable numbers, are sending a message.

Walking out quietly, though, makes it difficult to always know exactly what that message is. Exiting customers also give up an opportunity to make better what they don't like.

How can those losses be reversed?

"Management must find ways to correct whatever faults have led to these exits," Dr. Hirschman says. That's why feedback is necessary for organizational health. How are we doing, and where can we improve?

Even with inflation now at 2.9%, down from 9.1% in 2022, changed shopping habits are in place for many households.

If doable, exit interviews shed light on disengagement, providing insights into what it might take to get someone back in the fold (i.e., faith communities). Resolving problems should be a priority, as finding new clientele is time-consuming and hard.

Research by Frederick Reichheld, inventor of the net promoter score, shows that increasing customer retention rates by 5% increases profits by 25% to 95%.

Keeping the right customers is of great worth to enterprises, big and small.

Speaking but not too loud

The complement to exit is "voice," although consumers can speak and still leave. Voice gives rise to advocacy by remaining in a system. The book suggests that what causes us to choose voice over exit is loyalty, which, unfortunately, is a diminishing value.

Customers or members may express their objections to anyone they believe cares. "Voice is effective up to a point and can be overdone," says Dr. Hirschman. Voices alert management to failings but must give management time to respond to the pressures brought to bear," he adds. How much time it takes for remedial action to take effect depends on the situation's complexity.

Take the recent Crowdstrike-Microsoft crisis, which caused the largest IT outage in history.

A Crowdstrike software update failed, causing flight delays, broadcast disruptions, and blue screens on corporate PCs worldwide. Crowdstrike's founder and CEO, George Kurtz, has publicly apologized. "I want to sincerely apologize directly to all of you for today's outage. All of CrowdStrike understands the gravity and impact of the situation."

He reiterated the company's earlier message that the incident on Friday, July 19, was not the result of a cyberattack.

Not all airlines use Crowdstrike. Of those that do, Delta claims it was more affected than others. From July 19 to 25, it canceled 7,000 flights, affecting a half-million passengers due to the IT outages.

"I want to apologize to every one of you who have been impacted by these events," Delta's CEO Ed Bastian told customers. "Delta is in the business of connecting the world, and we understand how difficult it can be when your travels are disrupted."

Loyalty is a two-way street

Delta's passengers voiced their anger through social media and the press, as flyers were stranded in airports and sleeping on floors. Most affected travelers, including Sky Miles members, will stick around as they have little choice. Delta's slower recovery from the outage follows an earlier J.D. Power survey showing the airline as the best in first-class and premium coach satisfaction. *

The U.S. Transportation Department, which has received more than 5,000 complaints, has opened an investigation into Delta's response. Delta has retained famed litigator David Boies and is suing Crowdstrike and Microsoft to recover a projected half-billion cost; both companies denied fault.

Some passengers use their collective "voice" through a class action lawsuit to exert legal and political pressure on Delta's top management to reach financial settlements.

How does a business repair that kind of damage? As quickly and transparently as possible.

A Delta spokesman told The Wall Street Journal that the company has processed thousands of refunds and reimbursement requests. "The airline is working tirelessly to make this right for customers."

After suffering severe turbulence, how will Delta land safely?

One way is remembering what Scottish novelist J. M. Barrie said: "Life is a long lesson in humility."

* The author is a Delta SkyMiles member.

Strategist.com