2006-04-16

Business is no science

Not that I am a novice to the business world. I have had nine years of experience in banking. I have made decisions. I have been appraised for both my behavior and the outcomes I have managed. But in the busyness of doing my own job, I did not have time to reflect at length about my own decisions and decision making process.

Now that I am working with my friend on his business, I get to see the business and decision mking process dispassionately.

Business is hardly science. Despite the fact that today many disciplines within management use huge amount of math. Business involves decisions to be made by "people". People are hardly fully rational. People are emotional. They are a-rational and in some aspects, irrational.

When such is the state of human beings, recommendations which are based on facts may not be implemented. My friend told me that there are certain decisions he 'does not' want to make. This may mean that the decisions are constrained and may not bring the optimal results. He is fine by them. There is a self-image element to his business. He cannot overcome that. Mind you, my friend is an entrepreneur and a much smarter person that I am. But still he is a human being. At the end of it, just thanks to small improvements in processes and products, his business would surely look better than now.

The point is that all that we read in a b-school tends to presume that human beings are rational. In fact, my first argument with Prof Krishna Kumar (macroeconomics professor at ISB) was that man is not (necessarily) rational. In the last few years, most of the Nobel Prizes in economics have gone to people who have worked in the behavioral economics.

Management education and its professors need to build new theories with a new ingredeient in their formula. That it is people who make decisions and that people are not necessarily rational. I guess we can achieve far more efficiency and profitability than we do now.

11 comments:

Kapil said...

How very true..people are indeed at the center of any system or process...but how many business systems are designed keeping tht in consideration.The expectation is that people will adapt to the system and not othervise.As you already said...people are not always rational,emotions overrides logic more often than not..

Advertising has been aware of this aspect for sometime now .Products and servicies are peddled on the 'experiential platform' rather than their inherent attributes..The idea is to appeal to the emotions rather than rationale.
pheww..i guess I would b bttr off write a detailed post on this topic..
Perhaps business need to consider that the external customer is not mch different from the external customer and develop thr business processes accordingly

vkris said...

very well said...however I've seen people (infact only one, my ex-boss) who is so professional in making decisions that he never got fluttered/effected by people around him, or their feelings...

i guess thats one of the reasons that he's good at management and business...

but sometimes when you're looking at the bigger picture, you miss the finer details...

A rational mind said...

I have read couple of your posts, and I must admit this is your first irrational post.

"People are hardly fully rational. People are emotional. They are a-rational and in some aspects, irrational"

People are emotional, no dispute on that. But to say that being emotional necessitates irrationality is like saying best can't be achieved without an element of bad or worst. Statemets like these stem from the premise that emotions are irrational/nonrational and that human is incapable of being fully rational. I do not blame you, partly because we are, almost all the time, surrounded by people who either succumb to irrational emotions or accept irrationality (atleast on few occasions) as a virtue. Worst, some people think irrationality is inbuilt and they have no choice about it.

Yes, human does commit mistakes. But it is his rationality which makes him learn from these mistakes and see to it they are not repeated. But if he were to begin with the premise that emotions are irrational and mistakes are inseparable part of life then he would hardly bother to retrospect, leave alone correcting himself.

The point is, just because people do it or behave in certain way does not mean thats reality or unaltering attribute of human. Whether those people are in minority or majority.

Yes, rationality is not innate and it must be learnt/aquired. To achieve one's goals, one ought to be ruthlessly rational. More so in a field like business else one would not in business for long.

"Management education and its professors need to build new theories with a new ingredeient in their formula. That it is people who make decisions and that people are not necessarily rational. I guess we can achieve far more efficiency and profitability than we do now."

This is the most dangerous part of the post. It essentially says, "Observe a pattern in human action/behaviour without any critical analysis, that is, good or bad (rational or irrational), and declare that as the norm and innate in human beings"

To make you understand the enormity of such a premise, one possible application of it could be:
Most people love watching pirated movies, listening to pirated songs/CDs, illegally copying/distributing songs. And this pattern of behaviour is widely spread. And one might be tempted to "build new theories with a new ingredeient" and incorporate piracy as a norm and legal. So, "we can achieve far more efficiency and profitability than we do now".

Now try convincing that to yourself.

Why do I care? I had read couple of your posts, you sounded quite straight and rational. It was sad to see a person like you getting dragged into the irrational zone.

The choice is, as always, yours :)

itheabsolute said...

Kapil , vkris

thanks for ur comments. it would be good to see more about this topic on ur blogs

itheabsolute said...

a rational mind

if only u had left ur name.

just in case u did not notice, the blog is about 'my' views, opinions, et al. not that i am not willing to learn. i am, but not when someone tries to explain things without any deep understanding or even without figuring out what the post says.

if people are prone to piracy, then there is a good reason to study it and formulate incentives to discourage people. i suggest u read 'freakonomics' which deals with the subject u have raised very well. i also suggest you spend some time on www.nobel.se. it will give a good idea about the research being done on behavioral economics.

thanks for your comments.

all the best

cheers
cheers

Kapil said...

vkris
Most people love watching pirated movies, listening to pirated songs/CDs, illegally copying/distributing songs. And this pattern of behaviour is widely spread.

My friend ...no 1 loves watchin pirated stuff.Its just tht economics outweigh morality in such matters..Logic would say tht by watchin pirated stuff ur commiting a crime and also encouraging piracy...
But ppl still do ..coz the do not consider it a trivial offence...somethin like jumpin a red light on an empty road..
This is a major issue and requires out of the box thinking..
thrz the i-tunes example ..
closer home il take the example of chetan bhagat and his novels....they r priced at a very affordabe 95 buckz..wht this ensures tht ppl have hardly any incentive to buy a pirated edition as thrz hardly any difference...this was a brave gamble tht the publishers did and it paid off..the margins they probably earn are mostly minimized cos of piracy...now the volumes make up for the margin plus piracy is curbed

Kapil said...

Businesses and Tecnology have to keep the human aspect in mind..For instance take search engines...Yahoo or Msn or alta vista were the preferred choices ..then google came..and conquered..
The single most impt factor was'nt its better technology ..But something as trivial as the interface...which was plain and uncluttered..Rationale would dictate tht since this was the home page u shd have max advtg here ...but google understood tht ppl need something unintimidating and simple ..unlike its competitiors..and look wht being irrational got them

a rational mind said...

"just in case u did not notice, the blog is about 'my' views, opinions, et al. not that i am not willing to learn. i am, but not when someone tries to explain things without any deep understanding or even without figuring out what the post says"

I thoght you were objective and could stand critical analysis. But your subjective reaction proves otherwise.
Had hoped for logical arguments, but do not intend to drag myself into mud slinging.
You may ignore and/or delete the comments.

Kapil-
"and look wht being irrational got them"

Apart from technology, it's their astute thinking, refusing to follow the herd and understanding of people's need that got Google where it is today.
To say their strategy to keep the interface "plain and uncluttered" arose out of whim or "being irrational", is a gross injustice to 2 great minds. It's rationality in full force :)

itheabsolute said...

a rational mind

all that i am saying is - i am not convinced with your argument. i will hold to my views till someone proves me wrong. and if i had not changed my views over years i would not have done any learning whatsoever. trust u get the point.

i also do not like comments from those who cannot leave their name behind the comment.

all the best

cheers

Kapil said...

rational mind ..i presume u would do good as a loan shark considering wht i gather frm ur opinions so far

Maanas said...

I would say that you have a great thought process. I like the way you approach problems and analyze 'em.

2006-04-16

Business is no science

Not that I am a novice to the business world. I have had nine years of experience in banking. I have made decisions. I have been appraised for both my behavior and the outcomes I have managed. But in the busyness of doing my own job, I did not have time to reflect at length about my own decisions and decision making process.

Now that I am working with my friend on his business, I get to see the business and decision mking process dispassionately.

Business is hardly science. Despite the fact that today many disciplines within management use huge amount of math. Business involves decisions to be made by "people". People are hardly fully rational. People are emotional. They are a-rational and in some aspects, irrational.

When such is the state of human beings, recommendations which are based on facts may not be implemented. My friend told me that there are certain decisions he 'does not' want to make. This may mean that the decisions are constrained and may not bring the optimal results. He is fine by them. There is a self-image element to his business. He cannot overcome that. Mind you, my friend is an entrepreneur and a much smarter person that I am. But still he is a human being. At the end of it, just thanks to small improvements in processes and products, his business would surely look better than now.

The point is that all that we read in a b-school tends to presume that human beings are rational. In fact, my first argument with Prof Krishna Kumar (macroeconomics professor at ISB) was that man is not (necessarily) rational. In the last few years, most of the Nobel Prizes in economics have gone to people who have worked in the behavioral economics.

Management education and its professors need to build new theories with a new ingredeient in their formula. That it is people who make decisions and that people are not necessarily rational. I guess we can achieve far more efficiency and profitability than we do now.

11 comments:

Kapil said...

How very true..people are indeed at the center of any system or process...but how many business systems are designed keeping tht in consideration.The expectation is that people will adapt to the system and not othervise.As you already said...people are not always rational,emotions overrides logic more often than not..

Advertising has been aware of this aspect for sometime now .Products and servicies are peddled on the 'experiential platform' rather than their inherent attributes..The idea is to appeal to the emotions rather than rationale.
pheww..i guess I would b bttr off write a detailed post on this topic..
Perhaps business need to consider that the external customer is not mch different from the external customer and develop thr business processes accordingly

vkris said...

very well said...however I've seen people (infact only one, my ex-boss) who is so professional in making decisions that he never got fluttered/effected by people around him, or their feelings...

i guess thats one of the reasons that he's good at management and business...

but sometimes when you're looking at the bigger picture, you miss the finer details...

A rational mind said...

I have read couple of your posts, and I must admit this is your first irrational post.

"People are hardly fully rational. People are emotional. They are a-rational and in some aspects, irrational"

People are emotional, no dispute on that. But to say that being emotional necessitates irrationality is like saying best can't be achieved without an element of bad or worst. Statemets like these stem from the premise that emotions are irrational/nonrational and that human is incapable of being fully rational. I do not blame you, partly because we are, almost all the time, surrounded by people who either succumb to irrational emotions or accept irrationality (atleast on few occasions) as a virtue. Worst, some people think irrationality is inbuilt and they have no choice about it.

Yes, human does commit mistakes. But it is his rationality which makes him learn from these mistakes and see to it they are not repeated. But if he were to begin with the premise that emotions are irrational and mistakes are inseparable part of life then he would hardly bother to retrospect, leave alone correcting himself.

The point is, just because people do it or behave in certain way does not mean thats reality or unaltering attribute of human. Whether those people are in minority or majority.

Yes, rationality is not innate and it must be learnt/aquired. To achieve one's goals, one ought to be ruthlessly rational. More so in a field like business else one would not in business for long.

"Management education and its professors need to build new theories with a new ingredeient in their formula. That it is people who make decisions and that people are not necessarily rational. I guess we can achieve far more efficiency and profitability than we do now."

This is the most dangerous part of the post. It essentially says, "Observe a pattern in human action/behaviour without any critical analysis, that is, good or bad (rational or irrational), and declare that as the norm and innate in human beings"

To make you understand the enormity of such a premise, one possible application of it could be:
Most people love watching pirated movies, listening to pirated songs/CDs, illegally copying/distributing songs. And this pattern of behaviour is widely spread. And one might be tempted to "build new theories with a new ingredeient" and incorporate piracy as a norm and legal. So, "we can achieve far more efficiency and profitability than we do now".

Now try convincing that to yourself.

Why do I care? I had read couple of your posts, you sounded quite straight and rational. It was sad to see a person like you getting dragged into the irrational zone.

The choice is, as always, yours :)

itheabsolute said...

Kapil , vkris

thanks for ur comments. it would be good to see more about this topic on ur blogs

itheabsolute said...

a rational mind

if only u had left ur name.

just in case u did not notice, the blog is about 'my' views, opinions, et al. not that i am not willing to learn. i am, but not when someone tries to explain things without any deep understanding or even without figuring out what the post says.

if people are prone to piracy, then there is a good reason to study it and formulate incentives to discourage people. i suggest u read 'freakonomics' which deals with the subject u have raised very well. i also suggest you spend some time on www.nobel.se. it will give a good idea about the research being done on behavioral economics.

thanks for your comments.

all the best

cheers
cheers

Kapil said...

vkris
Most people love watching pirated movies, listening to pirated songs/CDs, illegally copying/distributing songs. And this pattern of behaviour is widely spread.

My friend ...no 1 loves watchin pirated stuff.Its just tht economics outweigh morality in such matters..Logic would say tht by watchin pirated stuff ur commiting a crime and also encouraging piracy...
But ppl still do ..coz the do not consider it a trivial offence...somethin like jumpin a red light on an empty road..
This is a major issue and requires out of the box thinking..
thrz the i-tunes example ..
closer home il take the example of chetan bhagat and his novels....they r priced at a very affordabe 95 buckz..wht this ensures tht ppl have hardly any incentive to buy a pirated edition as thrz hardly any difference...this was a brave gamble tht the publishers did and it paid off..the margins they probably earn are mostly minimized cos of piracy...now the volumes make up for the margin plus piracy is curbed

Kapil said...

Businesses and Tecnology have to keep the human aspect in mind..For instance take search engines...Yahoo or Msn or alta vista were the preferred choices ..then google came..and conquered..
The single most impt factor was'nt its better technology ..But something as trivial as the interface...which was plain and uncluttered..Rationale would dictate tht since this was the home page u shd have max advtg here ...but google understood tht ppl need something unintimidating and simple ..unlike its competitiors..and look wht being irrational got them

a rational mind said...

"just in case u did not notice, the blog is about 'my' views, opinions, et al. not that i am not willing to learn. i am, but not when someone tries to explain things without any deep understanding or even without figuring out what the post says"

I thoght you were objective and could stand critical analysis. But your subjective reaction proves otherwise.
Had hoped for logical arguments, but do not intend to drag myself into mud slinging.
You may ignore and/or delete the comments.

Kapil-
"and look wht being irrational got them"

Apart from technology, it's their astute thinking, refusing to follow the herd and understanding of people's need that got Google where it is today.
To say their strategy to keep the interface "plain and uncluttered" arose out of whim or "being irrational", is a gross injustice to 2 great minds. It's rationality in full force :)

itheabsolute said...

a rational mind

all that i am saying is - i am not convinced with your argument. i will hold to my views till someone proves me wrong. and if i had not changed my views over years i would not have done any learning whatsoever. trust u get the point.

i also do not like comments from those who cannot leave their name behind the comment.

all the best

cheers

Kapil said...

rational mind ..i presume u would do good as a loan shark considering wht i gather frm ur opinions so far

Maanas said...

I would say that you have a great thought process. I like the way you approach problems and analyze 'em.