A Framework for Improving Decisions

Smart organizations can improve decision making in four steps:

1.  Identification
2.  Inventory
3.  Intervention
4.  Institutionalization



The four steps to improving decision making.

1.  Identification

Managers should begin by listing the decisions that must be made and deciding which are most important.

For example,

• "the top 10 decisions required to execute our strategy: or 
• "the top 10 decisions that have to go well if we are to meet our financial goals."

Some decisions will be rare and highly strategic. 

• "What acquisitions will allow us to gain the necessary market share?"

Others will be frequent and on the front lines. 

• "How should we decide how much to pay on claims?"

Without some prioritization, all decisions will be treated as equal - which probably means that the important ones won't be analyzed with sufficient care.



2.  Inventory

In addition to identifying the key decisions in 1 above, you should assess the factors that go into each of them.

• Who plays what role in the decision?
• How often does it occur?
• What information is available to support it?
• How well is the decision typically made?

Such an examination helps an organization understand which decisions need improvement and what processes might make them more effective, while establishing a common language for discussing decision making.


3.  Intervention

Having narrowed down your list of decisions and examined what's involved in making each, you can design the roles, processes, systems, and behaviours your organization should be using to make them.

The key to effective decision interventions is a broad, inclusive approach that considers all methods of improvement and addresses all aspects of the decision process - including execution of the decision, which is often overlooked.


4.  Institutionalization

Organizations need to give managers the tools and assistance to "decide how to decide" on an ongoing basis.

For example, the managers can be trained to determine whether a particular decision should be made

• unilaterally by one manager, 
• unilaterally after consultation with a group, 
• by a group through a majority vote, or 
• by group consensus.  

In addition, they can also determine

• who will be responsible for making the decision, 
• who will be held accountable for the results and 
• who needs to be consulted or informed.

Companies that are serious about institutionalizing better decision making can often enlist decision experts to work with executives on improving the process.

For example, the members of a decision analysis group can

• facilitate framing workshops; 
• coordinate data gathering for analysis; 
• build and refine economic and analytical modes; 
• help project managers and decision makers interpret analysis; 
• point out when additional information and analysis would improve a decision; 
• conduct an assessment of decision quality; 
• and coach decision makers.

Regularly assess and review to improve the quality of your decision making.

An organization that has adopted these four steps should also assess the quality of decisions after the fact.  The assessment should address not only actual business results - which can involve both politics and luck - but also the decision-making process and whatever information the manager relied on. 

The organization should regularly performs "look-backs" on major decisions, and assesses not only outcomes but also how the decision might have employed a better process or addressed uncertainty better.

The Hidden Traps in Decision Making

Making decisions is one of the most important things we do in our daily living.  It is also the toughest and riskiest in some situations.  Bad decisions can damage your career, business and finances, sometimes irreparably.



So where do bad decisions come from? 

In many cases, they can be traced back to the way the decisions were made:

• the alternatives were not clearly defined,
• the right information was not collected,
• the costs and benefits were not accurately weighed.

But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker.  The way the human brain works can sabotage our decisions.

Psychological traps

There are a number of well-documented psychological traps that are particularly likely to undermine decision making.  These include:

• heuristics#, 
• biases and 
• other irrational anomalies in our thinking.  

Your best defense is AWARENESS

There are specific ways you can guard against them.  However, the best defense is always awareness.  

By familiarizing yourself with these traps and the diverse forms they take, you will be better able to ensure that the decisions you make are sound and that the recommendations proposed by others (your subordinates or associates) are reliable.

Additional notes:

#heuristics:  

These are unconscious routines we use to cope with the complexity inherent in most decisions.  These routines serve us well in most situations.  These simple mental shortcuts help us to make the continuous stream of judgments required to navigate the world.  But, not all heuristics are foolproof.  The resulting decisions often pose few dangers for most of us, and can be safely ignore.  At times, the decisions arising from these heuristics can be catastrophic.  What make all these traps so dangerous is their invisibility.  Because they are hardwired into our thinking process, we fail to recognize them - even as we fall right into them.

Investment Decisions and Fundamentals of Value

@ 6.47 min
Managers should invest in real assets and should not be involved in investing in financial assets which the shareholders can do on their own.


What is a Valuable Investment Opportunity?

1. An investment worth more than it costs.
2. An investment with a return greater than its opportunity cost of capital.

Why does an asset have value?

1. An asset provides a return on investment in the form of future cash payments.
2. When we make an investment, we are buying a cash flow stream.
3. When we assess the value of an asset, we assess the value of its cash flow stream.

Asset valuation is the answer to the following question:

What is the PRESENT VALUE of a Future Cash Flow Stream?

@ 13 min

What determines the present value of a cash flow stream?

1. Magnitude
2. Timing
3. Risk

@ 15 min

Risk of the cash flow stream

Consider 2 cash flows streams A and B

A pays $100 for certain.

B may pay as much as $100 but may pay as little as $60.

Choice:  Choose A

We are risk adverse.  A SAFE dollar is worth more than a RISKY dollar.

@ 17 min

Time Value of Money

Time value of money is the rate of exchange between present dollars and future dollars established in the financial market.

Time value of money is reflected in the rates of return available to all investors in the financial markets.

@ 18.30

Risk and Return Relationship

Safe dollars are more valuable than risky dollars

Risk averse investors prefer safe investments.

How do you induce risk averse investors to take a risky investment?

Risky investments must promise higher returns to induce investors to undertake them.

In the financial markets, investments are priced so that the higher the risk, the higher the expected return.

Risky investment's rate of return reflects a risk premium that rewards investors for taking on the investment's risk.

Investment's opportunity cost of capital is the return forgone on an investment in the financial market of comparable risk.

Riskier investments have higher opportunity costs of capital.

Rate of Return = Time Value of Money + Risk Premium

Rate of Return = Risk Free Rate + Risk Premium

@ 21.30

Value of an asset:

1.  Forecast the magnitude and timing of the cash flow stream over its economic life.

2.  Assess the risk of the cash flow stream.

3.  Value the cash flow stream given its magnitude, timing, and risk at its opportunity cost of capital.

Market Value and Rate of Return

@ 23 min

The cash flow stream's value is determined by the amount of money needed today to recreate its magnitude, timing, and risk in the financial market at its opportunity cost of capital.

@ 24.50

What is the investment's opportunity cost of capital?

PV = FV / (1+r)

The value of an investment asset is the money needed today to recreate its future cash flow stream in the financial market at its opportunity cost of capital (r).

The value of an investment asset is the present value of its future cash flow stream.

How much is the asset worth, and how much does it cost?

• What is the value of the asset's future cash flow stream today, and how much does it cost?
• What is its PRESENT VALUE, and how much does it cost?
• What is the prevent value net of cost?
• What is its NET PRESENT VALUE?

NPV = PV of Investment - Cost

A valuable investment opportunity is worth more than it costs.

@ 31 min

If 

NPV > 0, investment is worth more than it costs

NPV < 0, investment costs more than it is worth.

NPV =0, investment costs as much as it is worth.

NPV is the absolute dollar change in wealth from the acceptance of an investment opportunity.

Look for investment opportunities in those with positive NPV projects.

What is a valuable investment opportunity?

1. An investment with a net present value greater than zero.
2. An investment with a return greater than its opportunity cost of capital.

Investment Decision Rules

1. Accept all investments with Net Present Values greater than Zero.
2. Accept all investments with rates of return greater than their opportunity costs of capital.

@ 34 min

Example using the Net Present Value Rule

NPV = PV - Cost 

> 0, therefore we accept the project.

@ 35 min

Example using the Rates of Return greater than their Opportunity Cost of Capital

Rate of Return = 20%.

Opportunity cost of capital = 12%.

Therefore, accept the project.

@ 36.50

You are considering an investment opportunity that costs $100,000 and promises to return 10%.

A comparable investment in the financial market returns 15%.

A bank offers to lend you $100,000 at 8% with no conditions.

Do you invest $100,000 in the investment opportunity?  NO.

Financing cost = 8%.

What is the investment's cost of capital? 15%.

The cost of capital is the return on comparable investments in the financial market, that is 15%.

The cost of capital is not the cost of raising the money to finance the investment.  That is a financing decision and not an investment decision.  

That return in the financial market is the standard against which other investment opportunities are evaluated.

The financing by the bank loan is irrelevant to the investment decision.

Investment decision and financing decision are separate and independent decisions.

First make the investment decision, after that, then make the financing decision.

Thanks for pointing this video out to me.
<  I found these very helpful : https://www.youtube.com/watch?v=ZtQKrPBz3XA https://www.youtube.com/watch?v=4q2Xcbrazhw on Financial Ratio Tutorial Anonymous on 4/7/13 >

Reasonableness and Unreasonableness

An indictment against the Christian community

• Opinion
 

 2011-01-04 21:46

• 

My friend Jackson Ng has raised a very rational and legitimate point in his comment in the Malaysia Chronicle on the matter of the Najib aides asking the organisers of the Christmas Eve gathering at the St John’s Cathedral in Kuala Lumpur to remove the crucifixes, and the banning of singing hymns.

Jackson asked why didn't the church organizers object to such unreasonable instructions?

Although he is not a Christian, Jackson said he decided to write on the issue because it is a matter concerned with the universal acceptance of basic principles and the rights of mankind.

He has rightly pointed out that the removal of crucifixes and the banning of hymn-singing at St John’s Cathedral constitute a violation of religious freedom guaranteed under Article 3(1) of the Federal Constitution.

According to news reports, Datuk Seri Najib Razak’s aides had ordered the removal, claiming that the crucifixes would be offensive to the prime minister.

Jackson said he was not only upset with the instruction given by the Najib aides, but more angry with the church leaders for their failure to stand up and speak out on the matter.

"Are they not God-fearing Christians, just like Muslims are also God-fearing? Why then did the organisers remove the sacred crucifixes? Isn’t it logical to deduce that they are not God-fearing beings but Satan-fearing arse-licking politicians who claim to be Christians? God-fearing Christians would have defended the crucifixes, Jesus Christ and God. Do they value the presence of the PM more than God?" Jackson asked.

"As it was, the organisers, for reasons best known to them, felt the presence of the PM was more important than their Jesus Christ and God. To them, it was more important for the PM to grace the function and, therefore, abandon Jesus Christ and their God. Disgraceful and shameful are two words best to describe the organisers," he said.

"God-fearing Christians must therefore start defending Jesus Christ and their God by throwing out the organisers from their holy house of worship. If not, they too are condoning what they did," Jackson said.

Strong words, indeed, but Jackson certainly is right to lambast the church leaders for being spineless cowards in the face of such violation of human, civil and constitutional rights.

Jackson's denunciation of the action or lack of it of the Christian leaders is perhaps the first public indictment against the Christian community in Malaysia, as far as I know. And it is not without justification, and surely, appropriate too.

One of the major reasons that the fundamental human, civil and constitutional rights are slowly being eroded is the failure of so-called community and religious leaders to stand firm and steadfast to preserve, protect and promote these rights.

I am very familiar with the Malaysian Christian community, having been a Christian for nearly 45 years and actively involved in teaching and preaching for nearly 40. Hence, I think I am well-qualified to make observation and comment on the Church in Malaysia.

There are basically three types of Christians in Malaysia.

The first common type is the introvert conservatives, who are generally shy, reticent, and typically individualistic self-centered persons, predominantly concerned with their own thoughts and feelings, with nary a care for things outside the walls of their church.

These traditionally orthodox Christians are always concerned about their own "spiritual growth", and are generally timid and harmless. They live their lives in the familiar safe comfort zone of their church community, and speak a sort of churchy language, often convicing themselves that they will be okay if they go to church regularly, give often to the church and their pastor, pray always in whatever situation they are in, and shun, evade and eschew controversial matters, especially political ones. They dress decently and avoid elaborate and spectacular extravagant and lavish display of wealth and luxury. They made good church members and citizens as they never ask questions or challenge any rule, precept or instruction, no matter how excessive, unreasonable or even oppressive the rules and instructions are. They are generally afraid of anything official, especially the government and its enforcement agencies. Mention the ISA or May 13, and they will secrete cold sweat and clinched in fear.

Their pastors and church leaders love these church members, because they are literally under their complete control, and want them to remain in their innocent gullible situation. Hence, there is no real teaching of doctrines, biblical and theological matters, and on issues concerned with life, thoughts and faith in relation to the world outside the church. Actually, the pastors and church leaders themselves are as biblically and theologically disabled as their church members. Hence, they play church happily, and never growing beyond their religious pubescence. The church is their safe abode, and anything outside the church is none of their business.

The pastors and leaders of such churches generally avoid speaking up on issues, even if the issues affect their churches or their rights to religious freedom. They will not sign petitions to seek release of political and religious freedom fighters, and will not want to be part of the movement to struggle for the right to use the word "Allah" in the worship, teaching, preaching and publications of the Church. We have many of such Christians in the Malaysian Christian community.

The second type of Christians are the so-called Health and Wealth charismatics, whose main focus in their life, thoughts and faith is material wealth and luxurious living. Their church worship services are no difference from that of an entertainment disco joint, with whirling colourful psychedelic lights, with an intense, vivid and swirling abstract loud music and repeated chantings masquerading as worship songs that produce religious hallucinations and apparent expansion of spiritual consciousness.

Most of the worshippers jump, wave, swing, sway and undulated to the thumping rhythm of the deafening music, and wail loudly, with some making animal sounds. There is no solid biblical exposition, only entertaining motivation talks masquerading as sermons. A good preacher is one who tells a lot of stories and joke, and make the congregation laugh. No Bible message, just a feel good prosperity gospel.

Such churches are usually housed in mega complex with attractive facilities like gyms and swimming pools to attract members of other churches to their fold. There is no growth by evangelism or conversion, only the seduction of church members from other churches.

My personal observation is that most of these people are no different from those under the influence of psychedelic drugs, with their mental intuitive capability almost unilaterally being under the complete control of an irrational runaway emotion. These people are certainly brain-washed into giving large sums of money to their churches and pastors. Most of the pastors of such churches receive big fat pay packets, driving top brand cars, and live in luxury houses in upmarket residential areas. They go on church-sponsored overseas holiday masquerading as "mission trip" two or three times a year.

Obviously, the pastors, leaders and members from such churches couldn't care about what is happening in the real world outside their churches. They are in a world of their own. For the members, the churches are where they can find escape from their frustration, misery, griefs, mental suffering, and get release and relief for themselves. For the pastor, the church is a bigh income generator, giving him undreamt of wealth and luxury. The recent news reports of a mega church in Singapore, where the pastor is a multi-millionare is one example of such a church.

Such churches will not hestitate to remove any religious artifacts, like the Cross, and stop singing hymns and praying in order to receive a non-Christian VIP. To the pastors and church leaders, the Lord Jesus Christ is irrelevant so long as they receive material benefits such as government grants for their mega church building and facilities. After all, Christ is just a brandname of their religious commercial enterprise.

Finally, there are the radical non-comformist Christians, who will stick out their necks to stand up for their faith and principles. There is no organised body of such Christians, but they are found in various churches, especially the traditional denomination churches. These are Christians who are well-educated in their faith, know what it means to be "salt of the Earth" and "lights of the World", are professionals in the various fields in the secular marketplace, are outspoken and articulate in issues, especially on matters concerning the truth, righteous, justice, fairness, racial and gender equality, freedom of religious practices, freedom or speech and press, and accountability and transparency in the church and in government.

These are the Christians that the pastors and church leaders generally ignore and avoid, and will distance themselves from, for fear of getting into the bad book of the authorities. We don't find them holding leadership positions in the churches, but we see them active in the secular marketplace, spearheading the struggle for the advancement of God's kingdom among the people of the world, standing up and sacrificing career prospects for the sake of the Way, the Truth, and the Life.

These radical non-conformist Christians will never allow their faith and ethics to be compromised for the sake of acceptance by any unreasonable and oppressive regime.

My friend Jackson Ng is right. It's time the Christians who are truly God's people stand up and be counted in the face of the increasingly exessively unloving and tyrannical repressive regime.

MySinchew 2011-01-04

Big returns come from small caps

Big returns come from small caps


John Collett asks the experts for their top investment tips among our smaller companies.

The accounts of our biggest listed companies are pored over endlessly by an army of analysts, which makes it unlikely that investors are going to come across hidden value among these giants.

Smaller medium-sized companies, on the other hand, are usually less visible so they provide potential to uncover hidden value and big capital gains. For investors who are patient and prepared to invest over the long term, smaller companies can add some zing to share portfolios.

Money asked leading small-cap fund managers and analysts for their tips from among those market minnows with well-established track records and a history of paying reliable dividends. Like any sharemarket investments, there are always risks. And smaller companies come with more risks than large companies. Their earnings tend to be the most responsive to economic conditions - both good and bad.

Shares should never be held in isolation but in a diversified portfolio. Many investors may find a better way to get exposure to smaller companies is to invest with a specialist smaller companies fund manager. Professional fund managers run portfolios holding dozens of smaller companies, providing small investors with instant diversification.

The stocks nominated by fund managers and analysts cover the spectrum of the Australian economy - retailers, financial services, technology - but there are no resources stocks. Smaller resources stocks may be terrific investments but are too speculative for novice investors.

TURNAROUND STORY

The managing director of Perennial Value Management, John Murray, nominates OrotonGroup, which designs and makes luxury handbags, leather goods and accessories. Murray is a fan of the managing director, Sally Macdonald, who since her appointment in 2006 has turned the struggling retailer around. The company has expanded product lines and refocused on key brands including Polo Ralph Lauren and Oroton. Murray still has the Oroton briefcase he bought in 1991 and says the brand is "classic value fashion" - quality fashion that is not too expensive.

"We are believers in Oroton and growth will be driven by new stores and product lines like lingerie and menswear," Murray says. Perennial first bought Oroton shares for $3 each in 2007. The shares are now trading at about $7. As a luxury fashion retailer, the company's sales are vulnerable to down-turns in the economy. A little over a year ago, towards the tail-end of the GFC, Oroton shares dipped to $2.80 and in the year since, Oroton's share price has increased 250 per cent.

Before it will invest, Perennial has to be convinced of the strength of a company's balance sheet. And Oroton has good financial strength with low debt, Murray says. On a share price-to-earnings multiple of 11 times, Oroton shares are not cheap but they are still reasonable value, he says.

PIPING HOT

Reece Australia, a plumbing supplier, has many of the attributes the small companies fund manager and chief investment officer of Celeste Funds Management, Frank Villante, likes to see. House prices are rising and spending on renovation is healthy, which means Reece is "fantastically positioned" to take advantage of the trend.

Reece is a conservatively managed company, owned by the same family since the 1930s, and family interests own about 70 per cent of Reece shares. Australian corporate history is littered with examples of majority owners treating minority shareholders shabbily. However Villante says the Reece family has a long history of treating such investors well.

The company has a market capitalisation of about $2.5 billion, which puts it just inside top-100 companies. The company owns about $250 million of land and buildings and Reece's management takes the view that property in the right areas can be an attractive long-term investment. Reece is No.1 in terms of revenue, number of stores and on just about every measure Villante can find. Reece has no debt on its balance sheet; it is carrying about $60 million in cash. Villante is expecting earnings to grow at more than 15 per cent a year between 2011 and 2014.

WEB WONDER

The co-founder of Smallco Investment Manager, Rob Hopkins, is excited about the prospects of the internet sector.

Hopkins particularly likes the well-established internet employment website, Seek, which he says has a "very impressive" management team led by the Bassat brothers who, together with Matthew Rockman, founded Seek in 1997. Rockman left the company in 2006.

Seek expanded into New Zealand and has investments in employment websites in China, Brazil and Malaysia. It owns more than 40 per cent in Zhaopin, one of China's three leading online employment sites.

Seek shares have had a big run. A couple of years ago the stock was $2; it is now $8 and is on a price-to-earnings multiple of 23 times, which is expensive, Hopkins says. With a market capitalisation of $2.8 billion, it is not a market minnow and is just inside the top-100 companies but still has plenty of growth potential. "We expect earnings-per-share growth of more than 40 per cent over the next year," Hopkins says. In internet commerce there is not much room for No.2 and No.3 players. "People looking for a job go to a site where they know all of the jobs are advertised," Hopkins says, adding that the internet sector has plenty of examples where the No.1 player makes very good returns, while the No.2 player is just profitable and the third-placed player loses money.

GRIM REAPER

Fortune favours the grave with InvoCare Limited, which provides funeral homes, burial services, cemeteries and crematoria around Australia and in Singapore. Invocare operates two national brands, White Lady Funerals and Simplicity, and is the only funeral services provider that has a national reach.

InvoCare listed in 2003, having been built up during the 1990s under the ownership of a US funeral services operator and private equity investors that have since sold their shares in the company.

"It's amazing, what we call the death-care industry," says Brian Eley, co-founder of Eley Griffiths Group.

"The number of deaths is rising as the population increases and ages. You have that demographic trend, which is positive for the stock."

InvoCare has been a very good performer, Eley says: The stock is not "super cheap" and it never will be because people know that it's such as good business. The fragmented nature of the market presents plenty of opportunities for the company to grow through acquisitions, he says.

As people become wealthier they tend to spend more on their relatives' funerals, Eley says, and a growing part of the business is pre-paid funerals. He also says the funeral care industry has a lot of pricing power, which means the industry can increase prices by a bit more than inflation with little resistance from customers.

InvoCare has prices that are in the mid-range, which benefits the company as the mid-range is where most of the market is, Eley says.

TICKET CLIPPER

Funds management is a wonderful business because it is so scalable. Taking a percentage of funds under management - clipping the ticket, as it is known - has been the source of riches for banks and insurances.

IOOF, a funds management and investment platform administrator, is a very well-managed company, says Steve Black, a fund manager at Pengana Capital. It has a market capitalisation of about $1.3 billion, which puts it at the larger end of the small-cap companies. It pays out about 80 per cent of its profits as dividends and is yielding about 5.5 per cent, fully franked. "It has done very well but we still see very strong upside in it," Black says. "It is a stock that has not been well understood by analysts, which is why it is starting to perform now as more analysts start to recognise that these guys are delivering really good results."

IOOF, led by managing director Chris Kelaher, is one of the big-five platform providers. These are the administration platforms used by financial planners, which provide their clients with consolidated reports on portfolio performances and taxes and enable easy switching between investments. The platform owner levies a fee that is a percentage based on the assets. IOOF has been acquiring platforms and has its own financial planning network. IOOF is considered a possible takeover target by one of the big banks or insurers.

HEALTHY PERFORMER

Blackmores, the natural health remedies company, has very high returns on equity, which analysts say is a good thing because it shows a company is making good use of shareholder funds.

Whether it's arthritis, joint, bone and muscle pain or "brain health", Blackmores, which was started in 1938 by Maurice Blackmore, has a pill for everything.

Greg Canavan, a sharemarket analyst and editor of Sound Money. Sound Investments, a weekly report on the sharemarket, says Blackmores is a "nice little smaller cap" that is tapping into a growing market for natural remedies. It has a strong business in Australia and has established a presence in Thailand and Malaysia. The company distributes its products mainly through pharmacies and supermarkets.

Canavan says $23 a share is a little expensive and would prefer to buy at $20. "In 10 years' time, I think Blackmores will be a lot bigger company than it is now," he says.

http://www.smh.com.au/news/business/money/investment/big-returns-come-from-small-caps/2010/05/11/1273343328362.html?page=fullpage#contentSwap1

When things go wrong: The smart organisation

Consultants and researchers David and Jim Matheson identify research and development (R&D) as a key area of decision making for business success.  R&D decisions affect any areas where innovation (rather than improvement) is required.  This principally means creating and marketing new products and services, but also includes designing the new processes and systems that will make them possible.  'Processes' could mean manufacturing processes, but it could also refer to strategically critical aspects of the business, such as its decision making processes.

Essentially, R&D is about ensuring that the business moves forward.  As we have seen, potential strategic risk downsides include

• failing to innovate,
• failing to achieve renewal, or
• putting processes in place that fail to allow for the right kind of development.

The Mathesons suggest three levels of 'smart' R&D:

Technology strategy:

• How will you support existing products, generate new ones and develop radically new ones?
• Will technology be developed or supplied from inside or outside the business?
• What skills are required?

Portfolio strategy:

• Which R&D projects will be funded?
• Which will not?
• How will resources be allocated so that they provide the best R&D value?
• How will you balance short-term business needs with long-term renewal?

Project strategy:

• How will you ensure that each individual project delivers maximum value?
• How could commercial concerns (as well as technical, budget and timescale issues) be brought in?

Nine principles of smart R&D

They also propose nine principles of smart R&D, or the attributes that businesses need in order to be capable of making strategic decisions:

• Value creation culture:  the business has a purpose that everyone understands; this purpose is the test of whether strategies and actions will deliver value for the business and its customers.
• Creating alternatives:  for each decision, there must be a good set of competing alternatives; these must be created if they don't exist or aren't apparent, and carefully evaluated
• Continual learning:  change is certain, and everyone must learn from new situations and information rather than feeling threatened by it.
• Embracing uncertainty:  since there are no facts about the future, everyone must learn to live with and recognize uncertainty, measure and evaluate it, and understand what they are doing.
• Outside-in strategic perspective:  rather than thinking about where the business is and then where it should be going (inside-out), consider the big picture first and work back to the business (outside-in)
• Systems thinking:  use tools and techniques (such as the decision tree) to simplify the complexities involved in strategic decisions as far as possible and enable insights (but not so far that objectivity is lost)
• Open information flow:  any type of information may be important, so information needs to flow, unrestricted, to all parts fo the business, the habit of hoarding information as a source of power must be driven out.
• Alignment and empowerment:  rather than micro-managing every action through 'command and control' systems, aim to involve people in decision making through participation, while building alignment through common understanding of goals
• Disciplined decision making:  build processes that recognise the need for strategic decisions to be made before it is too late; then apply systematic, disciplined processes to making those decisions.

The Smart Organisation: by David and Jim Matheson

When things go wrong: Some themes of a no-blame culture

Some themes of a no-blame culture include:

• discussion of risk (and responsibilities for them) before problems arise, rather than afterwards
• emphasising collective responsibility and shared business goals
• aiming for insights and understanding about decisions, arrived at through a process of co-operation and collaboration
• acceptance of a joint commitment for taking specific actions, with no-one putting their 'head on the block' (regardless of any individual responsibilities that are assigned)
• using tools (such as the decision tree) to generate and confirm a joint commitment to decisions
• taking risks in an informed way, with full knowledge of the potential consequences
• when problems arise from particualr decisions, remembering and re-stating the reasoning that went into those decisions
• aiming to draw collective learning rather than individual advantage from mistakes, problems and negative situations
• using passive language to defuse tensions and sidestep the assignation of blame (e.g. 'there is a problem' rather than 'so-and-so has made a mistake')
• understanding that creativity, innovation and new directions imply some freedom to make mistakes
• thinking of ways to reward people on the basis of how well they take decisions, not the results of those decisions.

Responding to risks: Eliminating risks

Clearly, if a risk has potentially negative consequences, then eliminating it is the best alternative. Given the choice, we would like to live without the potential for downsides to occur.

In business terms, this is clearly the most desirable action to take - it reduces management effort both now and in the future if you don't have to worry about a particular risk any more.  However, this is seldom possible - few risks can be eliminated completely, and some risk is going to be present in nearly every business situation.,

The key to considering elimination is the risk profile.  As we've seen, any risk that involves a fatal downside is a strong candidate for elimination, since the occurrence of the downside, however low its probability, is totally unacceptable. 

We would not choose to play a dice game that might bankrupt us.  In business terms this might equate to changing manufacturing processes that endangered people's lives in some wqay.  However unlikely the outcome, it would not be acceptable simply to tolerate the risk. 

Eliminating a risk may involve doing things in completely new ways.  If significant business change is involved in getting rid of a risk, you may need to consider what new risks will be created as a result.

Responding to risks

Responding to risks - the actions you can take once you've identified a risk and understood its probability and impact.

There are usually risks that cannot be avoided in business, no matter what alternative we choose.  Our decisions therefore focus on how we will respond to them, rather than trying to avoid them.   Responses to risk will vary from business to business and from risk to risk, but they tend to fall into one of these categories:

• eliminating
• tolerating
• minimising
• diversifying
• concentrating
• hedging
• transferring
• insuring

Deciding which of these responses is appropriate in any given situation requires careful analysis of the risk in terms of probability, impact and potential outcomes (expected values).

Getting it right

Whatever approach you choose to the risks you face, there are central themes to risk management that have to be in place for it to be successful.

Effective decision making and risk management are based on understanding, information and consistency.  It is vital that everyone involved is working from a shared idea of the significance of the risks facing the business, the probability of them occurring and the actions that they need to take in order to minimise downsides (or maximise upsides).

Here are some questions to ask in key areas to assess your risk management capabilities:

understanding operational risk:

• are the risks that can arise in key business process understood?
• are the implications of choosing or creating particular new processes understood?
• are the impacts of operational risk understood, in terms of their immediate impact and also any potential impacts at higher levels?

understanding strategic risk:

• are decision makers aware of the strategic risks facing the business?
• are the implications of 'doing nothing' or continuing along the present course understood?
• has 'business as usual' been examined in the same way as a 'risky' new direction would be?
• have the risks implied simply by entering or remaining in a particular market been examined?

understanding probability:

• have probabilities been quantified in a consistent way, that allows for comparison?
• what evidence is there to support estimates of probability?
• where there is uncertainty, has this been understood and acknowledged by decision makers?
• is there shared understanding of the subjectivity involved in probability calculations?

understanding impact:

• have impacts been quantified wherever possible, to allow for comparison?
• is it clear where risks might impact on more than one area of the business?
• is there the potential for risks to have interdependencies, making the occurrence of two or more risks together more significant?
• are the different levels of impact understood (operations, strategy, financial, cultural)?

information:

• documenting:  how will risks, responses and results be documented?  what proceducres will be used for recording the actions taken to manage risks and their results?
• sharing:  how will information on risks and the success (or otherwise) of particular response be disseminated throughout the business, to avoid duplication of effort?
• communicating:  who owns key information? who does it need to reach in order to support decisions on risk? what are the best media, formats and techniques for communicating?

clear roles and responsibilities:

• whose responsibility is each risk? who 'owns' it by default?
• who has enough authority and/or information to take a decision on how risks will be managed?
• who will take action to manage the risk?  who will become its new 'owner'?

reporting and monitoring:

• who needs to know what, and when?
• what is the best medium or channel to provide information on risks, such that those who need to take decisions have the information they need in a format they will find conducive?

consistency of approach:

• if similar risks occur in different parts of the business, is the response the same?
• could risks easily be aggregated across the business if this kind of concentration brought benefits?

consistency of analysis:

• where possible, are risks assessed using standard, objective criteria, or at least those that are agreed by all within the business?

consistency of tools and techniques:

• where decision-making tools are used, are they used in a consistent way across departments and teams?
• is there a genuine shared perspective on risks that affect different groups?

consistency of terminology:

• are risks described in terms that allow meaningful comparison and evaluation across the business?
• are common terms used with the same sense throught the business?
• are there any aspects that need to be quantified, or made less subjective, to allow for more focused discussion between those involved?

Understanding Risk and Decision Making

Key ideas:

Probability is the likelihood of an outcome.  Probabilities are expressed numerically, but are often subjective.

Impact is the effect that a particular outcome will have.

Decision trees help us get a grip on our alternatives.

The concept of expected value helps us compare alternatives based on probability and impact.

Risk profies take us beyond expected value to consider unacceptable or fatal downsides.

Getting more information to reduce subjectivity in decision making takes time and costs money


Ref:
Risk:  How to make decisions in an uncertain world
Editor:  Zeger Degraeve

It's important to remember that people are the real decision makers.

Tools and techniques for decision making:  Means, not ends

However you go about making decisions, it's important to remember that people are the real decision makers.  Tools and techniques such as decision tress help to generate insight into a problem, stimulate communication and build a shared understanding of it, but they cannot take the decision for you.  In the last analysis, business decisions are about people - in every sense. 

Our favoured courses of action often flow more from our own values than from what is objectively 'right' in a situation.  Our estimates of probability are similarly subjective.  And in assessing impact, we are likely to be highly subjective too, perhaps concentrating on those areas of downside or upside that affect us most directly. 
The danger of using models such as those discussed in the previous postings is that they can give the illusion of objectivity.  Writing things down and analysing them is important, but the main benefit of doing so is to bring clarity to a decision, rather than precision.

We have to remember that tools and techniques are only as good as the information we put into them.  They are dependent on the extent and accuracy of information available at the time the decision is taken.  No matter how we present or analyse the information we have, we cannot add to it or make it any more reliable than it already is.  All we can do is aim for a shared sense of what we know and what we don't know, to build an informed consensus for particular courses of action.

Only people can build a bridge from the information that is available to a decision that can be taken forward.


Tools for risk assessement: and decisions making:
Probability
Subjective probabilities
Impact: hard and soft
Decision trees
Expected value
Fatal downsides
Life decisions
A business decision
Break-even analysis
Risk profiles
Probability/Impact matrix

The Information Trade-Off

Obtaining more information can help improve the quality of decisions by providing more detail about impacts and reducing subjectivity over probabilities.  It also helps to build up awareness of other alternatives that could be taken.  In general, it is a given that seeking more information will be beneficial to decision makers, having the general effect of reducing the level of uncertainty involved in a decision, and making it more likely that the outcomes of particular decisions will provide opportunities for learning.

However, there is a trade-off to be made.  Decisions usually have to be taken within a particular timeframe, and getting more information takes time.  It can also cost moneuy.

Both of these have implications for the level of extra effort that goes into facilitating more informed decision making.

The decision makers can reduce subjectivity by researching what is going on in various areas.  As they learn more and more, the probability that they are assessing becomes less and less subjective.  In the end (in theory at least), they can arrive at an objective probability.  However, there are some important issues facing them:

• getting information takes time:  the report must be submitted at a given deadline, even if they havent't pinned down the probability of the event occuring.
• gettting information costs money:  doing research will use up the resources of the business; you have to decide how much investment in information to support decision making is appropriate; this means assessing how sure you can be of the information you do have, and how much more certainty can be achieved for a reasonable cost
• situations change over time:  as you collect information to help you make a decision, the context or nature of the decision may be changing; there may be a limit to the accuracy you can achieve.

Inevitably, decisions have to be made with limited information.  Before you make a decision, you have to decide whether the information at your disposal is sufficient to make the decision, or whether you are going to make an investment (in terms of time or money, or both) in getting more information - and how this might affect the nature of the decision itself.  (You also need to guard against certain psychological traps.)

Management actions feed into decisions and affect their outcomes, whether this is in the form of considering decisions for longer, obtaining more information or just bringing different personal perspectives and experience to bear on the decision.  There will always be uncertainty involved, but by putting time and effort into decision making, its negative effects can be minimised.  In many decision situations, there is a 'third way' - the choice not to follow one of the branches on the tree, but to invest more effort in refining the picture of the decision before it is taken.

This poses interesting questions:

• how much is your time worth?
• what potential downside of this decision would you be prepared to accept if you could spend the time thinking about another issue instead?
• what potential upside do you regard as being a good 'purchase' to make with your time?

Up to this stage, you have acquired the knowledge you need to assess whether simple games of chance are worth playing.  Business decisions are much more complex and subltle than this, and you will never reach a point where you 'know everything', as in the dice game.  The issue is how much time to put into making a decision, and whether to put additional resource in obtaining more information before making the decision. 

In the end, this is likely to be a judgement call.  While time can be quantified and given a nominal cost,k the benefit to be obtained from it is likely to be very difficult to quantify.  In fact, until you actually invest the time, you cannot know how beneficial the information you gain will be.  We have to deal with this contradiction every time we take a business decision.

Probability/impact matrix to compare importance and urgency of one risk relative to another.

Probability/impact matrix


Having gauged the probability and impact of a number of risks, you can use the probability/impact matrix to compare them by assessing their importance or urgency relative to one another.  This diagram shows some risks that many of us face in our working lives, by way of illustration.  http://spreadsheets.google.com/pub?key=t5huetUWENmggchcXyeL9MQ&output=html

As with the other tools in this section, the matrix functions as a starting point for decision making.  It's a good way to display or share information on a number of risks facing the business, perhaps to form the basis for a meeting.  It might be possible to compare the different risks to each other, perhaps in order to highlight situations where disproportionate effort is being put into managing a particualr risk that is unlikely to occur, while another risk that is far more likely is being neglected.  Where risks are only expressed in verbal terms, there is a tendency to concentrate on those that sound worst rather than those that really do present the most likely or severe downside to the business.  The matrix can be used to help prioritise actions or focus efforts where they will have the most beneficial effect. 

As with the other tools, it is important to remember that the probability/impact matrix is only useful in proportion to the accuracy of your own assessments of probability and impact.  You only get out of it what you put in.


Tools for risk assessement:
Probability
Subjective probabilities
Impact: hard and soft
Decision trees
Expected value
Fatal downsides
Life decisions
A business decision
Break-even analysis
Risk profiles
Probability/Impact matrix

Making Life Decisions: appraising cost, risk and expected value, with limited information about the future

The dice games are simple parallels with the type of decision we take every day in our lives.  Investments offer the most direct comparison.  With a limited sum to invest, you have to evaluate the probability of making a profit, the expected value and the risk involved for each investment alternative.  And, as with the dice, you hve the alternative not to play, which is 100% safe, but will not make you any money.

We make other kinds of decisions too, where the investment is not always financial:

• selecting a savings account (which will make you richest in the long term?)
• buying a house ( will prices fall or rise?)
• deciding which people to socialise with (who will turn out to be better company?)
• renting a film to watch (which will you enjoy the most?)

However vaguely or subconsciously, we are appraising cost, risk and expected value, with limited information about the future, all the time - even if the only cost is our leisure time, the only expected value a fleeting enjoyment, and the only potential loss a mild feeling of irritation.

Decision making: Risk, Probability, Impact, Subjectivity, Decision trees and Expected Value

You are invited to play dice games version A and version B.  In this game, you bet $1 on the throw of a dice.  Throwing a six wins a prize; throwing any other number means you lose your $1.

In version A of this game, a bet costs $1, but you can win $10.  Faced with this game, you have two alternatives - to play or not to play.  Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved.  They are depicted on the decision tree here to help your decision.

http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html

Because the situation is simple, the probabilities of the various possible outcomes can be objectively known.  There is no subjectivity over the probabilities.  The impacts, too, are fixed and clearly set out by the rules of the games (the prizes and the cost of playing).  If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.6%) and the probability of losing 5 in 6 (0.834 or 83.4%).  If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit. 

In version B of the dice game, the stake and odds remain the same, but you can only win $5.  The alternative not to play remains.  In each case, we have to decide whether to play or not.  There is the alternative to walk away, but this offers no benefit.  Is it better to play or not to play?  Version A seems better than version B, but how much better?  Is B worth playing as well, despite the lower prize?  How can we make a decision about where to make an investment?  Most people can offer answers to these questions based on an intuitive, subjective grasp of probability and impact.  We make decisions all the time on this basis.  But for business decisions, we need to move beyond subjectivity whenever we can.  We need to quantify things wherever possible.


The concept of expected value (EV)

To compare different alternatives against each other in a quantitative way in order to determine whether a risk is worth taking, we can use the concept of expected value (EV).  The expected value of a risk is obtained by multiplying probability by impact for each possible outcome, and adding all the results together.  If a particular impact is negative, the value for that outcome is also negative. 

The table below shows the expected value calculation for playing version A of the dice game.  The expected value is 0.66.  Because this is a positive value, it indicates that the game is worth playing.

http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html

In version B, because of the reduced prize (a variation in impact), the picture is different.  This is shown in the table also.  Because of the reduced prize, the expected value of version B is negative.  If you play it repeatedly, you will steadily lose money over time.

In this case, the alternative not to play, although it brings no benefit, has a higher expected value (zero) than playing (-0.17).  You are better off keeping your $1.

Expected value helps us ascertain whether a particular alternative is worth taking, based on our knowledge of probabilities and impacts.  But, unless the outcome of a decision is certain, expected value can only ever be used as a guide.

In version A, for example, the expected value of not playing is zero, and this is certain.  But if you decide to play, the only possible outcomes are winning $10 or losing your $1 - in other words, values of either +9 or -1.  An impact of +0.66 (the expected value) is impossible. 
And, while a positive expected value of 0.66 makes the game nominally 'worth playing', the outcome of playing is not certain.  You might still lose.

Conversely, the negative expected value of version B, while it indicates you should not play, doesn't necessarily mean you won't win if you do.  The possible outcomes are value of +$4 or - $1.  You might play once and win.  You might even play three times in a row and win all three times, although the probabhility of this is 0.0046 (or less than 1%).  Despite the negative expected value, a positive outcome remains possible.

The actual probability of realising the expected value as a result of a single decision is zero.  However, if you played version A 100 times, you would find the average value across those many decisions tending towards 0.66 - you would have around $166 in your pocket.  This would prove the accuracy of your initial calculation of expected value.

Calcuating or estimating expected value wrongly - or not wanting to calculate it at all - has serious consequences for decision making.  Consider the National Lottery.  Although the prize (potential upside) is enormous, the tiny probability of winning gives the game a negative expected value.  But the lure of the prize outweighs the rational considerations of probability, making people mentally distort probabilities (if they consciously think in those terms at all) and decide to take an illogical risk.  This is the essence of the appeal of gambling, and points the way towards the psychology of risk.

So, despite the name, we can never expect the expected value.  Some may ask, in that case, why use the concept at all?  The answer is to help in making decisions, rather than in predicting the future.  As we've seen, there are no facts about the future, only probabilities.  In this case, probabilities are known but a reliable prediction of the outcome remains impossible - the dice will decide!

We have already seen how, in most business decisions, the picture is clouded by subjectivity.  Not only is it impossible to predict the future, there will also be uncertainty over impacts and probabilities.

Expected value is calculated from probability and impact information or estimates.  Whatever subjectivity or imprecision is inherent in our probability and impact figures will feed through into expected values.  There are only as good as the information from which they are calculated.  Therefore, just as with probabilities, it is important to remember, and explain to others, when subjectivity is a factor.

Using Decision trees to see how probability and impact relate to each other

We can use the simple example of a dice game.  In this game, you bet $1 on the throw of a dice.  Throwing a six wins a prize; throwing any other number means you lose your $1.

In version A of this game:

A bet costs $1, but you can win $10

Faced with this game, you have two alternatives - to play or not to play.

Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved. 

Because the situation is simple, the probabilities of the various possible outcomes can be objectively known.  There is no subjectivity over the probabilities.  The impacts, too, are fixed and clearly set out by the rules of the game (the prizes and the cost of playing). 

If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.66%) and the probability of losing 5 in 6 (0.834 or 83.4%). 

If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit.


Decision tree for dice game version A:

Decision:  Play dice game with chance of winning $10?  Yes or No

NO
Decision ---->  Risky Event  ---> Possible outcomes ---->   Probability ----->  Impact

No   ----->  Nil ------>  Avoid risk, keep money in pocket ----> 1.0 (certain) ----->  Neurtral: spend ntohing, win nothing


YES
Decision ----> Risky Event ---> Possible outcomes ----> Probability -----> Impact


Yes ----->  Stake $1 on throw of dice ----> Number 6  ----> 0.166 (1 in 6) ----> Gain Spend $1 Win $10
or
Yes -----> Stake $1 on throw of dice -----> Number 1, 2, 3, 4, or 5  -----> 0.834 (5 in 6) ---->  Loss Spend $1 Win nothing


http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html

Understanding IMPACT of a decision

Probability is the likelihood that a particular outcome will occur.

Impact is the effect that a particular outcome will have if it does occur.

Impacts can be positive or negative.  We call positive impacts 'upsides' and negaive impacts 'downsides'.  A single decision may involve the potential for both upsides and downsides.

Considering impact helps us

• weigh up different possible outcomes against each other,
• to assess how bad they will be for the business (if they are downsides), or
• how much benefit they will realise (if they are upsides).

We can think of impacts as 'hard' and 'soft'. 

'Hard' impacts affect areas of the business such as:

• financial:  losing or making money; changing profit margins; changes in share price
• performance:  changes in turnover; changes in business volumes; problems with quality, or improvements; losing or gaining customers; growing the business or seeing it decline
• business continuity:  whether business operations can continue when problems arise; whether new demands, or peaks in demand, can be met; the availability of business-critical systems
• individuals and groups:  physical safety; financial status and reward; working conditions; workload; level of responsibility; status and authority; prospect for the future.

'Soft' impacts affect areas of the business including:

• reputation and brand equity:  how the business, its products or services and its actions in society are perceived in the wider world
• morale and motivation:  how people feel about working for the business
• faith in management:  whether people believe in mangement's abilities and vision for the future
• sense of community:  whether people identify with the business and its aims and fell part of the business's culture
• social standing:  people's sense of value or relevance to the business; their sense of authority or power.

Use Binaries to Choose Among Options

The Forks in the Road to Investing Success
Use Binaries to Choose Among Options

by Angele McQuade



I’m sure you’ve heard the chestnut that the hardest choice isn’t the one between right and wrong but the one between two rights. When you’re faced with a decision between two potentially profitable investment strategies, how do you find the clarity that will leave you content with your selection? Although I can’t help you work through all your weighty life choices, I can channel a little investing guidance from Clark Winter, author of The Either/Or Investor: How to Succeed in Global Investing, One Decision at a Time.



As director of portfolio strategy and managing director of Goldman Sachs, Winter has surely faced a fair number of challenging choices. He believes binaries simplify the decision-making process: If you can whittle your options to two, you can begin to gather the necessary information and assess that data. “I realized that smart people approach problems as dichotomies — either/or decisions,” he explains in the preface. “If this, then not that. If yes, if no, then what?”

Great investing is really about understanding how to evaluate facts, Winter continues — “how to make reasonable suppositions about the things you don’t know, how to account for the uncertainties that impede decision-making, and finally how to do all that rapidly enough so that you can gain an advantage over competitors and thus the market.” At 27 pages the introduction might be longer than many book chapters, but it’s more illuminating than many, too. I found it very compelling reading and one of my favorite parts of the book.

Winter didn’t want to write yet another tome about investing but instead one about sound decision-making, with investing as the object, not the subject. Winter’s purpose is to “link the two skill sets, investing and decision-making.” Though he assesses markets using hundreds of binaries, he focuses here on the 21 he says can explain just about all investment thinking.

Most chapters in The Either/Or Investor are based on these dichotomies, with their titles identifying the decision-making lesson you’ll discover: “Here Versus There,” “The Developed World Versus the Developing World,” “Preservation Versus Growth,” “Fad Versus Trend,” “Conventional Wisdom Versus Anomalies” — you get the idea.

“In investing, the first and most important binary is fear or greed,” Winter says, and sure enough you can learn why by reading Chapter 7, called — of course — “Fear Versus Greed.” You might read his chapters hoping for universal right or wrong answers, but Winter wants you to learn to ask what the available information tells you to do. And although he can’t answer that question, he does give a firm enough push in the direction of information gathering and analysis to help you build some momentum in your process.

The Either/Or Investor disputes the popular belief that all the average inves-tor needs to achieve the returns of a spectacularly successful investor is to follow that master’s strategy. Winter even takes on books that model famous investors’ methods (ones you’ve probably read about right here, in fact). His beef isn’t so much with these experts but with what he considers the misapplication of perfect math (assuming, for example, the reader will achieve an average annual return of 11 percent) and readers’ inability to accept the idea that they won’t ever match the very best money managers’ returns. Winter is determined to promote this daring, provocative position even though it’s a hard reality for most investors — not to mention the publishers of all those investment books — to acknowledge.

The subprime mortgage crisis hit full force after Winter submitted The Either/Or Investor to Random House but before the book was published. He seized the opportunity to update his manuscript and address more directly the problems of easy credit. This revision makes the book feel even more relevant, especially for investors concerned about today’s economic uncertainties.

Can you endure a few final binaries? Plausible vs. forgettable: My answer? Highly plausible — quite convincing, too. Read it vs. skip it: Read it, definitely.

Here’s one more piece of information, if it will help your assessment: The Either/Or Investor is high on my list of the most thought-provoking, assumption-challenging, instructive books of 2008. And that’s one determination I didn’t have a bit of trouble making.

Have a question about this month’s book? Want to share your own recent financial favorites? Write to Angele at angemc
quade@betterinvesting.net.



Angele McQuade is the author of two books, including Investment Clubs for Dummies. You can find her online at angelemcquade.com.

http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/1008publicbv.htm

The Right Direction Starts With the Right Decisions

The Right Direction Starts With the Right Decisions

By Michelle Singletary
Sunday, June 28, 2009



Over the years, I've found that people end up in financial trouble not only because they don't have enough money. It's also because of poor decision-making.

The following is an edited transcript of an online chat with people who needed to be pointed in the right financial direction.


QI am separated, with two young sons, and my husband lost his job about five months ago. I am solely supporting myself and my children and am finding it difficult to cover all of our expenses. I have stopped dining out, I bring my lunch, don't have cable, etc., but my income just doesn't cover the monthly bills. I think I have to cut back my Thrift Savings Plan contribution to 5 percent or possibly less. I currently contribute 10 percent. There really isn't anything more I can do to cut expenses. Do you agree about reducing my retirement contribution?

AI do agree. I would cut out your contributions completely for now.

Although I'm a huge advocate for saving for retirement, you need the money right now so you don't go down financially. Even when there is an employer match, I would urge you to cut back on investing for retirement until you can figure out how to make your income match your expenses. For example, can you move to cut housing costs? Can you get a roommate? I know people don't like to do that with kids, but at least explore the option, perhaps with a close friend or relative.

Also, have you explored everything to keep your marriage together? Even without a job, having your husband help at this point could allow one or both of you to get a part-time job. And he wouldn't be paying for the cost of his separate living expenses. Just asking.

We're in a position to refinance our home at a lower interest rate, and we need a new roof. You usually advise against treating your equity like an ATM, but what about needed repairs? It's very unlikely we can set aside $7,000 to $10,000 in cash without wiping out our emergency funds. My husband and I are journalists, so our jobs are on the line these days with the awful economy. Any suggestions?


Here's how I would approach this decision. Find out how much it costs to fix the roof and whether not fixing it would create major damage to your home. In other words, is this something that can wait or be fixed more cheaply for now? If you are unsure about your job situation, I wouldn't deplete your savings. So in this case, if you absolutely need the roof done, pulling that money -- and that money alone -- out of the house equity during the refinance is acceptable. Try your best, though, to find another way to pay cash to fix the roof.

I have a friend who lives in the District who really wants to buy a house in Maryland to move her children to a better school district. She has a good job making decent money, at least $45,000 to $50,000 a year. She has credit scores between 500 and 700. She does not have money for a down payment. She has some credit card and student loan debt. I have suggested that my friend rent in Maryland until she is ready to buy. What advice would you give her?


You are a good, good friend giving great advice. Your friend is not ready to buy a home and would probably have trouble doing so anyway with the tougher lending standards. At any rate, let's look at her financial profile:


-- She has credit scores in the 500 to 700 range. That's a huge range. In the case of a mortgage, the lender will take your middle credit score. Still, having a score in the 500 range is not good.


-- She has credit card debt. Not good.


-- She has student loan debt. Not good.


-- Her income is decent, but it will be hard finding a home in Maryland in a decent neighborhood with that income.

So you are right. She should rent and build up her emergency savings, pay off the credit card and student loan debt and get her low credit scores up.

Why did you say student loans are not good? As long as you're paying them back, what's the deal?


The deal is, it's debt.

Debt = bondage.


* * *

I added that last question from the chat to illustrate one of the reasons people make bad decisions. Too many people blindly follow conventional wisdom -- that a student loan is good debt -- when that wisdom is and has always been wrong.

As I pointed out in the chat, lose a job, get sick, etc., and no loan looks good at that point.

-- By mail: Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.