The discussion of what makes us successful has been going on for a considerable period of time.  Many of us are tempted to fall for fads, schemes or popular culture concerning the meaning and methods for achieving success in our lives.  Many of us have come to believe that success is about setting personal goals, and tracking our progress on those goals.  Others view success as a “life purpose” that we seek to accomplish.

Many of these perspectives contain important elements of truth, but many of them are also missing some very important elements.  By understanding these key factors of personal, professional, and professional achievement, we can learn how to create our own vision of success.

The first step on the journey toward our life’s goals and purpose is to create a clearer picture of what they look like.  Each person’s ambitions are unique, but many people share a common passion for some area of interest in their life, and a desire to pursue those interests.  When we develop a vision of the direction that we would like our lives to move, it frequently involves the ability to spend more time engaged in the activities that we enjoy.  This frequently leads us to believe that they key to success is simply to attain more of what we want.

More is Not Always More

The common conception that many people hold is that they will feel more fulfilled in their life if they can simply achieve more.  More money, a nicer car, a bigger house, more vacation, more time to follow their interests.  The implicit problem that we run into when thinking in the context of “more” is that our time is a finite quantity.  Each day only contains 24 hours, and there is only so much that we can fit into that amount of time.

Thus, the pursuit of more becomes a study in time scarcity.  Assuming that we are able to attain the additional things that we want, it is highly likely that they will create additional time commitments that we must undertake.  When these time commitments are added to our existing schedule, it frequently leaves us with more to do than we have time to do things.  This abundance of projects and scarcity of time frequently leaves us shorting the aspects of our life that are highly important (such as personal relationships) but not articulated on our sheet of goals.

What you Subtract is More Important than What you Add

The next level of insight in the attainment of success is to understand that our most important decisions are frequently not what to add, but what to take away.  The only way that we can avoid a permanent time crunch that leaves our friends and family out in the cold is to re-arrange our personal, professional, and financial priorities on a consistent basis.  This means that when we add something, we must be prepared to take something else away.

In the real world, trade-off decisions are a fact of life.  We cannot have our cake and eat it too.  There are decisions that must be made, and the way that we make those decisions will have a tremendous impact on our future.  The way that we can keep our life in balance is to continually monitor our balance of activities to determine when it is time to add something and when it is time to remove something or change the way we do it.

Success is an Equilibrium, Not an Achievement

What all of this ultimately means is that “real” success is not an achievement … it is an equilibrium.  It is a balance of things we want and things we do that deliver the most total happiness and satisfaction that we are able to achieve.  Unfortunately, there are very few success authors who are teaching this truism, and there are many people who are seeking success in the context of goals and achievements.

Granted, goals are very important.  However, goals are not the end … the are a means.  For example, many people profess a desire to run a marathon as a goal in their life.  What most people really mean by this goal is that they would like to adjust the equilibrium of their life in such a way that they can increase their level of fitness to a state where they can train to successfully run a marathon.  However, what this goal-setting process frequently misses is that it is possible to complete a marathon without being in optimal fitness (albeit at a slow pace), and that it is possible to achieve considerable fitness without ever running a marathon.

What happens when we place too much emphasis on the goals themselves is that the equilibrium can be lost.  The desire to run a marathon can come to dominate our thoughts and actions.  (Especially for Type-A folks)  In this way, the goals we are seeking can take on an obsessive nature that displace many of the other highly important aspects of our life in the single pursuit of a particular goal.

As we go throughout our lives, we should seek to keep our goals and ambitions in perspective so that they are viewed in the context of our life’s larger equilibrium.  This is the way that we can stay balanced and pursue the “real” success that is a (whole) life that we want to live.  The decisions that we make will all echo throughout our future, so it is important to choose wisely.

 

One of the famous scenes from JR Tolkein’s book series “The Lord of the Rings” is when Frodo the Hobbit is talking with Gandalf the Wizard about his quest to destroy the ring of power.  Frodo remarks that he wishes the ring had not come to him, and that it was not his burden to bear.  To this, Gandalf replies that Frodo’s sentiment is shared by all people who face difficult times.  But the times you live are not for you to decide.  All that we can decide is what to do with the time we are given.

This scene is very metaphoric for the current economic environment that has left many people wishing for better days or complaining about the burdens of a floundering economy.  It is a time where painful changes are being forced on the populace by market realities and government fiat.  However, we as individuals are not give a choice about the times we live in.  The only choice that any of us really have is about what to do with the time that we are living.

As such, it logically follows that we should seek to focus on the parts of our life that we can actually control.  Said another way, we should concentrate our thoughts and actions on our sphere of influence instead of our sphere of awareness or sphere of concern.  This isn’t to say that we should ‘check out’ from the world . . . knowledge of the local, national, and global marketplace is all a part of making decisions within our sphere of influence.  However, most of us would be well served by resigning our self-appointed post as “General Manager of the Universe” and concentrating our efforts on the pieces of our world that we can control.

Part and parcel to this is the understanding that your life is shaped by our decisions.  Both our good decisions and our bad decisions impact the course of our life.  Most of us seek to take credit for all of our decisions that turn out good, and seek somebody to blame when things take a downward turn.  We want to blame the government, big business, the Fed, or just about anybody else we can.  However, the fact still remains that the investments we chose went down in value.  We didn’t know they would go down … otherwise we wouldn’t have bought it.  Before we can make much progress in our lives, we mus take ownership of the decisions that we make.

The hidden wisdom of this change in perspective is that it actually bestows more personal power.  When we are faced up against a big nameless power, we can easily succumb to a feeling of inevitable helplessness.  However, when our focus shifts to the things that we can control, it puts an entirely different spin on the time that we are given in our lives.  We may not be able to control and influence everything, but we can learn to make the most of what we are able to influence and let go of the things that are out of our control.

It is only by learning to look past what is out of our control that we can learn to focus on what is within our control.  The way that we make the most of the time that we are given is by doing the most with what we can control.  In the end, each of us has a supreme choice to make.  That choice is how we choose to spend the time that we are given to live on the earth.  The quality of our time will depend on the decisions and choices that we make.  It is incumbent upon each individual person to choose wisely.

 

There is a disturbing trend among both people and politicians to find somebody to blame for each setback, difficulty, or annoyance they experience.  This phenomenon frequently provides a convenient alibi for failure, as some opaque persona such as ‘big business’ or ‘the man’ is blamed for our problems.  The most critical danger of focus on these ghosts of failure is that they give us a subconscious excuse to avoid doing what is necessary for success.  However, the realization of our goals, dreams, and aspirations will require many of us to ‘man up’ (or ‘woman up’ as the case may be) to make our goals happen.

The importance of ‘making it happen’ cannot be overstated, since it shifts the responsibility for our circumstances squarely onto our shoulders.  This means that we can no longer place the responsibility for our wellbeing onto other people (or politicians) and must take full accountability for our achievements and failures.  This means that if there are great things we want to achieve, that we must personally take action.  If there is something that we want to do in the future, we must first become educated and then we must take action.  If things don’t turn out the way we wanted, it is our responsibility to study our decisions and learn what we can do differently next time.

Make Your Own Luck

There is a popular aphorism that you make your own luck.  While this is not completely true, it contains a valuable nugget of insight.  Luck is a factor that is beyond our realm of control.  However, we have supreme control over whether we will be prepared to reap the benefits when fortune turns in our favor.  Every person experiences opportunities that emerge throughout the course of their lives.  However, not all people are willing or able to capitalize on opportunity when it occurs.  Thus, by perpetually preparing yourself to capitalize on opportunity, you will be able to create the conditions for success when luck turns in your favor.

The truth is that we each have the ability to influence the shape and course of our personal, professional, and financial future.  The decisions we make create the basis for our future achievements.  Each step that we take builds on the actions and decisions that we made in the past.  We make our future happen through intelligent decisions.  If we want to enhance the trajectory of our future, we only need to increase the number of intelligent decisions that we make.  In this way, our part of success boils down to a science of increasing our velocity of intelligent decisions.

We may not be able to directly create the luck that we need to achieve all of our ambitions, but we can make the conditions happen that will allow fortune to smile on us.  If we truly wish to achieve our ambitions, we must move beyond ‘hoping’ that they happen and embark on a journey to ‘make’ them happen.  This is likely to involve a significant intellectual commitment, but is a matter of critical importance to our personal, professional, and financial lives.

In practice, this mindset is quite liberating since it frees us from the constant feeling that we are being held down by somebody else.  The counterpoint to that mental freedom is the realization that all of the obstacles in our way that prevent us from achieving success are really self-imposed.  The truth is that those self-imposed obstacles have always been there . . . it’s just that we were previously unaware of their existence based on a belief that something external was responsible for our failure.  Once we become aware of our ability to influence our own achievements, it becomes our responsibility to identify and remove the obstacles that we have placed in our own way.

 

Our world is one where there is a considerable amount of risk and uncertainty.  Unfortunately, the current trend is that this uncertainty appears to be growing.  In nearly every facet of our personal, professional, and financial lives, the things that used to be taken for granted are no longer considered to be certain.

One of the most influential events of recent history is the financial crisis of 2008.  The credit bubble had escalated the stock market and real estate prices to unbelievable highs, just before they came crashing down.  A startlingly large percentage of people had been lulled into a belief that the government and Federal Reserve could “fine tune” the volatility out of the marketplace.

The reason for this belief was that for a long time, the fantasy of stable continuous growth was a reality.  In what appeared to be a triumph of financial science, the geniuses at the helm of our nation’s fiscal ship had guided us to what seemed like a magical place … a financial world where the market followed a nice smooth upward trajectory with no big disruptions.  All seemed to be bliss …

However, there is one critical observation that does not seem to receive much attention and that is asking why we allow a small group of people to have so much power over the US financial system?  It has always been true that the power to do good is also the power to destroy.  Our natural hubris dictates that we would rather have somebody be ‘in charge’ of the financial system who can ‘fine tune’ interest rates and the money supply to soften the impacts of recessions and accelerate recoveries.

The unfortunate problem with having ‘somebody in charge’ of the financial system means that any small mistake by the people in charge can create massive devastation for the entire national and world economy.  Realistically, it is inevitable that any system which relies on the discretion of a powerful committee for the health of the financial system is going to experience a dramatic collapse since it is not possible for any group of people to act correctly every time they need to make a decision.  When decisions are fragmented down to individual buying and selling decisions, prices are dynamic as people individually vote with their wallets.

Many years ago, Milton Friedman advanced a simple proposal for the Federal Reserve to grow the supply of money at the approximate annual rate of productivity growth (Somewhere around 2% and 3%) and allow the market to reach equilibrium on interest rates and asset prices.  Such a system would not attempt to mask the effect of economic downturns with accommodating monetary policy.  However, it would also lack the false sense of stability that was created by a prolonged period of smoothed cycles that was ruptured in a crash that nearly collapsed the entire financial system.

Any time that volatility can be artificially suppressed is conditioning people to panic when the inevitable market disruptions transpire.  The fundamental question that we must ask ourselves is whether it is more advantageous to make our own decisions instead of relying on the government authorities to create stability.  Change is a reality of life, and attempting to create artificial stability will not accomplish anything more than further conditioning people for panic when the fictional expectations of stability are eventually broken.

In this way, it is much better for us to pattern our lives in a manner that allows us to adapt to changes rather than be destroyed by them.  This is most certainly easier said than done, but it is nonetheless quite important to do.  One of the first things that we should make sure to do is ensure that our financial future is dependent on our own efforts.  Many people have been promised pensions or entitlement payments from both private companies and government entities.  Unfortunately, the same entities that have promised pension benefits are proving that they may be unable to make good on their obligations.  This has the potential to leave many people in a very difficult financial position if the pensions they had depended on for their financial future disappear.

In the end, each of us must condition ourselves to accommodate uncertainty, since change is becoming an unavoidable fact of life.  Since we are unable to stop the risks and uncertainty of life, we must take action to ensure that we are able to withstand the changes that are an inevitable part of life.  Ultimately, the future of our personal, professional, and financial lives come down to the decisions that we make.

 

One of the oldest and most frequently cited geometric axioms is that the shortest distance between two points is a straight line.  While this is most certainly true in the sphere of mathematics and geometry, the path we take through business and life rarely (if ever) moves in a straight line.  Because of this, much of our ability to realize success is dependent on our ability to adapt to the twists and turns that we are presented with on a perpetual basis.

This is especially important for our financial calculations and decisions.  It is not a secret that most financial planning models are built on the assumption of indefinite steady compounding that is expected to make you rich after a certain calculated period of time.  Of course, real life does not work in that manner.  The stock market does not compound at 9% per year, every year, with no deviation.  In some years … or in the past decade, in many years, gains do not meet expectations or values decline.

Thus, it is not just the paper performance of our decisions, but their ability to absorb uncertainty that is highly important.  The problem is that most people do not fully understand the impact of uncertainty, and even fewer people are not aware of how to make their financial plans sufficiently robust so that they can withstand abrupt, significant changes to the marketplace.

Adaptability is Key

Regardless of whether you are talking about a manufacturing line, a small (or large) business, or a financial portfolio, it is absolutely critical to ensure that your strategy is adaptable to new market realities.  The more you allow yourself to depend on static models, the more you will be susceptible to destructive changes in the marketplace.  This concept must be internalized when planning, executing, and revising our personal and professional strategies.  As reality changes, we must be able to adapt and change with it.

A simple way to understand this concept is by internalizing the following three truisms about business/life:

1. Business/Life is a game
2. The game has rules
3. The rules are always changing

If this feels highly chaotic, that’s because in many cases it is.  We cannot suffice ourselves with learning the rules (both written and unwritten) of business/life.  We must also learn how and when the rules change so that we can adjust our personal, professional, and financial decisions.  An unfortunate fact of life is that none of us possess the power to change the larger reality … we only have the ability to change the decisions we make and influence the decisions that people close to us make so that we can adapt to the larger reality more successfully.

Learning When the Rules Change

Many people make a regular habit of following the news both in print and on the internet.  The typical result of most people’s news consumption is agreement with stories support their political views, and anger at stories that stand in contrast to their personal views.  This typically manifests itself in political arguments over current events with friends, co-workers, and family members.  The only problem is that none of us have the ability to change the political reality of the world at large.  Our vote counts as one of many, many millions, and political decisions do not vary as much many are led to believe.  Politicians are wildly different in their rhetoric (what they say), but their decisions (what they do) are much more closely tied to their incentives.

At first blush, this can easily lead to a belief that the news is useless, and it is optimal to tune out.  While temping, this view is not completely accurate.  The news is not useful from the context of my ability to change the global political reality, but it is useful from the context of understanding what changes are coming in the national and global marketplace.  From this perspective, news and information take on an entirely new light.

Signal and Noise

The key to making use of what we learn through the news is the concept of signal and noise.  Within most transmissions, there is an element of useful information (signal) and an element of useless information (noise).  In everything that we see, sense, or experience, there is something we can learn (signal) and there is everything else (noise).  The challenge that we have as people and as businesses is to act on the signal, and not on the noise.  In practice, this is much easier said than done.  In following the news, we should not be simply looking for stories that either confirm or conflict with our beliefs, but looking for useful information signals that can help us make better personal, professional, and financial decisions.

In the end, each of us will be able to achieve the best results if we realize the importance of adapting our strategy and decisions to a changing marketplace, while using the signals that we gain from our everyday experience to inform better decisions in the future.  By learning to do this on a consistent basis, it will allow us to perpetually move closer to our goals, dreams, and aspirations.

 

In the game of blackjack, you can ‘double down’ on a hand by doubling your bet for one more card from the dealer.  (When playing blackjack, your goal is to create a hand that is as close as possible to 21 without going over)  This action allows you to take additional risk for an immediate payoff.  Within the community of people who enjoy the game of blackjack, most will tell you that it is advantageous to double down on an eleven, or possibly a ten.  The principal reason for this is because cards with a value of ten have a higher concentration than other cards.  Because of this, it is advantageous for players to increase their risk in certain situations because of an increased probability for a higher payoff.

In the world of investing, there are both times to increase your exposure to risk for a higher payoff, and appropriate situations.  The problem which arises is that many people end up taking excessive risk to chase returns.  In this situation, it is rarely the optimal time to take more risk in the hopes of earning a higher return.

Currently, there are many people from the baby boom generation who are currently ‘doubling down’ with their retirement accounts by over-weighting their portfolios in high-risk ventures such as emerging market stocks and speculative real-estate in an attempt to pump-up the value of their nest egg before retirement.  The risk of this strategy is that your nest egg could crack just before it hatches.

The hidden danger of highly volatile investments is that the risk of loss generally stays hidden until market disruptions push the value of multiple asset classes down simultaneously.  In this case, there is not enough time to adjust your portfolio before it has been significantly burned.  These types of situations are especially dangerous, because the market tends to change very abruptly as relevant news and information develop.  For people who are approaching retirement, volatility can be especially dangerous.

This is not to say that investors shouldn’t take risks . . . it is very difficult to generate returns in excess of bond or money market yields without taking risks.  The caution is that you should be aware of the risks that you are taking, and not allow yourself to fall into a false sense of security because the market hasn’t had a significant downward movement lately.  Large returns generally require that you take large risks.  If you are currently earning large returns, chances are that you are at risk for a large adjustment.  It is very important to make sure that a significant downward adjustment in value of your risky investments will not place you in a situation that you can’t recover from.

Thus, when deciding whether to ‘double down’ on your investment strategy, it is critically important to understand whether you are in a situation where such a decision is optimal.  Are your personal emotions constructed in such a way that a dramatic shift in market valuation will cause excessive nervous tension?  In most cases, investors are their own worst enemy … we allow our emotions over the movements of our portfolio value to influence our actions in a way that frequently moves contrary to our rational thoughts.

Thus, investing becomes a battle of reason vs. emotion.  Our reason frequently tells us to make decisions that would appear to be quite smart by most objective standards.  Reason typically evaluates decisions based on their inherent merits.  However, not all of our decisions are made rationally.  Instead of making our investing decisions based simply on the merits of a particular investment, we allow ourselves to be influenced by the other people we have seen being successful in making money.  When the market is going up, our emotions want to double-down on what we have seen as being successful.  When the market is going down, our emotions want to run for the hills and retreat from the perceived danger of the investing world.

As it turns out, the movement in market perception of a particular investment does not necessarily change the underlying fundamentals.  Many investments that are fundamentally sound experience negative market news, and other investments that lack solid fundamentals will experience upward escalations in market valuation that defy reason.  In the former case, it is important to avoid the emotional pull to bail-out on an otherwise solid investment strategy.  In the latter example, it is important to avoid the temptation to increase our investment, simply because the price has gone up and we hope that it will go up some more.

In the end, it is important for each of us to understand the extent to which our emotions compel us to ‘double down’ on what may turn out to be a highly risky strategy.  All of our decision should be made because of what we judge to be best for our well-being.  Achieving our desires will require that we take risks of some manner along the way.  However, it is important to ensure that all of our decisions are being made consciously instead of re-actively … rationally instead of emotionally.  This will help us to make sure that we don’t double-down on risky situations that we are not emotionally prepared to deal with.

 

There are two basic management formats. One is the pyramid organization, where the head of the company, typically the owner, makes all the decisions and managers simply implement the company’s mandates.

Alternatively, there is the flat organization, where managers make operational decisions, with the management team and owner only reviewing results or discussing issues and problems. Managers resolve daily operation issues, while reporting on a regular timely basis such as in a weekly managers’ meeting. Of course, the owner can always review critical issues as required, but the company is run by the managers in this flat format.

There is a huge difference in these styles. The pyramid organization concentrates all power and decision-making typically in the owner’s hands. The owner micromanages every aspect of the business with a constant flow of managers asking him or her for immediate short-term consideration and response to whatever is happening at the moment.

Typically few systems are in place, as the owner makes decisions on an issue-by-issue basis. This is more often called putting out brush fires and babysitting, as these are the main functions such a style promotes. It means endless hours of work and total self-absorption on the part of the owner.

In contrast, the flat organization allows, encourages and even requires managers to make operational decisions without going to the owner or CEO for the answers to every micro issue. A flat organization requires that managers be held responsible for success and also be held accountable for their achievements or failures.

Employees can also be empowered to contribute to decision making. This way, you involve the entire team in the responsibility and accountability for success. Holding periodic department meetings, managers can frankly and honestly discuss the workings of the operation and ways to improve it.

This approach works best when the employees are rewarded for success on an incentive basis. It puts everyone in the same boat, all pulling together trying to achieve the same goals.

To become a flat organization, start from the top. If you select a strong management team and let them manage, if the managers can create quality teamwork in each department, and if the departments can work together to create a larger team effort, success will be assured.

This requires a significant discussion with your managers to agree upon goals and objectives, but the managers are responsible for achieving them. Each division or group acts as if its manager was the chief executive officer of that group. The manager’s answer is the final word, and he or she does not have to retreat to the mother ship for ratification, affirmation or permission.

It further requires a CEO who will expect that managers will make errors in judgment and will support them when this happens. This is critical since every decision will not be correct or the best. As long as enough of the decisions are appropriate, then the CEO should cultivate decision-making by supporting managers.

Managers should be encouraged to occasionally take risks and experiment, and maybe they will hit a home run, bringing additional profits into the company. They should be supported in their efforts and encouraged to try again if they fail, even if they fail more often than they succeed, as long as they reach their objectives and projections.

Ask your managers to draft their own department business plan and supporting budget, and then give them the authority to implement it. You will have the basis of a very successful flat organization, with far less management and babysitting for you.

Why not even leave hiring decisions to your managers? It’s their team. Allow them to pick their own players.

This begs the question, what does the CEO do if he or she is no longer responsible for the operation and is running a flat organization with the managers controlling and operating the game? Plan, train, and review: That is the CEO’s real job.

• Plan. Chart the future course and goals. Plan for capital investments, growth and development.
• Train. Make certain your managers are constantly learning new skills and acquiring additional capabilities. Provide training opportunities and make them mandatory.
• Review. Always monitor the results and the key indicators so you have a pulse on your progress and success. If faltering, you’re there as soon as possible to help make corrections. You’re supporting your managers’ efforts, not doing their job for them. Inspect your managers’ work, often and deeply.

That’s a flat organization. Can anyone do it? It requires a CEO who can resist being a control freak and who can let go in exchange for the benefits of greater success with less work effort. Let your managers do their job. Why pay them to watch over the employees when they should really be managing them?

Finally, learn from the masters: Jack Welch, the most successful CEO in modern history, spent his career flattening General Electric, one of the most successful organizations ever. He spent years converting a huge pyramid to a flat organization, division by division, and he claims flat is the only way to go.

Article source: Entrepreneur.com

 

For both individuals and business owners, negotiations can prove to be one of the most difficult and most important things that we do.  The largest purchases that most people make frequently involve very intense negotiations.  The ability to gain employment, and earn promotions is also frequently influenced by your ability to negotiate.  Negotiation has a very significant impact on personal, professional, and financial success.  Because of this, it is very important to understand the parts of negotiations that are the most important, along with the parts that are frequently misunderstood.

To many people, the idea of negotiating brings up images of aggressive arguments where both sides attempt to prevail against the other in a pitched battle for power where one side wins and the other side loses.  Another paradigm of negotiation is one where a “win-win” paradigm requires that no deal be made unless both sides realize significant benefits.  The truth of negotiation exists in-between these opposite visions.

Best Alternative To a Negotiated Agreement

The term BATNA, meaning “Best Alternative to a Negotiated Agreement” was coined by Roger Fisher and William Ury of Harvard University, and incorporates many of the ideas published by John Nash in his work on Game Theory.  The idea incorporated in BATNA is that our ability to negotiate is heavily influenced by our alternatives if the negotiated agreement does not occur.

One way to think about BATNA is to imagine that you’re looking to sell a car.  If you have one buyer lined-up who will pay $2,000 for the car, then you will be very unlikely to accept less than $2,000 from anybody else unless you have doubts about the original offer.  Your best alternative is selling the car for $2,000 and that places you in a position of power to confidently list the car for sale at a higher price. Alternatively, if you need to raise cash very quickly and have no buyers lined-up, then you may need to accept $500 or less from the first able buyer whom you come into contact with.  Thus, your best alternative exerts a tremendous degree of influence over your decisions.

How BATNA Influences Our Idea of Fairness

One of the enduring ideas of humanity is the notion of fairness.  The situations that most people perceive as being unfair are those where one side has a significantly better BATNA than the other.  An example of this is if you are walking across a desert, parched of desperate thirst, and run across a truck who offers to sell you a 20 ounce bottle of water for $5,000.  The natural response to this scenario is that the transaction is supremely unfair since the cost of that bottle to the seller is approximately one dollar.  In this situation, the BATNA of the person walking through the desert is a painful death of dehydration.  Alternatively, the BATNA of the seller is their lost time and the expense of driving across the desert to find somebody walking whom they can sell water.

The reason why this feels so unfair is because the alternative of the person walking is death, while the alternative of the person selling the water is simply wasted time.  However, this transaction still makes both parties better off, even though it feels patently unfair.  If the truck were not present to sell the high-priced water, the person walking across the desert would suffer a painful death.  Even when the person driving the truck engages in what is frequently called “price gouging,” he still delivers a valuable service that is critically important to the person in the desert.  Thus, in what seems to be a blinding paradox, some of the transactions that appear to be the most unfair to the “little guy” are actually the most beneficial.  The reason for this is because when the best alternative for the “little guy” is worse that the seemingly unfair exchange, then they are far better off with the deal that feels severely slanted against them.  Thus, by using legislative power to prevent exchanges that feel unfair, it is possible that we are actually condemning the people whom we think we are helping to suffer an even worse outcome.

How BATNA Influences our Negotiations

Another important thing to consider in regards to BATNA is its impact on our personal, career, business, and investing decisions.  Within this insight is two levels of distinction.  The first is that our alternatives influence our decisions.  The second is that our perceptions may differ from reality, and result in decisions that are sub-optimal.  In short, it is very easy to both over-estimate and under-estimate our best alternative.

• Why our Alternatives Matter

  • The simple reason why alternatives matter so much is because we can be more confident in refusing low-quality outcomes when we have a better alternative.  If you are highly educated and experienced in a field that is in demand, you do not need to take the first job offer that comes your way.  If you are able to re-locate with ease, you can be more flexible in finding a new job that allows you to advance more quickly.  If you are a business owner who already has a key customer that generates sufficient revenue to cover your costs, you can negotiate pricing with new customers from a stronger position.  If you are able to assemble investment deals that generate a high rate of return, it will allow you to walk past the traditional financial instruments that are sold for retirement planning.
  • In short, the decisions that you make are bracketed by the alternatives that you possess.  By increasing the quality of your alternatives, you increase the strength of your decisions.  Thus, the ‘real’ way that people achieve success is not just through the decisions that they make, but through developing the alternatives that allow them to make high-impact decisions in the first place.  Most of the best investments require some degree of capital.  If you are unable to pay the monthly rent, high-impact investing is not an option.  Regardless of how educated you are in decision making, those decisions will not become available until you influence the underlying alternatives through preceding actions and decisions.

• Over-Estimating the Alternatives

  • One of the thing that frequently happens in high-stakes negotiations is that one or both sides will over-estimate their alternatives.  This typically results in the adoption of “tough-guy” negotiation techniques, and can create very large problems if the deal falls apart and the assumed alternative do not materialize.  Typically this situation occurs when negotiators fail to invest sufficient research into their realistic options.  The most frequent occurrences of this effect are when one side focuses on the other side’s lack of options more than their own situation.
  • For example, the union frequently notes that management will be in a pinch without labor.  Similarly, management frequently notes that the union members will be in trouble without their wages.  The truth is that both labor and management suffer from a prolonged work stoppage.  It is important to avoid taking your eye away from your own alternatives by excessively focusing on other people’s alternatives.

• Under-Estimating the Alternatives

  • Another way that people can run into trouble is by under-estimating their alternatives.  When this happens, people will be likely to take “the first thing that comes along” instead of searching for their best option.  Typically, this situation occurs when people have a low opinion of themselves and their abilities.  This is not to say that ego and arrogance are in order, but that an honest assessment is critical.

In the end, understanding our alternatives is a critical part of optimal decision making.  It is important to make an honest assessment of what our options look like so that we can avoid the errors of both over-estimating and under-estimating the quality of our alternatives.  This is one of the fundamental keys to negotiating success in our personal, professional, and financial life.

 

Knowledge and power are both deep and influential topics.  There is a popular sentiment that knowledge is power.  This sentiment stems from the fact that people who are educated and skilled have much greater opportunities to influence the shape and direction of their lives.  As time has moved forward, knowledge has become increasingly specialized and increasingly dispersed among a larger number of people.  In short, the power of knowledge comes from specialization and that specialization is no longer concentrated in a handful of metropolitan areas.

This is where the impact of politics creates problems.  Political solutions are frequently created and implemented by a central authority.  This can be a city council, county agency, state, or the federal government.  In each case, a council of experts are gathered by the political authority to study the situation and make recommendations.  In some cases, public agencies become hotbeds for corruption and influence by corporate interests or unions.  These circumstances make for popular news stories and special reports. However, there is a deeper problem that is largely unknown and frequently unreported.  With the world becoming increasingly complex, knowledge becoming more specialized and the people possessing that knowledge becoming more dispersed, it is literally impossible for any central agency to possess enough knowledge to create an optimal solution.

Over time, this problem has grown in scope and impact since the number of government representatives has stayed the same while the population and size of government has grown.  Consider that the the US legislature currently has 100 Senators and 435 Representatives.  This total has not changed for a very long time, so with each passing year the number of people represented by each person in congress increases.  Similarly, the political power of each person in congress increases.  With this trend of more power becoming concentrated in the hands of government, the impact of mistakes becomes increasingly stark.

It is important to consider that when the number of people represented by an individual increases, it becomes impossible to individually know a significant number of the people you represent.  This means that elections become an exercise in marketing and messaging instead of campaigning to people whom you personally know.  This means that large amounts of money are required to spread a message to many people whom you need to influence in order to win the next election.  This phenomenon results in shifting influence away from individuals, toward large contributors such as special interest groups, corporations, and unions.  Even in an environment that is absent of overt corruption, the influence of large organizations will necessarily trump that of individuals.  In most elections, there is a small field of candidates and none of the candidates completely represents the interests of any voter … people simply vote in favor of the person who they believe are likely represent their interests the most closely.  Even then, most elections result in between 1/3 and 1/2 of the electorate (i.e. people who voted for the opposing candidate) are unrepresented.

Thus, the question becomes one of the best way to create results in a world where knowledge is specialized, that specialization is widely dispersed, and decision power is becoming concentrated.  The current situation is one where people in power have far too much power, and create initiatives that are (supposedly) well intentioned, but fail to produce results.  One way to address this issue is to increase the number of representatives in government.  Another option is to decrease the size and scope of government so that market-based solutions emerge.

The notion of increased representation in government is appealing to many, due to the intellectual appeal of legislators who are members of our community.  This is most certainly preferable to the current situation, but still carries the implicit problem of trying to make centralized decisions in a world where knowledge is specialized and dispersed.  It is possible that this these centralized decisions will be incrementally beneficial to those who are currently under-represented, but will not address the fundamental problem of centrally planned solutions.

The idea of market based solutions is appealing to many in the business community, because it allows them more freedom to create products and services that can profitably benefit their customers.  The unique power of markets is that the dynamic process of trial and error allows for ideas and solutions to emerge from the specialized knowledge people possess, and is not constrained to a particular geographic area.  The aspect of markets that many people find unappealing is that the outcomes they create are not always the same ones that they personally desire.  Competition necessarily means that some people will be more successful than others.  Relying on voluntary charitable donations necessarily means less funding than would be available through a government agency that is financed with tax revenues.

The fundamental question that individuals must answer is not one of whether markets are ‘good’ or ‘bad’ … those descriptions are highly subjective, and lack intellectual depth.  The question is whether we prefer to pursue centrally planned solutions that we know to be sub-optimally effective, but are able to be directed.  In contrast to this is markets, where more products, services, and solutions emerge but results are produced that many people do not find desirable.  Fundamentally, the choice is between a sub-optimal solution that we can direct and a more optimal solution that we must allow to emerge.  The question of knowledge, power, and politics ultimately comes down to whether you value the ability to direct outcomes over the generation of greater output and opportunity.  The result of this choice is ultimately less important that the understanding that a choice must be made.

The great fallacy of utopia is quickly becoming revealed.  There is no perfection … only varying degrees of trade-off decisions.  We make these trade-off decisions as individuals, and as an electorate.  As each of us go throughout our lives, it is important to understand these decisions, and their extended implications on our personal, professional, financial (and political) lives.

 

One of the ideas that is most common in business literature is the notion of solutions.  Namely that leaders should seek to find solutions to problems.  Instead of selling a product, sell a solution.  Instead of doing a job, solve the problems of your group manager.  Creative problem solving has become its own genre of business writing.

Unfortunately, there is one critical insight that this genre frequently leaves out of the analysis.  This learning is that perfect solutions do not exist.  Every choice requires that we forgo other alternatives.  Every problem that we solve results in the emergence of new problems.

Thus, the paradigm is not one of solving problems, but making decisions.  There are no solutions in the world, only decisions.  Each decision has different costs and consequences.  This is an important insight because it highlights the fallacy of solving short-term problems, only to create long-term problems.  Thus, we are not faced with the issue of solving a single problem, but an entire system of decisions that we must attempt to optimize in such a way that we receive the greatest total benefit for the least total cost.

This phenomenon is complicated when dealing with short time windows such a single year, and is further complicated when we are spending other people’s resources.  When making decisions, most people only think about what is happening right now, and assume that they will be able to deal with whatever comes about in the future when it arrives.  Unfortunately, this frequently results in decisions that pull benefits into the present and push costs into the future.  Many people have amassed large credit card bills based on this principal alone.  When costs are continually pushed into the future, they do not go away.  They simply grow and compound until they are so large that drastic action is necessary in order for them to be addressed.

Let us also consider what happens when we are spending other people’s resources.  One of the singularly dominant themes in all stripes of economic thought is that people do not spend other people’s money as wisely as they spend their own.  Evidence of this can be found in both the public and private sectors.  Decision makers in both sectors spend other people’s money.  Politicians and public employees spend taxpayer money for the ‘general good’ or ‘social welfare’ of their community.  Unfortunately, this is a very loose concept and frequently allows considerable room for funneling resources to special interests and pet causes to help the politicians stay in power.  Corporate decision makers use the resources of shareholders in an attempt to earn profits.  Wile considerably less vague than ‘social welfare’ this arrangement still leaves room for self-serving interests to override service to the shareholders.

Thus, we can see that short-term “problem solving” with other people’s money has the potential to create a perpetual cascade of bad decisions that eventually result in problems that are too large to address without making significant sacrifices.  The prime example of this in the United States is our national debt and entitlement liabilities.  Large promises of future entitlement payments have been made to multiple generations of workers, based on programs that fund current expenditures with current revenues.  This means that as the number of recipients grows relative to the number of payers, the programs will quickly run out of resources.

When addressing a problem of this magnitude, it is important to understand that there is no “solution” to be found.  There is no way to keep the (unrealistic) promises that have been made without imposing more costs on more people.  This situation is aggravated by the fact that current federal government spending exceeds tax revenue by nearly $1.6 trillion dollars.  When combined, these two problems spell future fiscal calamity since the US cannot borrow indefinitely at current interest rates.  Sooner or later, major sacrifices will need to be made.

One way to address the problem is by reducing future promises, cutting spending today, and re-aligning the tax code to provide incentives for greater economic growth.  Another way to address the problem is by raising taxes to capture more revenue, and sacrifice future economic growth for the sake of current spending.  A third option is to ignore the problem entirely and attack anybody who proposes reforms as a radical extremist.  This is the path of least resistance for politicians, and will ultimately prove to be the most painful.  The many promises that have been made cannot all be kept.  Simply opposing any changes will not alter the fact that the resources to fund these promises do not exist.  Very large cuts will be required in the future if action is not taken in the present.  Unfortunately, politicians have almost no incentive to make current sacrifices for future gains.  Those future gains won’t be realized until after they are out of office.

Fortunately, our individual lives are not directed by the sway of public opinion.  Each person has the ability to decide and to act.  The decisions that you make will shape the future you experience.  The problems that you face can be addressed many ways, but each decision you make will spawn new problems.  Thus, the real question is not one of how to solve problems, but which problems you face, and when you face them.  Your life comes down to decisions.  Which ones will you make, and how will it shape your future.  The answer to those questions is difficult at best, but in any circumstance it is certain that delaying all of our major decisions until later will result in a worse situation than if we take action today.