India

Whoops, I’m in Mumbai & Goa for two weeks. Everything is gorgeous. But internet will be sparse.

Incidentally, I missed the entirety of January 7th due to travel. 27 consecutive hours of airports, airplanes, layovers, and meals in tin foil. What a beautiful holiday from the world. And it probably helped everything come out all the more regal on the other side.

What I Learned at Harvard Business School: Part I

Save yourself the fifty million tuition dollars. Here’s everything I learned through one semester at Harvard Business School, summarized in concise, easy-to-read blog format.

FINANCE

1. If you ever find yourself not doing a Discounted Cash Flow (DCF) Model…just remember that you’re wrong.

The DCF is a fancy modelling tool used to project future growth and expectations of a company or a project. In the simplest terms possible: take what you know about a business (we sell ten sodas every year!), add in your estimates for the future (we’ll sell 10% more sodas every year because of how popular we’re getting!), and discount the value of the future cash flows based on how risky you think the idea is or how much/little you value money next year compared to this year (I’m pretty sure people will still like soda next year, so this is low risk). You’ll end up with a number that’s either positive or negative (if, for example, someone said “you can buy the soda business for $100″ but you find it only sells $12 worth of sodas), and you’ll want to pick whatever makes money.

It sounds simple, but I promise that the bigwigs in finance have found plenty of ways to make things impossibly complicated. If you want to get serious, you’ll need to do things like figure out how your assets are going to depreciate, how your working capital is going to grow, how your company typically expects returns from its current projects and values for its future cash flows, and more. Still curious? Get started with an Introduction to Present Value at the Khan Academy.

On a more practical note…

2. Everybody’s pretty much just (educated) guessing. Don’t trust things blindly.

So…maybe the cases we discussed in class were oversimplified. And maybe the lesson above is a bit extreme. But the points still stand.

At length, we explored instances where even minuscule differences in estimates had unnervingly large effects on really big decisions. Expecting a Discount Rate (r*) of .09 instead of .085? Suddenly, your business which draws $100,000 in perpetual yearly cash flows is worth $1,111,111 instead of $1,176,470.  You just destroyed $65,000 in value because of a whim…or a rounding error.

Worse, perhaps, is the notion of how easy it is to build—even subconsciously—projections and valuations that conform to your own desires and expectations.

Granted, we’re not picking numbers out of a hat. We’ve at least, through hours of careful analysis and years of expensive education, been able to narrow down our field of expectations to something on the order of just over a million dollars. Nonetheless, the lack of true accuracy and transparency, and the subjectivity to error should be quite alarming.

Easy to apply this lesson beyond the finance realm. How much does any expert really know anything? In business, and in life, always exercise reasonable doubt and tread very, very carefully.

2008

I’ve been doing some housecleaning around the blog archives—touching up on old grammar mistakes, removing work that doesn’t seem funny or relevant anymore now that I’m a big grown-up boy.

I was actually quite astonished to see how well my article “The 10 Best Things My High School Taught Me on Accident” has held up. Check it out. That was written in August, 2008.

More airline stuff: Process Efficiency style

Gosh, this stuff is so easy. A cancelled flight home yesterday offered hours of further opportunity to ponder and investigate the airport and airline conundrum.

Looking around the whole airport experience, there are a plethora of problems that we business school folk like to call “bottlenecks”: situations where the performance of the entire system is limited by the productivity of a specific area.

Most readily complain about the difficulties and delays in check-in and security—but I don’t think expedition here would really make the process go any faster. A quicker check-in process would simply reallocate waiting time elsewhere.

There’s another wait-heavy area about which far fewer complaints are heard: the plane boarding process.

It’s freaking difficult for passengers to embark and disembark the plane in rapid fashion. And the wait time is sneaky because it’s broken down into four parts:

1. “We will now begin the boarding process. Rows 1-5, you are now welcome to board.” Everyone else waits.
2. Once on the plane, individual passengers have to file into their seats and stuff their plus-sized luggage into the overhead compartments. Everyone else waits behind them in the center aisle.
3. Sitting in your seat waiting for the plane to take off.
4. The sneakiest part: between #1 and 2, the time elapsed waiting in the bridge / extend-o-arm that stretches between airport terminal and airplane. Wait time here typically occurs as a result of backup and overflow from #2.

Plane embarking efficiency is more important than check-in or security because advances here might actually lead to an efficiency improvement in the overall process. If we can turn the planes around faster, we can either increase the number of flights or decrease the time sensitivity (a likely cause of delays and other problems) of each.

The “progressive” airlines like Southwest have implemented a “group” system: If you’re in Group A, you get to board first and can take whichever spot you like—there are no assigned seats. Speed is rewarded, rather than precision.

Seat upgrades are a fake solution: Customers in a hurry can spend an extra $40 or so to board the plane first…and…uh…sit around in the plane for 20 minutes while everyone is doing the same thing, but in the terminal.

How can we get people on and off the plane faster? The true root of the problem is the plane aisle: the aisle is wide enough to accommodate someone walking down the length of the plane, or wide enough for someone to reach up to their overhead bag, but not wide enough to allow two passengers to do both at the same time.

I propose three possible solutions:

1. Eliminate the overhead compartments. I really don’t think these are necessary anymore, if they ever were. It seems obvious that a large portion of boarding delays are due to people like Grandma, who’s packed her son’s Christmas gift (probably an olympic weightlifting set) into her carry-on and can’t quite reach the storage above her frame. She means well, but the negative externalities of her thoughtfulness are adversely affecting everyone else on the flight.

If you’ve been flying recently, you’ll notice that the overhead often reaches capacity, thanks in large part to increased fees for checked luggage. So, remarkably, you’ll have also already noticed that the airlines have a solution for this problem—you can leave your excess overhead on the bridge for some terminal workers to check under the plane, and you can pick it up in the same spot on your way out. This isn’t a perfectly efficient process—surely there are better places to build up crowds of people than in the middle of the highly-trafficked bridge—but the building blocks of the process are already in place.

In fact: the whole, entire checked bags process is already in place! Airports already have entire areas for baggage claim and plenty of complicated luggage trolley systems. By adding baggage fees, the airlines have moved much of the baggage process from the airport, where there’s plenty of excess time capacity (as far as the airlines are concerned), onto the airplane itself, where time is very much of the essence (in spite of how much the airlines try to convey that they just don’t give a damn).

If we (the airline) removed the overhead space and allowed only one carry-on, could we move to smaller, cheaper planes? Could we make the beneath-the-seat spaces bigger? We could surely revoke the policy on charges for the first checked bag. And we could definitely make plane turnaround process time faster (…perhaps while making customer process time longer, which seems like a perfect fit for the airline industry jerks).

2. Also board seats in the chronological order of window-middle-aisle. By far the weakest of my three solutions, but also, the option that might get implemented most quickly and cheaply. Every time an aisle-seat passenger is seated, and has to stand up and get back into the aisle to make room for a window-seat passenger, seconds or minutes are lost for everyone on the plane.

3. Invent a second bridge that runs along the side of the plane on the outside. You couldn’t successfully argue for making the original aisle wider—this would either necessitate wider planes (and more fuel) or fewer passenger seats. All planes are required to have both a front and a rear exit (at least, so I’m told by every single plane welcome video EVER)…but the passage in the back is seldom if ever used. Why?

The airport’s bridge is wide enough to accommodate two streams of traffic. Why doesn’t an airline invent a proprietary, temporary/move-able second bridge that might allow passengers to go directly to the back entryway from the main bridge? You should then be able to board through both doors at once, starting with passengers seated in the middle—the emergency exit rows, which are typically regarded as the luxury seats with bonus legroom, anyway.

What kind of benefits might be reaped by shaving 20 minutes off your turnaround time, every flight? At the cost of what, a few thousand bucks up front to build the thing?

Graphs

A questionable graphic I noticed in my dad’s important-sounding and official-looking magazine:

I already drew on it a little bit (sorry) before realizing this might be an interesting thing to comment on.

Here’s why it’s important to:

1. Understand your source of information (and its biases)
2. Understand how graphs work (and can be abused)

The aim of this pair of graphs (and the article) is to show that a particular politician’s economic plan is not working—a point that seems illustrated if you cast a passing glance at these two charts.

But look closely.

The Y-axis (vertical) of the red graph on the right doesn’t start at $0, it starts at $330. If it started at zero, your graph might look more like the pen line I doodled on top.

The Y-axis of the blue graph does start at zero. If it didn’t (to match the original red graph), the blue chart might look more like its respective doodled line.

Corporate profits went up by nearly $1 Trillion, and median weekly earnings went down by roughly $15. Median earnings going down is still not a positive, but clearly, the information presented here has been warped to show a significantly more tragic reality.

Note: I’m no politician, I’m not taking sides, etc., etc. If you’re concerned about the political nature of this content, then you’ve missed the point entirely. Which is, again: Graphs and information can be manipulated. Exercise caution.