Flow: The Psychology of Optimal Experience

Posted on November 28, 2007
Filed Under Business & Entrepreneurship, Ideas, Leadership, Psychology | Leave a Comment

Last year I read the book Flow: The Psychology of Optimal Experience by Mihaly Csikszentmihalyi. More than a year later I keep thinking about this idea. Here is an excerpt that explains this concept better than I could:

“Why are these things fun? Strangely enough, when we try to answer that question, it turns out that contrary to what one would have expected, the enormous variety of enjoyable activities share some common characteristics. If a tennis player is asked how it feels when a game is going well, she will describe a state of mind that is very similar to the description a chess player will give of a good tournament. So will be a description of how it feels to be absorbed in painting, or playing a difficulat piece of music. Watching a good play or reading a stimulating book also seems to produce the same mental state. I called it “flow,” because this was a metaphor several respondents gave for how it felt when their experience was most enjoyable–it was like being carried away by a current, everything moving smoothly without effort.

Contrary to expectation, “flow” usually happens not during relaxing moments of leisure and entertainment, but rather when we are actively involved in a difficult enterprise, in a task that stretches our mental and physical abilities. Any activity can do it. Working on a challenging job, riding the crest of a tremendous wave, and teaching one’s child the letters of the alphabet are the kinds of experiences that focus our whole being in a harmonious rush of energy, and lift us out of the anxieties and boredom that characterize so much of everyday life.

It turns out that when challenges are high and personal skills are used to the utmost, we experience this rare state of consciousness. The first symptom of flow is a narrowing of attention on a clearly defined goal. We feel involved, concentrated, absorbed. We know what must be done, and we get immediate feedback as to how well we are doing. The tennis player knows after each shot whether the ball actually went where she wanted it to go; the pianist knows after each stroke of the keyboard whether the notes sound like they should. Even a usually boring job, once the challenges are brought into balance with the person’s skills and the goals are clarified, can begin to be exciting and involving.

The depth of concentration required by the fine balance of challenges and skills precludes worrying about temporarily irrelevant issues. We forget ourselves and become lost in the activity. If the rock-climber were to worry about his job or his love life as he is hanging by his fingertips over the void, he would soon fall. The musician would hit a wrong note, the chess player would lose the game.

The well-matched use of skills provides a sense of control over our actions, yet because we are too busy to think of ourselves, it does not matter whether we are in control or not, whether we are winning or losing. Often we feel a sense of transcendence, as if the boundaries of the self had been expanded. The sailor feels at one with the wind, the boat, and the sea; the singer feels a mysterious sense of universal harmony. In those moments the awareness of time disappears, and hours seem to flash by without our noticing.

This state of consciousness… comes as close as anything can to what we call happiness….”

This book isn’t a step by step self help book. I hate those. It is more like a good, readable, academic study that is also applicable. Nonetheless, there are 8 components of Flow.

The 8 components of Flow

  1. Confronting tasks that we have a chance of completing.
  2. Concentration.
  3. Concentration is possible because the task has clear goals.
  4. Task provides immediate feedback.
  5. A deep, effortless involvement removes from awareness the worries and frustrations of everyday life.
  6. Enjoyable experiences allow one to exercise a sense of control over one’s actions.
  7. Concern for self disappears, yet paradoxically the sense of self emerges stronger after the flow experience is over.
  8. Sense of time is altered - hours pass by in minutes.

Think about the above components and how they relate to the things you enjoy. When I was on the rowing team in college I often wondered why I enjoyed working out for 3 hours each day and pushing my body to its limits. I felt like crap most of the time because my body was ripped to shreds and I had almost no time for anything else I deemed ‘fun.’ But I loved it and it was because we were setting big goals to win races with achievable small goals along the way - and it was easy to measure the results. I used to get lost in the sport.

Could this be why startups are so much fun and big companies suck out your soul?

This idea is being applied to a number of different fields and it is becoming especially popular in video games. Here is an online game designed around the idea of Flow, and even called flOw. It has become so popular that Sony Playstation has picked it up.

20 Minutes: What Every City (and everyone online) Needs

Posted on November 28, 2007
Filed Under Business & Entrepreneurship, Ideas | Leave a Comment

Network news demands an hour of your time to get up to speed on the latest happenings, and the local paper takes at a minimum half of that.  I don’t usually have that much time, which is exactly why I like the idea of 20 minutes so much.  Here is what the company is all about:

“20 minutes is a free, high quality newspaper concept targeting morning commuters in major urban areas. The name “20 minutes” refers to the average time that European commuters spend in public transport every working day.

Published every weekday, 20 minutes fills an empty time-slot in the media consumption habits of active urban people. The newspaper gives its readers an update and overview of the most important news and is a useful guide to urban life.

Initially launched in Zurich Switzerland in December 1999, 20 minutes today publishes 27 editions in 3 countries. With a total circulation of more than 2,3 million, 20 minutes reaches more than 5,5 million people five days a week. Our readers are mainly young urban citizens (15-40 years old) that to a lesser extent consume traditional newspapers.”

I can see this same model working in just about any major city, especially those with frequently used public transport systems. 

Although, perhaps an even better use of this model, with a much larger reach, is to create the web version of 20 minutes.  Condensing all of the world’s information into digestible chunks that take an average or 20 minutes to read isn’t easy, but that is exactly why it would be profitable.   This reminds me of the publication The Week, which summarizes all of the major world news into a few paragraphs, and then adds in what the major media outlets and op-eds are saying.  Although, The Week takes a bit longer than 20 minutes to read. 

Profile of Sam Zell in the New Yorker

Posted on November 27, 2007
Filed Under Business & Entrepreneurship, Leadership | Leave a Comment

There is a great article of Sam Zell in the New Yorker.  Zell, who built and later sold the giant office REIT Equity Office Properties Trust shares many insights into his life.  One of my favorites is his humor:

“Sam was the rainmaker, and Bob was the one that took care of all the messes Sam made,’ Stuart Sloan, an investor and a friend of Zell’s, said.  Lurie was as funny as Zell, and when they were together their interactions often took the form of a comic routine. They created myriad partnerships and delighted in giving them names like B/S Investments and FU Associates. Their height—Lurie was short, as is Zell—was a subject of ongoing mock competition. They drafted a partnership agreement, which said that, in the event of a dispute, “the taller one” would decide. “

Another is his directness:

“That day, Sheikh Sultan bin Tahnoon al-Nahyan, who is the chairman of the Abu Dhabi Tourism Authority, had invited Zell to see a model of a planned development of an island being created just off the coast, in the Persian Gulf. The neighboring emirate of Dubai has become famous for its devotion to the superlative: it has one of the world’s largest indoor ski slopes, and is constructing the world’s tallest building and largest shopping mall. Abu Dhabi, with far greater oil reserves and a more conservative, religious population, has proceeded more deliberately. Sheikh Tahnoon was eager to hear what Zell thought of his development plans. Accompanied by a small entourage, the two men drove to a hotel and entered a conference room dominated by a model so vast that it nearly filled the space. Sheikh Tahnoon led Zell around the structure, pointing to office towers, malls, hotels, schools, hospitals, apartment buildings, and houses. The towers would be built first, he explained. Zell listened intently, scrutinizing the model. Finally, he spoke. “Pardon me, Your Highness, but I have a reputation for being direct,” he said. “This makes no sense!”

Zell told the Sheikh that his planners had it all wrong. They should start by building the kind of housing, schools, and shopping centers that would make people want to live on the island. Office towers should be built only after it had been populated. Zell warned the Sheikh not to be influenced by the grand ambitions of his architects—not to build a skyline in advance of demand. Sheikh Tahnoon said that he thought Zell might be right. At Zell’s direction, a construction manager began to move pieces of the model around, and an assistant to the Sheikh took notes. “

 Check out the New Yorker for the full article or head over to Ben Casnocha’s blog for an interesting discussion on Zell’s and business ethics (which include expletives).

Kiva.org Microloans

Posted on November 27, 2007
Filed Under Business & Entrepreneurship, Finance & Economics, Global Issues, Ideas | Leave a Comment

A couple of months ago I made two $25 loans on kiva.org.  This week I received notice that both of the entrepreneurs have repaid 10% of the total loan commitment.

I am excited about this for a number of reasons.  First, I have become convinced that micro credit is the best way to bring the third world out of extreme poverty.  In theory it works like any other bond investment in that you lend money and are returned payments of principal and interest.  However, in the case of micro loans, there is a third component: Social return.  Kiva.org doesn’t yet pay interest to its lenders, but there is still a significant social return that is provided.

Second, I love the idea of taking my charity dollars each month and putting it towards funding third-word entrepreneurs.  What I consider a small loan can literally change someone’s life, and I’m not just giving it away- there is a very high probability that I will get my money back.  This means I am able to recycle the money back to other borrowers, and reap even more benefit.

Third, I get interaction with the borrowers, albeit limited.  I am provided with profiles as well as periodic updates via a borrower journal.  Here are the profiles of my borrowers:

“Clarence Vincent Obuya is 24 years old. He lives at his parents’ residence in a sprawling slum neighborhood in the town of Mombasa. Despite being under his parents’ care, he is determined to make it on his own and be independent. He supplements his parents’ income using earnings from his water vending service that he runs within the slum residence. He began this business three years ago after being unable to find formal employment after he completed school. His activities include delivering the water in cans to the customers’ premises. He uses a wheel-cart to ferry the water cans from door to door. This service is quite essential in this slum area since the majorities of the residents do not have tap water at their premises, and have to purchase water from vendors. He saves some of his earnings and plans to enroll in college in future. He has a large number of clients who place orders for water delivery on a daily basis. His main problem in this business is that he has to hire the wheel-cart and this consumes his profit. He is therefore requesting a loan of $350 to assist him in purchasing his own wheel cart and more water cans. ”

“Margaret Owino Okello is a 28 year-old married woman. Her husband works as a casual laborer at the docks. She lives with her unemployed sister in a slum residence in the town of Mombasa. To earn a living, she runs a small kiosk selling fruits and vegetables to the residents of her area. She has been doing this business for the last four years and her earnings have managed to provide for all her family’s basic needs. The items sold are popular among the slum dwellers since they are sold in small, convenient quantities that are affordable to the residents of this low-income neighborhood. Recently, the business has been performing poorly. This has been caused by increasing costs of the vegetables at the market, forcing her to purchase only a few items, which makes her earn very little, which is barely enough to sustain her family. She would like to increase her income so that she can make more gains from this trade and be able to operate at a profitable level. Margaret is requesting for a loan of $350 to enable her to increase her stock of vegetables and fruits. The proceeds from here will enable her to uplift her lifestyle and afford better housing.  “

Kiva.org has become popular very quickly, and my experience as a lender so far has been positive.  I am excited to get my loans returned and recycle them back to other entrepreneurs.

Give kiva.org a try.  It also makes a great gift!

Capitalism Cafe: Where there’s no such thing as a free lunch

Posted on November 21, 2007
Filed Under Business & Entrepreneurship, Finance & Economics, Ideas | 1 Comment

When I was in college I had a great idea for a supply and demand based restaurant concept. I’m sure I’m not the first one to come up with the idea, but I haven’t ever seen or heard of anything like this.

Imagine this:

You’re an investment banker in New York City or London and you need a place to go for a quick bite to eat and a client meeting. You walk into Capitalism Café (where there’s no such thing as a free lunch), and you are presented with an electronic menu showing the items of the day and their current prices. You now have two choices.

  1. What do you want to eat?
  2. When do you want to pay?

If you come in before the lunch rush, and you pick a menu item that isn’t particularly popular during the lunch rush, then the price will go down and you should pay after you are finished eating.

If, on the other hand, you choose to pay after you eat and whatever you ordered was particularly popular among customers that day, then the price will go up and you will now have to pay more for the same meal.

Quite simply this is just a restaurant that has some fun with the dynamics of supply and demand.

Of course, it would probably make sense to do this in a market where your customers actually understand these dynamics, such as NYC or London. And, given the market’s demand profile in those places, it would also probably make sense to make this an upscale, moderately expensive place to eat.

You could keep people coming back with an endless number of side games customers could play. A lot of forecasting games come to mind as well as a number of ways to ‘hedge’ your bets. Not to mention this would make it both easy and fun for groups to decide on who pays.

Economists Don’t Predict Recession, Which Is Why We Are Headed For One

Posted on November 21, 2007
Filed Under Business & Entrepreneurship, Finance & Economics, Global Issues | Leave a Comment

Most economists aren’t predicting a recession for the American economy in 2008, which is exactly why we are going to have one.

According to the Economist’s briefing on the American economy, it is very likely the US will see a recession in 2008, but even if it doesn’t it will still feel like one. This is because the downturn is going to be fueled by the consumer. Here are the problems identified in the article, which is well worth reading:

  1. Home price declines will continue to accelerate. The wealth effect of falling prices will change the behavior of consumers as the housing downturn enters a second, more dangerous, phase.
  2. The credit crunch will soon restrict consumer access to debt, which has fueled consumer spending, as we begin to understand its severity. The ratio of household debt to income is now 130%. Earlier in the decade it was 100%; in the early 1990’s it was 80%.
  3. A spike in oil prices will exacerbate the pain in the short term as the higher prices of oil in the global market are reflected at the pump. The recent surge in oil has not been fully reflected in American petrol prices, largely because refineries had unusually fat margins earlier in the year.
  4. Job growth has been trending downward. While the labor market is still strong, careful inspection shows a wide slowing. The pace of net job creation has fallen from a monthly average of 189,000 in 2006 to 118,000 in the past three months.

According to the Wall Street Journal’s survey of economists and forecasters in November, the odds of a recession in 2007 are still at less than 50%. To be precise the odds are at 27.1% for the remainder of 2007 and 33.5% in 2008. The Economist uses this information as a leading indicator of a coming recession. Here is the quote from the Economist:

“IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession’s pitiful forecasting record offers little comfort.”

I suppose a forecaster who is wrong all of the time is just as good as one who is consistently correct.

Given all of the above information, its no wonder why consumer confidence has been plummeting. The University of Michigan’s index is at is lowest level in 15 years.

GDP is largely dependent upon consumer spending, which accounts for about 70%, but the good news is that a downturn will also depend on business investment and net exports. And today, as compared to the last recession in 2001, businesses have much stronger balance sheets overall. Further, because of the weaker dollar and strong demand for imports from the emerging economies, things may not be quite as bad as they seem.

Nonetheless, according to the Economist it doesn’t matter if we formally go into a recession.  Since the slowdown will be led by the consumer, its going to feel like a recession either way.

How to Borrower $50,000,000: The Commercial Mortgage Underwriting Process

Posted on November 20, 2007
Filed Under Business & Entrepreneurship, Finance & Economics | Leave a Comment

When applied to commercial real estate debt, underwriting is a term used to describe the process a mortgage originator goes through when deciding whether or not to issue credit to a borrower.  Financing commercial real estate is a completely different game than residential mortgage financing, and knowing how the process works will most certainly work out to your advantage. 

Commercial real estate financing is different than residential debt for many reasons.  For example, residential loans largely deal with the borrower’s capacity to repay and ignore any income potential of the property (there usually isn’t any).  On the other hand, the underwriting of commercial real estate places most of the analysis on the income potential of the property, while the guarantors or sponsors of the project are secondary.  This is not to say that that the borrower doesn’t matter, but if a property is sufficiently lucrative on the basis of its income potential alone, then the loan will most likely get approved even if the borrower is weak.

Before we move on one important distinction in commercial real estate debt needs to be made.  And that is between construction loans and permanent loans.  Construction loans are used to finance the construction of a real estate project, which could include a large master planned community or an income producing building.  After the project is built, the construction loan is paid off, either by the sale of homes, the sale of the building, or the refinance of the building by a permanent market lender.  Permanent financing, on the other hand, is long term financing designed for buildings that are already built and stabilized.

Underwriting Criteria
The good news about commercial real estate financing is that most of the underwriting criteria are fairly standardized.  And once you know what a lender is going to look at, you can do that analysis yourself before you present a loan package, which will significantly strengthen your bargaining position. 

Although the bulk of the analysis will focus on the property itself and the market, it is important to know what to expect as a guarantor on a loan.  This usually doesn’t apply in permanent market financing, but is especially relevant in construction lending. 

The typical laundry list a construction or mini-permanent lender will look for include:

Mostly what the underwriter is looking at in his analysis is the financial strength of the sponsor.  They will take your financial statement and spread them onto a standardized software program or excel worksheet in order to better understand your financial health.  If you list out a number of real estate developments or business interests for example, then the lender will want to get a good feel for what those include, and the current status of those projects.  Also, the underwriter will want to make sure you have enough liquidity or interest reserve built into the projects to carry the debt service should the need arise.  The lender will also calculate a number of ratios such debt to worth (liabilities divided by net worth), and debt to income (all debt service requirements divided by total sources of income).

Property Level Underwriting Criteria
Loan to Value (LTV).  This is a basic measure of the contractual principal loan amount divided by the property’s market value (usually established by the appraisal).  The actual LTV will largely depend on the risk of the product type.  Raw land, for example will see a much lower LTV than an apartment complex since raw land is a riskier product (there is no income potential).

Loan to Cost.  This is the contractual loan amount divided by the cost of the project.  This is mostly relevant in construction lending where the actual cost of the project may differ significantly from the value of the project.  Please note that it is typical for a lender to provide a loan amount of the lesser of the LTV or LTC.  For example, a loan covenant might state something like ‘to provide funds for the finance of a retail shopping center in the amount of the lesser of 75% LTV or 80% LTC.’

Debt Service Coverage Ratio. While the LTV is an asset based underwriting criterion, the DSCR is an income based underwriting criterion.  The debt service coverage ratio is the property’s Net Operating Income (NOI) divided by the annual debt service required by the loan.  Typically a DSCR of 1.2 is standard, however this will also change based on the risk of the property.  The DSCR is an easy way to measure the cushion available to the lender, should the property experience a higher vacancy than projected or lower rents. 

Break Even Ratio.  The BER is the annual debt service requirements on the loan plus the property’s operating expenses, divided by the potential gross income.  This measure gives the percentage occupancy of the property needed to cover all the expenses associated with the property.  Sometimes the lender will look at this including the market vacancy rate as well to be even more conservative.

In addition to the above measure and the items needed from the personal guarantors, these items are typically needed as a part of the lenders due diligence process:

Depending on the type of property you are trying to finance, there may be some other relevant items required, but those are they typical ones.

Other than these basic guidelines for underwriting commercial real estate mortgages, it is very important to note that this industry is built on relationships.  If you operate as a developer or investor in a local market, you already know that no matter how big the city is, the real estate community is small and after a few years people know who you are. 

Lenders don’t like spinning their wheels and would much rather work with you over the long-term than just on one or two deals.  This is beneficial for both parties and more often than not the lender will be willing to bend a few rules and make a few exceptions for repeat customers.  Just something to keep in mind.

Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life.

Posted on November 19, 2007
Filed Under Books, Business & Entrepreneurship, Finance & Economics | Leave a Comment

I just finished the book Thinking Strategically: the competitive edge in business, politics, and everyday life by Avinash K. Dixit and Barry J. Nalebuff. It is the single best narrative (non-math) introduction to game theory that I have ever read. Here is the epilogue from part I, which paints the big picture incredibly well:

“A game is a situation of strategic interdependence: the outcome of your choices (strategies) depends upon the choices of another person or persons acting purposively. The decision makers involved in a game are called players, and their choices are called moves. The interests of the players in a game may be in strict conflict; one person’s gain is always another’s loss. Such games are called zero-sum. But more typically, there are zones of commonality of interests as well as of conflict; there can be combinations of mutually gainful or mutually harmful strategies. Nevertheless, we usually refer to the other players in a game as one’s rivals.

The moves in a game may be sequential or simultaneous. In a game of sequential moves, there is a linear chain of thinking: If I do this, my rival can do that, and in turn I can respond in the following way….Such a game is studies by drawing the game tree. The best choices of moves can be found by applying Rule 1: Look forward, and reason backwards.

In a game with simultaneous moves, there is a logical circle of reasoning: I think that he thinks that I think that….This circle must be squared; one must see through the rival’s action even though one cannot see it when making one’s own move. To tackle such a game, construct a table that shows the outcomes corresponding to all conceivable combinations of choices. Then proceed in the following steps.

Begin by seeing if either side has a dominated strategy - one that outperforms all of that side’s other strategies, irrespective of the rival’s choice. This leads to Rule 2: If you have a dominant strategy, use it. If you don’t have a dominant strategy, but your rival does, then count on his using it, and choose your best response accordingly.

Next, if neither side has a dominant strategy, see if either has a dominated strategy - one that is uniformly worse for the side playing it than another of its strategies. If so, apply Rule 3: Eliminate dominated strategies from consideration. Go on doing so successively. If during the process any dominate strategies emerge in the smaller games, they should be chosen succesively. If this procedure ends in a unique outcome, you have found the prescriptions of action for the players and the outcome of the game. Even if the procedure does not lead to a unique outcome, it can reduce the size of the game to a more manageable level. Finally, if there are neither dominate nor dominated strategies, or after the game has been simplified as far as possible using the second step, apply Rule 4: Look for an equilibrium, a pair of strategies in which each player’s action is the best response to the other’s. If there is a unique equilibrium of this kind, there are good arguments why all players should choose it. If there are many such equilibria, one needs a commonly understood rule or convention for choosing one over the others. If there is no such equilibrium, that usually means that any sustematic behavior can be exploited by one’s rivals, and therefore indicates the need for mixing one’s plays.

In practice, games can have some sequential moves and some simultaneous moves; ten a combination of these techniques must be employed to think about and determine one’s best choice of actions. “

The book moves on after part one to talk about resolving the prisoners dilema, making credible commitments, being unpredictable, brinkmanship, cooperation and coordination, the strategy of voting and the role of incentives.

Here are the key takeaways:

  1. Figure out if the game is simultaneous of sequential.  If it is both, then you must fit your strategy to the context.
  2. Draw game trees in sequential games.
  3. Draw game tables in simultaneous games.
  4. To punish cheaters, make your threat credible.

If you are looking for a good introduction to game thoery that paints the big picture with plenty of real world applications, you will like this book.

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