Think Like An Economist - Dawn Of The Data Age Lecture Series

Dawn of the Data Age Lecture Series
Interpreting Data Like a Pro

Hi. I’m Luciano Pesci, PhD…
Founder & CEO, EMPERITAS
● Team of economists and data scientists delivering bi-weekly Customer Lifetime Value
intelligence so our clients can beat their competitors for the best customers.
Founder & Director, Utah Community Research Group, Univ. of Utah
● Teach microeconomics, data science, applied research, & American economic history.
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Today’s Lecture Outline
● Teach the benefits of using economics in business.
● Show economic approaches you can use now.
● Explain how to start thinking like an economist.
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Unparalleled Progress
● Natural experiment of market economics
during the last 250 years has created a
100x increase in the real standard of living.*
○ As we get more data, it’ll increase exponentially.
● The market is a global institution (for now).
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*200 Years of Wealth & Health Visualized: youtu.be/jbkSRLYSojo

Worldly Viewing Lens
● We all, individually & organizationally, pick
the lens that we view the world through.
● Economics happens to be the best lens
because it requires you look at the entire
system and all of its (many) connections.
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Go With The (Circular) Flow
● Economics is the study of people, forced to
exchange, under technological constraints.
○ Describes the real world as a “circular flow.”
● No matter how big you are, your
organization is a teenie-tiny little grain
of sand on the world’s economic shores.
7

Eyes on The Big Picture
● Within the circular flow of the economy
organizations are subdivided into 2 types:
○ B2B - biz to biz (who sells to a consumer)
○ B2C - biz direct to consumer
● Within these are verticals that contain a
set of competitors supplying the market.
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Don’t Hate on The Market
● The “invisible hand” is one of the most
mind-blowing things of our present world.
○ All happens without a central planner.
○ It’s powerful & guides mostly through price.
● Market failures are possible, and happen
when there’s a lack of perfect information.
○ They also happen when humans make mistakes.
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Don’t Hate on Profit
● Historically prohibited (aka usury).
○ Apple would’ve been burned at the stake
for its 39% margins over the last 5 years.*
● Profit only comes from two places:
○ Fraud - one side takes more than they give
○ Valued Exchange - voluntary & mutually beneficial**
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*Apple’s Profit: ycharts.com/companies/AAPL/gross_profit_margin
**How to Make Money Standing in Line at Apple: goo.gl/PkZ3ft

Profit = Ultimate KPI
In our market economy the only KPI that matters is profitability.
It’s the ultimate “net” metric of organizational efficiency (which is God) and
should be considered when guiding all organizational decisions.
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There’s an Equilibrium
● More than likely there’s a specific set of
outcomes that everything is naturally
gravitating towards.
○ Could get there linearly. More likely, it’ll be
non-linearly (predator-prey models).*
● Track everything about these patterns.
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*Lotka–Volterra: wikipedia.org/wiki/Lotka–Volterra_equations

Product Life Cycle*
● Every product moves through the same
life cycle, starting with innovation then
broad adoption & finally obsolescence.
○ The time dimension is important.
● Amount of time this process takes
isn’t deterministic, but it is inescapable.
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*Product Life Cycle: quickmba.com/marketing/product/lifecycle/
**WOW: mmo-champion.com/threads/1507874-Product-life-cycle

Costs & Factor Markets
● Costs are always within your control.*
○ If you don’t have a holistic view of a factor’s
contribution to profit you should cut cautiously.
● Factor markets are your supply chain.
○ The most important factor is the level of
human capital (intelligence) you can utilize.
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*Shut Down Decision (in 60 sec): youtu.be/VFY2aJwpdNM

Diminishing Returns
● Throwing money at an opportunity or a
problem doesn’t work forever.
● The Law of Diminishing Returns is real.
○ Because effective production (the output of your
organization) requires a lot of coordination among
a large group of specialized humans & machines.
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*Diminishing Returns: britannica.com/topic/diminishing-returns

Know Your Enemy
● Everyone thinks they understand their
competition, but they usually don’t.
● You don’t operate in a bubble so knowing
about your competitors is mandatory.
○ This information should be constantly available
and roughly real-time (monthly updates).
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Game Theory
● You can use Game Theory to find best
strategies for beating competitors.
○ Requires you have data on them.
● Duopolistic models (Cournot) can help
you find “best responses” given any
action by your competitors.*
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*Cournot’s Duopoly Model: goo.gl/82kLYd

Power of Expectations
● Customer expectations, from preferences
to demand patterns, are critical to track.
○ They change rapidly, and are rarely extreme values.
● Can also be the expected value given the
likelihood of an outcome. For example:
○ The expected value of robbing banks is $4,300*
○ Each additional member of the gang adds $1,800*
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*Robbing a Bank Won’t Make You Rich: goo.gl/PRwgd5

Know Your Customer (Personally)
● Individuals are usually grouped into
“representative agents” in economics.
○ Same purpose as personas: go beyond averages.*
● With 5 you can describe 99% of customers.
○ But the real CX payoff comes from going that extra
1% to understand all of them personally.
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*Personas Through Agile Research: goo.gl/RWPaEJ

Simulate to Shape The Future
● You don’t have to wait passively for
fate to take its course. You can simulate.
○ It’s effectively like creating a Tron world.
● Best models describe agents using
parameter estimates for behavior
based on actual (real world) data.
○ Can come from survey experiments.
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Another Way To Look At It
● The key to economic success is having
perfect information (KPIs) for decision making.
● More details about the important role
of KPIs are laid out in my recent article.*
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*Don’t Fear the Coming KPI Cataclysm: goo.gl/kVPF3b

It’s About Humans
● It’s easy to get drawn into seeing the
world only through price & quantity.
○ This is economic quicksand.
● Customer experience/success is more
important than most organizations think.
○ Because it uncovers underlying preferences.
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Focus on First Principles
● Core concepts of microeconomics can be
taught in 6 weeks and are instantly useful.
○ Choice theory is particularly powerful.
● This is because it focuses on concepts
that motivate virtually all economic theory.
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Validate Empirical (Data)
● Information is the second most important
factor you can use in your business.
○ The first is your human capital.
● Systemized tests can validate empirically
if what you’re doing is/isn’t working.
○ This is how you’ll converge to “perfect information.”
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Fail REALLY Fast
● Be proactive and don’t fear failure.
○ Fear is the market economy’s kryptonite.
● One of the key lessons of economic history
is that persistence pays more than luck.
○ The key is to get through each iteration efficiently.
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Focus on Efficiency
● In a world of scarcity, efficiency is God.
○ It guides equilibrium & profitable outcomes.
● Comes from nature and is expressed
through the limit of successive ratios in
the Fibonacci Series (aka Golden Ratio).*
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*Golden Ratio: mathsisfun.com/numbers/fibonacci-sequence

Beware Lock-In*
● People are slow to change, but tech isn’t.
○ If you don’t move forward you fall behind fast.
○ It can also lock you into a suboptimal path.
● Sometimes the cost of fixing a past
mistake is high and creates hesitancy.
○ Identifiable by phrase, “that’s just how we do it.”
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*Technological Lock-In: wiki.mises.org/wiki/Technology_lock-in

What We Covered Today...
● The benefits of using economics.
● Economic approaches to use now.
● How to start thinking like an economist.
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You Should Watch - [The BIG Picture of Economics]*
Created by Jacob Clifford, ACDC Leadership.
Cliff Notes: starting with the circular flow, the differing roles
and behaviors of consumers, firms, and governments are
explained at both the micro (individual) & macro (social)
levels. A focus on the free flow of this system is highlighted.
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*The BIG Picture of Economics: youtu.be/onRWs561-XM

Thursday June 21st, 2018
emperitas.com/lecture

Think Like An Economist - Dawn Of The Data Age Lecture Series

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