Total Shareholder Returns (TSR) represent the complete returns from investing in a stock, including both price gains and dividends.

It's important to note that dividends, although sometimes overlooked, can significantly boost investment returns.
![total-shareholder-returns](//images.ctfassets.net/vwq10xzbe6iz/3ovGIwYelCXb116nTMQVNM/642876cd1c2179d42272caed84c95ca9/tsr.png)

### Comparing Total Shareholder Returns
For instance, over the past 5 years, tech giants like IBM and Cisco have seen share price gains of just 4% and 13%, respectively. This is underwhelming, especially when even cash assets would have given returns of around 10%.

But when you include dividends, IBM and Cisco's returns jump to about 28%. This is comparable to the returns of tech growth stock Salesforce, which doesn't distribute dividends.

Similarly, while Exxon Mobil's share price gains lag behind the broader S&P500, its performance is on par when dividends are considered.
Moreover, if dividends were reinvested in the S&P500, both IBM and Cisco would outperform Salesforce, and Exxon Mobil would beat the broader S&P500.

### Calculating Total Shareholder Returns
TSR is calculated using the formula:
> TSR = (Current Price - Purchase Price + Dividends) / Purchase Price

Here, dividends are the total received over the period you're measuring, such as the past 5 years. They are added to the gains from the share price.

Here is an example spreadsheet showing how to create your own TSR comparison table. It uses Google Finance for real time share price data and company dividend data consolidated by Dividend.com.
![tsr sheet](//images.ctfassets.net/vwq10xzbe6iz/48D9fcOOtk00AXuOJgUtr0/bfa7be8551a630d225f25266231e2708/tsr_sheet.png)
[Google Sheet - TSR Model](https://docs.google.com/spreadsheets/d/1KY7oeRtXbdoeTkVFTTb8wR1GcIRZTHAcLa9c5DXXpx0/edit?pli=1#gid=0)

TSR calculation and spreadsheet examples. Compare TSR performance from stocks including IBM, Cisco, Exxon Mobil. 

total-shareholder-returns

How to Measure Total Shareholder Returns

The Internal Rate of Return (IRR) is a metric that measures the annual return of an investment, particularly when future cash flows are uneven. While it's a commonly used tool, the IRR can be easily misunderstood, leading to poor investment decisions.

A more reliable approach is to use the Modified Internal Rate of Return (Modified IRR), which accounts for realistic rates of reinvestment for future cash flows and the costs of financing.
![MIRR formula](//images.ctfassets.net/vwq10xzbe6iz/6BQn8xUvcw65nlxIipw3ax/6740bac9d7376b84a4b5a2b26a74ec8a/MIRR_formula.png)

## Understanding the Dangers of IRR: A Simple Investment Opportunity
To illustrate the risks associated with IRR and why Modified IRR is a superior method, let's consider a simple investment opportunity: investing in a frozen banana stand.

![banana stand](//images.ctfassets.net/vwq10xzbe6iz/194cMB4VkJO1xIKqJxr1Rl/8b22454a93ae1bc3c508b10b40ca1faa/banana_stand.jpeg)

### IRR and Modified IRR Example
Imagine you are presented with an opportunity to purchase a franchise in a frozen banana stand. The seller is asking for a purchase price of $100,000 and promises potential annual profits of $40,000. You plan to hold onto the franchise for 4 years and then sell it. 

However, you learn that in 3 years, an expected redevelopment of the esplanade where the banana stand is located will mean minimal to no profits for that year before recovering the next year.

![banana stand investment](//images.ctfassets.net/vwq10xzbe6iz/4hxkmzryWw7e9ajc5q08ya/3e1905a2e1e0a030d25ad0a1dfd0a4e9/banana_stand_investment.png)

__Question:__ 
What is the annual return you can expect to make from the frozen banana stand?

__Answer:__ 
Your IRR is 32%, but your Modified IRR is 23%. Let's examine the calculations below.

![IRR](//images.ctfassets.net/vwq10xzbe6iz/7gsxCUoS4uyUUtPjYMTEkx/5a3ee23b34f6b262b98762348fd76019/IRR.png)

#### Investment
First, include the initial investment of $100,000 in year 0 and assume that you can sell the franchise at the same price you paid at year 4.

#### Profit
Assume you achieve $40,000 in annual profits, except for year 3 when the esplanade closes, forcing you to shut down for most of the year.

#### Cashflows
Sum the profit and investment to calculate the net cash flows for each year.

#### IRR Formula
The IRR formula determines the rate of return needed to make the present value of cash flows from the investment equal to the initial investment. IRR can be calculated using Excel or Google Sheets with the formula `=IRR(cashflows)`, resulting in 32%.
![internal rate return formula](//images.ctfassets.net/vwq10xzbe6iz/L1TzGb5BYQqx9QBWiyWQW/e90b6dc0aaef50ecd15f86d895a8fb5a/internal_rate_return_formula.png)

In simple terms, an IRR of 32% means that to earn the same return as the banana stand investment, you would need to invest $100,000 in a 4-year term deposit with a very high compound annual return of 32%.

However, the major shortcoming of IRR is that it assumes the cash flows earned throughout the investment are reinvested back at the same rate of return, such as investing in another banana stand and earning a high 32% return. This is rarely the case.

#### Modified IRR Formula
The Modified IRR formula improves upon the IRR by including the actual rate of reinvestment you can earn with the cash flows of the investment.

![MIRR formula](//images.ctfassets.net/vwq10xzbe6iz/6BQn8xUvcw65nlxIipw3ax/6740bac9d7376b84a4b5a2b26a74ec8a/MIRR_formula.png)

For example, if there are no new banana stand investment opportunities, you would realistically invest the cash flows in a term deposit earning a 5% annual rate for the remainder of the 4 years. By using a realistic reinvestment rate of 5% instead of 32%, the Modified IRR decreases from 32% to 23%.

In simple terms, a Modified IRR of 23% based on a reinvestment rate of 5% means our banana stand investment is equivalent to a 4-year term deposit earning a high compound annual return of 23%.

#### Conclusion
Our Modified IRR of 23% is materially lower than the advertised potential annual returns of 40%, but still significantly above a safe investment of 5% in a term deposit.

Investing in the banana stand does come with risks. We must assume that the $40,000 can be achieved in the years the esplanade is open, and that someone else would be willing to pay the full $100,000 we paid for the franchise.

Lower profits would hurt cash flows and negatively impact our resale price. This is the risk premium we are demanding in our purchase price.

But, as George Bluth Snr says:
> There’s always money in the banana stand.


Example of an investment in a frozen banana stand. Compare the Internal Rate of Return and Modified Internal Rate of Return. Understand the importance of the reinvestment rate.

MIRR formula

IRR vs Modified IRR: How to Measure Investment Returns

Here are five formatting tips to follow when presenting with charts:
1. [Descriptive titles](#descriptive-titles)
2. [Fewer segments](#fewer-segments)
3. [Color from dark to light](#color-from-dark-to-light)
4. [Selective data labels](#selective-data-labels)
5. [Direct legends](#direct-legends)

Below are examples of good and bad chart formatting practices:
![good-chart-formatting](//images.ctfassets.net/vwq10xzbe6iz/2Z0ah5QcObvhxtLwKxwLaC/fddcfd14744069c7000b017dbb969a20/good-chart-formatting.png)
![bad-chart-formatting](//images.ctfassets.net/vwq10xzbe6iz/6QcSKUcr6CvFTYILvrJLz8/c0acb98ea20978d323a8c70295a028e7/bad-chart-formatting.png)
## <a name="descriptive-titles"></a>1. Descriptive Titles
Your chart title should clearly explain what you are measuring. 

**Bad practice:**
"Revenue Split"

**Good practice:**
"Apple Revenue by Category, 2012 - 2022 ($bn)"

A good chart title should include:
- **Subject**: The entity being measured. For example, Apple
- **Metric**: The specific measurement and dimensions. For example, revenue by category
- **Time period**: The interval being measured. For example, 2012 - 2022
- **Unit of measurement**: The units in which the data is measured. For example, ($bn)

## <a name="fewer-segments"></a>2. Fewer Segments
Limit your data to fewer segments that align with the narrative you're telling.

**Bad practice:**
A line chart showing Apple's annual revenue split by five categories: iPhone, Mac, iPad, Wearables, Home & Accessories, and Services.

**Good practice:**
A stacked bar chart dividing Apple's annual revenue into three categories: iPhone, Other Products, and Services.

## <a name="color-from-dark-to-light"></a>3. Color from Dark to Light
Use sequential color palettes, moving from dark to light, to convey a visual hierarchy.

**Bad practice:**
Using unrelated or illogically ordered colors, such as rainbow color schemes.

**Good practice:**
Using a uniform color scheme, with light colors for low data values and dark colors for high values.

## <a name="selective-data-labels"></a>4. Selective Data Labels
Choose which data points to label selectively to avoid clutter.

**Bad practice:**
Labelling every single data point in a line chart with dozens of data points, leading to clutter.

**Good practice:**
Only labelling the starting and ending values to communicate the change in data over time.

## <a name="direct-legends"></a>5. Direct Legends
Place legends close to the data they represent for easy reference. If there's only one category, omit the legend and rely on the chart title.

**Bad practice:**
Positioning a single legend far from the data or using complex keys requiring constant cross-referencing.

**Good practice:**
When possible, place labels directly on or next to the data points or bars they describe.


Chart formatting tips: 1) Descriptive titles; 2) Fewer segments; 3) Color from dark to light; 4) Selective data labels; 5) Direct legends.

good-chart-formatting

Chart Formatting: 5 Best Practices

Learn when and how to use these four key charts including best practices.

1. [Column Chart](#column-chart)
2. [Line Chart](#line-chart)
3. [Pie Graph](#pie-graph)
4. [Data Table](#data-table)

## <a name="column-chart"></a>1. Column Chart
Use column charts when you need to quickly compare data across different categories side-by-side.
![profit-margin-column-chart](//images.ctfassets.net/vwq10xzbe6iz/3qc04XHwg8Q9Kqbm5Q4ppv/2c2cbd15c118ff28afd7a711bc537e43/Screen_Shot_2023-06-18_at_8.00.30_pm.png)
__Examples__
- __Profitability margins__: compare profit margins across different companies. Use multiple columns (known as clustered column chart) to compare multiple metrics per company such as gross margin and operating margins (see above).
- __Employee performance__: compare customer ratings, renewal rates, revenue ownership across different customer success team members or regional departments.
- __Feature usage__: compare Monthly Active User (MAU) engagement by product feature category using total MAU or % of MAU. In this example a column chart is better vs pie graph as the users are not mutually exclusive by feature.

__Best Practices__
- __Consider the order of your data__: rank your categories from best to worst, put the best on the left and the worst on the right. The highest value is not always the best. For example, customer complaints per employee.
- __Use stacked column charts__: stacked column charts are useful when comparing composition breakdown across many categories. For example, looking at the split between Domestic vs International revenues between listed companies. Limit stacked column categories to max three.
- __Add data labels__: when comparing many different categories, add data labels to specific categories you want to highlight. 

## <a name="line-chart"></a>2. Line Chart
Use line charts when you have time series data and want to see trends over time.
![fed-rate](//images.ctfassets.net/vwq10xzbe6iz/1SdIiUErJ0uTun6U818PAH/510b46dfb2c470d6868878742e5073e5/fed-rate.png)
__Examples__
- __Financial data__: track central bank interest rate changes on a monthly basis over multiple decades (see above).
- __User growth__: track Monthly Active Users (MAUs) on a 30 day rolling basis using a daily interval across a 12 month period
- __Revenue growth__: track monthly Annual Recurring Revenue (ARR) using a monthly interval across a 12 or 24 month period
- __Customer satisfaction__: track Net Promoter Score (NPS) on a 90 day rolling basis using a daily interval across a 12 month period

__Best Practices__
- __Choose the right period__: choose the right x-axis time period to match the story you are presenting. For example, when presenting seasonal data such as monthly retail sales use a 12 month period. When presenting daily data such as website traffic use a one month period.
- __Use benchmarks__: when relevant, include a secondary dataset and line that provides a benchmark performance. For example, when comparing NPS include the previous year figures to compare. When comparing quarterly churn include industry churn figures as a fixed-line benchmark.
- __Don’t plot too many lines__: limit to four or less lines including benchmarks. Don’t overload your line chart.

## <a name="pie-graph"></a>3. Pie Graph
Use pie graphs when you want to display the proportion of parts to a whole, expressed in percentages.
![global ecommerce](//images.ctfassets.net/vwq10xzbe6iz/5RpP7NWgAWsBH0A4nt048d/f2e7b2c21f59148f2c90ad8d99d618e0/global_ecommerce.png)
__Examples__
- __Market share__: show the global revenue market share of e-commerce spend by country and sub-grouped by company for the largest country (China) (see above).
- __Revenue streams__: showcase the proportion of total revenue coming from different products or services.
- __User segmentation__: reveal the distribution of user types, like paying vs non-paying users or split by region.

__Best Practices__
- __Limit your segments__: too many segments can make a pie chart unreadable. Try to limit it to 5-7 segments, and group smaller segments together into an 'other' category if needed.
- __Label using percentages__: pie charts are designed to show what percentage each part contributes to the whole. Don’t clutter your graph by adding raw numbers.
- __Use it for positive values only__: only use pie charts when your data is all positive. For instance, when representing assets or liabilities in a balance sheet, use separate pie charts.

## <a name="data-table"></a>4. Data Table
While not a traditional chart, data tables are a powerful tool for presenting detailed, numeric information. They allow for precise data comparison and are less prone to data visualization bias.
![financial-ratios](//images.ctfassets.net/vwq10xzbe6iz/5QJuRsYRmu8hUMFsmQxoAm/51781a90e0fd1d0ea40ab5a6f8a2fbea/financial_ratios.png)
__Examples__
- __Financial metrics__: present key financial metrics and ratios in a table comparing against different companies. Here, a data table can present a more complete financial performance vs a single chart (see above).
- __Key Performance Indicators (KPIs)__: track multiple KPIs in a single table. For example, New ARR, Churn, MAU, NPS. Consider adding another column under each KPI highlighting the target for the quarter or year.
- __Customer account metrics__: showcase detailed breakdown of key metrics by customer account. For example, ARR, renewal dates, region, account manager, customer health score. 

__Best Practices__
- __Keep it simple__: limit your table to the most relevant metrics to keep it readable.
- __Use clear labels__: each column and row should have a clear, concise label. If you need to include units (like % or $), be consistent in your use.
- __Order your data logically__: whether you're sorting by time period, in alphabetical order, or by numerical value, make sure your data follows a logical sequence.

4 charts everyone should know: 1) Column Chart; 2) Line Chart; 3) Pie Graph; 4) Data Table. Examples and best practices.

profit-margin-column-chart

4 Key Charts - When and How to Use Them

Here are the 6 key financial ratios that can offer insights into a business’s operational performance. This guide uses practical examples from well-known companies - Best Buy, Netflix, Meta and Apple. These ratios are:

1. [Gross Margin](#gross-margin)
2. [Operating Margin](#operating-margin)
3. [Free Cash Flow Conversion](#fcf-conversion)
4. [Free Cash Flow Margin](#fcf-margin)
5. [Cash Conversion Cycle](#ccc)
6. [Leverage Ratio](#leverage-ratio)

![financial-ratios](//images.ctfassets.net/vwq10xzbe6iz/5QJuRsYRmu8hUMFsmQxoAm/51781a90e0fd1d0ea40ab5a6f8a2fbea/financial_ratios.png)

### <a name="gross-margin"></a>1. Gross Margin
> Gross Margin = Gross Profit / Revenue

Gross margin is a profitability indicator that shows what portion of revenue remains after deducting the cost of revenues. It's calculated by dividing gross profit by the total revenue for a given period. 

Best Buy, a big-box electronics retailer operates with low gross margins (21%). Its cost of revenues include the cost of products purchased (e.g. from Apple), shipping expenses and in-store staff costs.

Meta has high gross margins (78%) as it primarily generates ad revenue on its social media platforms (Facebook, Instagram, WhatsApp) and captures the majority of that revenue. This compares to YouTube which has lower gross margins as it splits its ad revenue 55% to content creators.

### <a name="operating-margin"></a>2. Operating Margin
> Operating Margin = Operating Profit / Revenue

Operating margin, also known as operating profit margin, serves as a key measure of profitability. This figure represents the percentage of total revenue that remains after accounting for all operating expenses - these include costs beyond just those of producing goods or services, but do not encompass financing or tax expenses. It's determined by dividing operating profit (alternatively called operating income or EBIT) by the total revenue for a specified period.

Comparing Apple and Meta, we see that despite a lower gross margin (43% vs. 78%), Apple maintains a higher operating margin (30% vs. 20%). This is due to Apple's efficient operations, strong brand, and strategic marketing spending. On the other hand, Meta spends more on research and development (30% of revenue vs. Apple's 7%) on its platforms and new VR technology, and incurs significant data management, privacy, and security costs.

### <a name="fcf-conversion"></a>3. Free Cash Flow Conversion
> FCF Conversion = Free Cash Flow / Operating Profit (EBIT)

Free Cash Flow Conversion is a critical financial metric showing how efficiently a company can turn its operating profit (earnings before interest and taxes or EBIT) into free cash flow. Free cash flow represents the cash a company generates, which is available to all stakeholders, including shareholders, debt holders, and others (net operating cash flows minus capital expenditures). This metric is calculated by dividing free cash flow by the operating profit for a specified period.

Comparing Apple and Netflix, Apple is more efficient at converting its profits into available cash with a free cash flow conversion rate of 93%, compared to Netflix's 29%. 

Under Tim Cook, Apple dramatically improved its cash flow by pushing inventory risks to suppliers such as Foxconn. Cook introduced “Just-in-Time” inventory management, meaning Apple only orders components as needed, reducing storage and related costs. Despite being a hardware supplier and retailer, Apple has less inventory on hand than Best Buy which generates less than 10% of Apple’s revenues. 

Netflix's low cash flow conversion is due to its heavy upfront investment in content. It spends a lot upfront on producing and acquiring shows and movies, which it then gradually expenses over years. This means the cash is spent before it fully impacts their profits, leading to lower cash flow.

### <a name="fcf-margin"></a>4. Free Cash Flow Margin
> FCF Margin = Free Cash Flow / Revenue

This ratio indicates how much of the company's revenues are converted into free cash flow. A higher percentage means the company is more efficient at converting sales into cash. It is calculated by dividing free cash flow by the revenue over the specified period.

Apple leads in this metric as well with 28%. This means that for every $100 in revenue Apple generates, $28 is available to shareholders to be paid out as dividends, share repurchases or further reinvestment. This compares to Netflix with 5% and Best Buy at 2%.

### <a name="ccc"></a>5. Cash Conversion Cycle
> Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

The Cash Conversion Cycle (CCC) measures the length of time a business takes to pay for inventory from its suppliers to when it collects cash from its customers. Calculated as the days inventory, plus the days sales (receivables collection period) minus the days payable.

- Days Inventory Outstanding = Inventory Closing / Cost of Revenues x 365 days
- Days Sales Outstanding = Receivables Closing / Revenues x 365 days
- Days Payable Outstanding = Payables Closing / Cost of Revenues x 365 days

When we compare Best Buy and Apple, we see quite a contrast. Best Buy has a CCC of 4 days while Apple has a CCC of negative 71 days.

Apple's negative CCC indicates that it collects payments from its customers much quicker than it needs to pay its suppliers. This situation is a result of Apple's efficient supply chain, powerful negotiation position with suppliers, and fast inventory turnover due to high consumer demand for its products.

On the other hand, Best Buy's positive CCC reflects its retail business model, where it must purchase inventory upfront, hold it in stores until a customer purchases it, and then wait for the transaction to clear. Best Buy's shorter cash conversion cycle still reflects efficient operations for a retail company, but its nature of business doesn't allow the luxury of a negative CCC like Apple.

### <a name="leverage-ratio"></a>6. Leverage Ratio

> Leverage Ratio = Net Debt / Operating Profit (EBIT)

The leverage ratio is an important metric that assesses a company's financial health by measuring the extent to which it uses borrowed money (debt) to finance its operations. In this context, we're specifically looking at net debt (total debt minus cash and cash equivalents) divided by operating profit, also known as earnings before interest and taxes (EBIT).

Apple's leverage ratio of -0.6x suggests a strong financial stance, with more cash than total debt, largely due to efficient cash management and substantial profits. In comparison, Netflix, with a 1.5x leverage ratio, carries more debt than cash, attributed to substantial upfront investments in content, often financed through debt.

A more conservative measure would be to look at the leverage ratio against Free Cash Flow. Given Netflix’s poor FCF conversion this would imply a leverage ratio (Net Debt/ FCF) of 5.1x. This means that it would take more than 5 years for Netflix to repay its debts from operating free cash flows leaving nothing for shareholders or reinvestment.


1. Gross Margin; 2. Operating Margin; 3. FCF Conversion; 4. FCF Margin; 5. Cash Conversion Cycle; 6. Leverage Ratio. Understand their significance with real-world examples from Best Buy, Netflix, Meta, and Apple

financial-ratios

Understanding 6 Key Financial Ratios - Best Buy vs Netflix vs Meta vs Apple

Loss aversion bias explains why the pain a person feels from losing $10 hurts more than the pleasure of gaining $10. 

People also act irrationally when they lose something they have “almost gotten”. This can hurt more than losing something “already gotten”. 

![deprival-super-reaction](//images.ctfassets.net/vwq10xzbe6iz/5cMMiEEYkcUaCp7NaGTEU/ea5e4a8debf00d9557834fa15ab840cc/deprival.png)

Famous value investor Charlie Munger refers to this bias as the Deprival Super Reaction Tendency and relates it via his family dog:

> "Take the Munger dog, a lovely harmless dog. The only way to get that dog to bite you is to try to take some food out of its mouth. Nothing could be more stupid than for the dog to bite his master. But the dog couldn’t help being foolish. He had an automatic Deprival Superreaction Tendency in his nature. 
> 
> Any of you who have tried to do takeaways in labor market negotiations will know that the human version of that dog is there in all of us.
> 
> I mean people are really crazy about minor decrements down.
> 
> Huge insanities can come from just sub-consciously over-weighing the importance of what you’re losing or almost getting or not getting.”

Here are three examples of how Deprival Super Reaction bias can affect people  and ways to navigate:

1. [Losing a promotion](#promotion)
2. [Holding on to falling stock](#holding)
3. [Overvaluing ideas](#ideas)

## <a name="promotion"></a>1. Losing a promotion
Deprival Super Reaction bias can cause major disputes amongst managers and employees during salary and career discussions.

An employee who has an indication of a salary increase or promotion can become enraged and demotivated if they don’t get it.

An employee seeing others get out of cycle salary increases and promotions can be led to believe that the squeaky mouse gets the cheese and can feel betrayed.

__How to navigate?__
Managers must beware the severe consequences of over-promising and under-delivering in career development and labour negotiations. Be transparent and set clear expectations if there are hiring or salary freezes. 

## <a name="holding"></a>2. Holding on to falling stock
Investors may experience Deprival Super Reaction bias by holding on to a stock which had previously increased but has subsequently plummeted.

When stock investments rise people feel like the smartest people in the room. Once they fall, people can feel hurt and cheated of their unrealised gains. It can then be irrational not to sell, as there may be tax benefits from realising the loss. 

__How to navigate?__
Focus on the fundamentals of the business. If a stock has subsequently fallen, revalue the asset based on latest information. View your holding from the perspective of a new investor and ask yourself if you would invest in it today compared to other opportunities (stocks, bonds, cash).

## <a name="ideas"></a>3. Overvaluing ideas
The [IKEA Effect](https://mannhowie.com/ikea-effect) explains how we tend to overvalue things we place successful effort into. Our Deprival Super Reaction tendency can cause us to feel hurt and breed resentment to people who dismiss or overlook those ideas.

__How to navigate?__
Treat your ideas like cattle not pets and be ready to cull them not coddle them. Create a workplace that encourages an idea meritocracy where the best ideas float from the front line to the top and where the idea wins not the person who sponsored it.  

## References
- The Psychologies of Human Misjudgement ([transcript](https://fs.blog/great-talks/psychology-human-misjudgment/)) - Charlie Munger Harvard University speech 1995 


Bias caused by loss of something almost possessed.  3 examples: 1) Losing a promotion; 2) Holding on to falling stock; 3) Overvaluing ideas.

deprival-super-reaction

Deprival Super Reaction Bias - Why it makes people go crazy?

Availability bias occurs when we overestimate the frequency or likelihood of an event when it is easier to recall. This can lead to bad decision making especially when assessing risks or making investments.
![availability-bias](//images.ctfassets.net/vwq10xzbe6iz/3xmF85xOP7EIdJWIa0tJ9D/e54863460e43ac8d37a49683182e7fd0/availability-bias.png)

For example product managers may assess the demand for a particular feature by recalling past interviews they participated in. People managers may weigh internal promotions based on how often their schedules match with each candidate under a hybrid work environment.

### Sections
1. [Why does availability bias occur?](#why)
2. [How can availability bias be overcome?](#how-to-overcome)
3. [Examples of availability bias in startups](#examples)

## <a name="why"></a>1. Why does availability bias occur?
Tversky and Kahneman argued that people tend to assess the relative importance of issues by the ease of which they are retrieved from memory.

Our memory can be swayed by factors including:
- __Limited capacity__: average number of items we store in our short term memory is 7
- __Salient events__: vivid and emotional events that leave a lasting impact in particular negative experiences
- __Recency__: frequency of media coverage or social discussion  
- __Imagery__: excellent at encoding images over words 

Tversky and Kahneman demonstrated the availability heuristic in a series of studies in 1973 including one measuring “Fame, Frequency and Recall”.

Participants listened to a list of 39 names being read and were then asked to recall whether the list contained more men or women. The list either had fewer names of famous women and more names of less famous men (e.g. Elizabeth Taylor vs William Fulbright) or a list with fewer names of famous men and a list with more names of less famous women (e.g. Richard Nixon vs Lana Turner). 

Over 80% of the participants incorrectly judged the list with famous names to be more frequent in terms of gender. Tversky and Kahneman argued that people’s frequency judgements are biassed by the ease of which names could be recalled.

## <a name="how-to-overcome"></a>2. How can availability bias be overcome?
Here are three ways you can overcome the availability heuristic:
- __Acknowledge__: as with most biases you will always have an initial “gut reaction”. Take the time to acknowledge that you lack the full data and are making an assessment based on what you can remember
- __Frame the problem__: before making an assessment ask what problem you are really trying to solve. This will assist with asking the right question to get more data and assessing whether any decision solves the right problem
- __Look for different examples__: seek out and compare counter examples of what is easier to remember (e.g. older vs recent instances, positive vs negative experiences, multiple instances of any memorable imagery)

## <a name="examples"></a>3. Examples of availability bias
Here are three examples of how product, HR and marketing teams may be impacted by availability bias and how they can overcome it.

| Role     | Example     | Counter     |
| ---------- | ---------- | ---------- |
| Product Manager       | Assume a certain feature is more important to users because they participated in past interviews and recall the user and their emotion       | Encourage video recordings of user interviews to ensure teams are not biassed by images over words       |
| HR Manager       | People managers may overweight candidates for internal promotion by how often they match with their schedules under a hybrid work environment       | Set a higher relative weight for promotion criteria towards competency and deliverables vs team culture       |
| Marketing Manager       | Increasing ad spend on outdoor medium as they view more non-competitor startups spending on more outdoor on their path to work       | Evaluate any new ad spend formats against a small experimentation budget which must compete against other proposals       |

## References
- [Availability: A heuristic for judging frequency and probability (1973)](https://familyvest.com/wp-content/uploads/2019/02/TverskyKahneman73.pdf) Amos Tversky and Daniel Kahneman


Availability heuristic occurs when we overestimate the frequency or likelihood of an event when it is easier to recall. 1) Why does availability bias occur? 2) How can it be overcome? 3) Examples in product, HR and marketing.

availability-bias

Availability Bias - Examples and How to Overcome

The Cognitive Reflection Test (CRT) is a simple three question test that measures people’s tendency to answer questions with the first idea that comes to their mind without checking it.

The first and most popular question is the “bat and ball problem” which more than 50% of students at Harvard, MIT and Princeton get wrong. 

![cognitive-reflection-test](//images.ctfassets.net/vwq10xzbe6iz/55mZtOXLz6Z3uVaaFzEFKy/cce62be0aa1919ebdcf07e80fa73f713/cognitive-reflection-test.png)

### Sections
1. [The Bat and Ball Problem](#bat-and-ball)
2. [How to Improve Your CRT Score](#improve-crt)
3. [Examples of Reacting vs Checking](#react-vs-check)

## <a name="bat-and-ball"></a>1. The Bat and Ball Problem
__Problem:__
- A bat and a ball cost $1.10. 
- The bat costs $1.00 more than the ball. 
- How much does the ball cost?

__First Reaction:__
- 10 cents

Nearly all people have a first reaction of 10 cents which is wrong. The correct answer is 5 cents. 

In a study of 3,428 university students, 50% of participants across Harvard, MIT and Princeton gave the incorrect intuitive response and did not actively check their response. A failure to check is instructive because it requires such minimal mental effort.

Anyone who would pause and check would recognise that if the ball is 10 cents the bat would need to cost $1.10 and the sum would be $1.20, which is above the target $1.10. 

Daniel Kahneman describes this cognitive bias as the distinction between a person’s two processes of thinking:
- __System 1__: executed quickly with little conscious deliberation; and
- __System 2__: executed slowly and more reflective

System 1 processes occur instantly and effortlessly for example knowing the answer to 5 x 5 or indicating left when turning the car left. 

System 2 processes require more effort, concentration and calculation for example the answer to 25 x 7 or correcting for car slides on icy roads. 

## <a name="improve-crt"></a>2. How to Improve Your CRT Score
Here are three ways you can improve your CRT score and mitigate against biases of System 1 thinking:
1. __Acknowledge__: that you will always have an initial “gut” reaction to an event or problem and jump to solution mode. This is unavoidable and it is ok. Note your initial reaction and solution;
2. __Pause and check__: your first idea before sharing your feedback. Check who the decision would impact and how much effort the solution would require; and
3. __Ask questions__: to find out who really has the problem and where the problem comes from. Check again whether your first idea would answer these questions.

## <a name="react-vs-check"></a>3. Examples of Reacting vs Checking
Here are three examples of how product, customer success and marketing teams may react with their first idea and how they could pause and check.

| Example     | React First Idea     | Pause & Check     |
| ---------- | ---------- | ---------- |
| __Product__ <br> Watching an end-user struggle to upload a file       | Propose feature solution of drag and drop file upload       | Before solution mode: <ul><li>check funnel data of what % of users fail upload</li><li>are those not uploading files blocking the flow of other users</li><li>are there non-UX factors causing this (e.g. file size, internet speed)</li></ul> |
| __Customer Success__ <br> Unhappy customer feedback that solution was not a fit with their internal system and they may now churn       | Blame sales team for selling to clients with poor system fits and create a new process to screen out incompatible customers       | Before solution mode: <ul><li>check how many existing customers are at risk of incompatibility. Are they using workarounds</li><li>could the cause of the incompatibility be known in advance of the sale</li><li>does the customer still see value in the solution</li></ul> |
|__Marketing__ <br> Prospect complains angrily they are getting too many marketing emails | Disable this week’s new marketing campaigns | Before solution mode:<ul><li>confirm how many other recent complaints have been received</li><li>check if prospect is an existing paying customer or opportunity</li><li>if not, check if prospect fits the ideal sales qualified target</li></ul>|

To learn more about how to pause and check, read about the 4 simple questions you can ask to help identify and solve the right problems before jumping to solution mode ([How to solve the right problems](https://mannhowie.com/problem-solve)). 

## References
- Shane Frederick (2005). ["Cognitive Reflection and Decision Making"](https://www.aeaweb.org/articles?id=10.1257/089533005775196732). Journal of Economic Perspectives.
- Daniel Kahneman (2011). [Thinking Fast and Slow](https://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374533555). Chapter 3, The Lazy Controller


Why 50% of Harvard, MIT and Princeton students get the bat and ball problem wrong. 1) The Bat and Ball Problem; 2) How to Improve Your CRT Score; 3) Examples of Reacting vs Checking in Product, Customer Success and Marketing.


cognitive-reflection-test

Cognitive Reflection Test - Examples of Reacting vs Checking

In understanding the concept of the Time Value of Money (TVM) we can expand and answer Aesop’s 600BC fable:

> “When are two birds in the bush worth more than one in the hand?” 

![time-value-of-money](//images.ctfassets.net/vwq10xzbe6iz/5GtG859hf4SfRq67YOALSv/4a6dcb5c6a2ee243263d0758a0fe31ac/tvm.png)

Warren Buffett in his [2000 annual shareholder letter](https://www.berkshirehathaway.com/2000ar/2000letter.html) answered Aesop’s fable by answering four questions:
1. __Future value__: How many birds are there in the bush?
2. __Certainty__: How certain are you that there are indeed birds in the bush?
3. __Time periods__: When will they emerge?
4. __Annual rate__: What is the risk free interest rate?

### Future value
In answering the first question of future value we are told there are two birds from the bush that will be captured for us.

### Certainty
In terms of certainty we can be fairly certain that the species of birds is not extinct or endangered and the hunters have the means of capturing them.

### Time periods
To answer when they will emerge we will need to assess how long it will take the hunters to capture them after deducting for their costs and supplies.

### Annual rate
To assess the present value of the opportunity we need to look at the risk-free interest rate which we can consider to be the yield on long-term US bonds. This rate represents the expected low-risk return we would receive for investing our current bird in the hand if exchanged for dollars - also known as our opportunity cost.

__US long-term treasury yield rates__
![fed-rate](//images.ctfassets.net/vwq10xzbe6iz/1SdIiUErJ0uTun6U818PAH/510b46dfb2c470d6868878742e5073e5/fed-rate.png)

Source: [Board of Governors of the Federal Reserve System (US)](https://fred.stlouisfed.org/series/DGS10)

### Present value
If we answer these four questions we will know the maximum number of birds we possess today that should be offered to invest for the promise of two birds in the bush.

__Scenario A - High interest rates__
If we are in a high interest rate environment of 15% (as in the 1980s) and we expect to receive two birds from the bush in 5 years then we should exchange our bird in the hand. Any longer than 5 years then we should keep our bird in hand.

Investing our one bird in the hand at a 15% compound rate over 5 years would yield us 2 birds.

__Scenario B - Low interest rates__
But if we are in a low interest rate environment of 3% (as in the 2010s) and we can still get two birds out in 20 years it still makes sense for us to give up our bird in the hand.

Aesop’s fable expanded and converted from birds to dollars applies to any financial investment whether it be for stocks, bonds, commodities, farm output and rental property.


Understanding the TVM with Aesop’s fables. When are two birds in the bush worth more than one bird in the hand? Learn the four elements of TVM: 1) Future value: How much are you going to get?; 2) Certainty: How sure are you that you’re going to get it? 3) Time periods: When are you going to get it?; 4) Annual rates: What are current interest rates?

time-value-of-money

What is the Time Value of Money with Examples - 4 Elements of TVM

Google acquired YouTube for US$1.6bn in 2006. In 2022, YouTube could be worth over US$180bn achieving a +110x return. Analysis of YouTube revenue and usage statistics and financial metrics.

yt valuation comparison

How Much is YouTube Worth? Over US$180bn in 2022

The average is the most commonly used metric we use to understand data and infer insights - it is also the most dangerous.
![beware_average](//images.ctfassets.net/vwq10xzbe6iz/12kJw6jBqfvjjSCHyMxUNm/2dbf7edf379236641095dffe09c670fb/beware_average.png)

# The Pitfall of the Average
The US Air Force began life in the late 1940s with a high rate of aircraft accidents and pilot fatalities (excluding combat losses) with 23.6 aircraft destroyed per 100,000 flying hours. This dramatically reduced to 4.3 by the end of the 1960s driven largely by the work of one man, Lieutenant Gilbert S. Daniels who saw the pitfall of using “the average” to design solutions.

> The tendency to think in terms of the “average man” is a pitfall…it is virtually impossible to find an “average man” in the Air Force population.
[Gilbert S Daniels (1952 US Air Force Report)](https://apps.dtic.mil/sti/citations/AD0010203)

US Army engineers had standardised the design of pilot cockpits to conform to the average dimensions of a 1926 pilot. This was revisited in the 1950s by Lt. Daniels who measured the bodily dimensions of more than 4,000 pilots and found that zero pilots matched the average dimensions.

The US Air Force responded and demanded that its manufacturers design its cockpits to be adjustable to individual dimensions vs the standardised average. As a consequence, both pilot performance and accident/ mishap rates dramatically improved.
![us_airforce](//images.ctfassets.net/vwq10xzbe6iz/6mtEbxaIXNU60Svdu9uGsO/3c61d041d241f4040e7269db2552b8eb/us_airforce.png)

# A Modern Example
A modern example of the pitfall of the average would be to look at user activity. Imagine we build software that helps users perform inspections and we are tasked with improving user engagement.

Looking at the data we find that the average count of monthly inspections performed by our active users is 32 inspections per month:

![table_inspections](//images.ctfassets.net/vwq10xzbe6iz/3SfYJ8CwfGsBPFptTVL3jB/44bd12fd8ec35a7fc0c8efe608a47ed3/table_inspections.png)

Knowing this, we can deduce that our users on average perform 32 inspections per month or approximately one inspection a day. We begin building solutions such as daily notifications to help remind our users to perform their daily inspection.

__Stop.__

Reducing a large data set into a single number can often mask useful information and give us the wrong answer. Instead we can look at the distribution of our data and graph the same data as a histogram to reveal how often each different value occurs in a dataset.
![histogram_inspections](//images.ctfassets.net/vwq10xzbe6iz/1UixJwtgp0xcrWIvV6I6J2/ce429dc02a478f3c49abb41f28b113bc/histogram_inspections.png)

Now looking at the distribution of our data we can see that none of our users perform the average number of 32 inspections per month. Instead we see that 60% of our users perform 10 or fewer inspections per month and a large group (+30% of users) perform 70 or more inspections per month.

The distribution of our data could suggest that the usage of our software differs widely by different cohorts of users. One cohort could be using it to perform monthly scheduled safety checks vs another cohort using it to perform factory line QA checks. 

Next time when using the average, pause before making any conclusions and ask: "How many instances of the data actually reflect the average?". 

__References:__
- [THE “AVERAGE MAN”? - Gilbert S Daniels (1952 US Air Force Report)](https://apps.dtic.mil/sti/citations/AD0010203)
- [Trends in U.S. Air Force Aircraft Mishap Rates (1950-2018) - Thomas Light, Thomas Hamilton, Spencer Pfeifer](https://www.rand.org/content/dam/rand/pubs/research_reports/RRA200/RRA257-1/RAND_RRA257-1.pdf) 
- [The End of Average - Todd Rose (2015)](https://www.penguin.com.au/books/the-end-of-average-9780141980034) 


The average is a myth. Understand the pitfalls of the average and how it can conceal useful information. How the US Air Force threw out the average and saved lives. Use distributions to better understand your data.

beware_average

How the US Air Force Ditched the "Average" and Saved Lives

Exchange Traded Funds (ETFs) are listed funds that commonly track a basket of securities linked to major indices. Most ETFs are passive equity index funds that track major stock market indices. The world’s top 5 ETFs represent over USD1.5 trillion in assets under management:

| ETF Fund | Assets USDbn | Index |
| ---------- | ----- | ---------- |
| 1. State Street  SPDR S&P 500 ETF | 416 | S&P 500 |
| 2. Blackrock  iShares Core S&P 500 ETF | 335 | S&P 500 |
| 3. Vanguard S&P 500 ETF | 293 | S&P 500 |
| 4. Vanguard Total Stock Market ETF | 292 | CRSP US Total Market Index |
| 5. Invesco QQQ Trust | 197 | NASDAQ 100 |

Source: [ETF Database](https://etfdb.com/compare/market-cap/) 

This article explains why people invest in ETFs, how they work, why they trade close to Net Asset Value and how they differ vs actively managed mutual funds.
1. [Why Invest in ETFs](#why)
2. [How do ETFs work](#how)
3. [ETF Price vs NAV](#nav)
4. [ETFs vs Managed Funds](#vs)

## <a name="why"></a>1. Why Invest in ETFs?
People are attracted to investing in ETFs as a low cost way of gaining exposure to the entire market economy vs picking individual stocks.

For long term investors, individual stock picking is a bet that a company will remain great over the long run. This is not an easy task, as famous value investor Mohnish Pabrai says “Capitalism is Brutal”. 

Consider that today, 2/3rds of companies in the Dow Jones Industrial Average were not represented 30 years ago, and only one company still remains when looking back 45 years (Procter and Gamble) [source](https://en.m.wikipedia.org/wiki/Historical_components_of_the_Dow_Jones_Industrial_Average). 

A passive investment in an index such as the S&P 500 is a bet that the top 500 companies listed on US exchanges combined will be more valuable in the future than they are today. 

Over the past 10 years, the S&P 500 index combined market cap has grown from ~US$12 trillion to +US$40 trillion achieving an annualised return of +12%. This period has been characterized by major disruption with the technology sector displacing the financial and commodity sector as the key drivers of growth.

__S&P 500 Index 10 Year Performance__
![S&P500](//images.ctfassets.net/vwq10xzbe6iz/2BjqItN0HZGQ7fGNgmxkq6/393c0e11cc4c484c15e9a411038a6bb3/sp500.png)
Source: [SPGlobal](https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview)

Whether the next 10-20 years is driven by AI, robotics or even the agriculture sector should not matter for passive index investors, so long as the overall economy and company earnings grow.

## <a name="how"></a>2. How do ETFs work?
To understand how ETFs are created imagine we are establishing an equity index ETF which will track the performance of the top 5 largest US listed companies (a fictional S&P Big 5 Index).

The creation of an ETF involves 3 parties:
1. ETF Sponsor (eg Vanguard)
2. Participating Dealer (eg Citigroup)
3. Individual Investors (eg retail investors)

__ETF Creation and Redemption Process__
![etf_creation](//images.ctfassets.net/vwq10xzbe6iz/3OTJ4z6jbGk1Qoc8cGSo50/68e14fe987b5a5f34c61b98919ea5c4d/etf_process.png)
Source: [Vanguard](https://www.vanguard.com.hk/documents/etf-how-etfs-work-en.pdf)

__Stage 1__

We start with our ETF Sponsor Vanguard who begins marketing the idea of an S&P Big 5 ETF. They engage Citigroup as a Participating Dealer to go out to their investors to gauge interest for this new ETF.

Investors express strong demand in the fund and Citigroup sees a business opportunity to act as a broker and trade these ETFs for their investor clients to earn a commission.

__Stage 2__

Citigroup goes into the stock market and starts buying up parcels of shares of the S&P Big 5 constituents in the same weight as the index on behalf of their investor clients.

They then take these newly acquired shares to the ETF Sponsor Vanguard and exchange them for a parcel of ETF shares. Vanguard having received these physical shares creates new parcels of ETF shares to give to Citigroup. This is known as the creation process in the primary market for ETFs.

__Stage 3__

Citigroup now sells these newly created ETF shares to their investor clients via the stock exchange who want the convenience of a single ETF share that has the underlying holding of the index shares. This happens in the secondary market for ETFs (being the listed exchange).

Investors can then buy and sell these newly created ETFs on the secondary market. As demand outstrips supply, Citigroup can once again buy the underlying shares and go into the primary market and request more ETF shares be created in exchange for the acquired shares.

In this way, ETF shares on issue can continue growing without the need for the fund to engage in costly capital raising activities like other managed/ mutual funds or listed investment companies.

## <a name="nav"></a>3. ETF Share Price vs NAV
ETF share prices trade very closely to their underlying Net Asset Value (NAV). The NAV is the value of the underlying shares less the fund’s expenses. This occurs because of arbitrage in the primary and secondary market.

Imagine if the ETF share price were to trade at a 50% discount to its NAV. A participating dealer could buy up the ETF shares and take them to the fund and ask for them to be redeemed for their underlying shares. The ETF Sponsor would accept and then cancel the ETF shares and then transfer the underlying shares to the Participating Dealer. The dealer would then sell these shares at market value and pocket the 50 % profit. This would continue bidding up the ETF share price until it reached close to NAV.

Similarly if the ETF share price was trading at a 20% premium to NAV. The Participating Dealer would buy the underlying shares in the market, exchange them for newly created ETF shares in the primary market and then sell them in the secondary market to pocket a 20% profit. They would continue doing this and selling ETF shares until the price fell close to NAV.

## <a name="vs"></a>3. ETF vs Managed Funds?
The primary difference between ETFs and Managed Funds are that ETFs are typically a low cost passive index play with high liquidity vs Managed Funds being higher cost active stock picking play with lower liquidity.

ETF fee structures can be as low as a fixed annual management fee of 0.2% vs Managed Funds being 1.0% annual management fee plus 20% performance fee above market returns.

ETFs are able to achieve a lower fee structure as they have no active internal or third party headcount focused on investment analysis and there is no active trading or capital raising function (that is done via Participating Dealer). 

Managed Funds are also often close-ended and unlisted meaning during downturns investor redemptions can negatively impact returns as they are forced to sell underlying shares to realise losses. This also puts upward pressure on expense ratios as assets under management decline.


1) Why Invest in ETFs; 2) How ETFs work; 3) ETF Share Price vs NAV; 4) ETF vs Actively Managed Funds

S&P500

Why Invest in Exchange Traded Funds (ETFs)? 

Here are three core formatting best practices you can apply for financial models and data analyses in Excel and Google Sheets.

[Formatting cheat sheet with examples (free download)](https://docs.google.com/spreadsheets/d/1lPK9rY2XF0C5kbo1EtUGiCEvozOfaUPxt9zilfthTZc/edit#gid=0)

## 1. Color Coding Cells
- <span style="color:black;border:solid 1px;border-width:1px;padding:0px 2px">Black</span> = formula, calculations and links to other cells
- <span style="color:blue;border:solid 1px;border-width:1px;padding: 0px 2px">Blue</span> = hard coded input cells and historical data
- <span style="color:blue;border:solid 1px;border-width:1px;padding: 0px 2px;background:yellow">Blue with yellow background</span> = key input assumptions
- <span style="color:green;border:solid 1px;border-width:1px;padding: 0px 2px">Green</span> = link to other spreadsheets in the same file

__Example - Big Tech Company Metrics__
![COLORCODE](//images.ctfassets.net/vwq10xzbe6iz/1B5GvkyNo7NBDedwEllnDM/1a7fa72588abd089f5d470992a41baef/COLORCODE.png)

## 2. Financial Tables
- __FY20XX__ = Use financial year end for your column headers, include the year end and metric in the table header
- __Revenue__ = bold important headline metrics (Revenue, EBITDA, EBIT, NPAT)
- Cost of Revenue = indent sub metrics used to calculate headline metrics (e.g. COGS)
- Financial formatting = use brackets for negative values and avoid more than 1 dp
- Left to right = older to newer FY dates ordered left to right

__Example - Alphabet Income Statement__
![TABLE](//images.ctfassets.net/vwq10xzbe6iz/1HaM9TUGNg0UkczOVAIDgl/98d7bb87c0cda476c90562f9a85056f5/TABLE.png)

### 3. Key Metrics
- __FY20XX__ = Align your key metrics under the same columns as the financial table
- *Revenue growth yoy* = italic text for key metrics
- *23%* = italic text including the unit metric (e.g. %, x)
- <span style="color:gray;border:solid 1px;border-width:1px;padding: 0px 2px;background:gray">Grey</span> = grey out cells if computed metric not able to be calculated

__Example - Alphabet Income Statement Key Metrics__
![METRIC](//images.ctfassets.net/vwq10xzbe6iz/jKJYZgcCeyTjKK6kjKaR8/e98f783e10d0b4fb8fc2326d4de988ce/METRIC.png)

[Formatting cheat sheet with examples (free download)](https://docs.google.com/spreadsheets/d/1lPK9rY2XF0C5kbo1EtUGiCEvozOfaUPxt9zilfthTZc/edit#gid=0)

Investment Banking Excel and Google Sheet formatting best practices for building spreadsheets and financial models: 1) Color Coding Cells; 2) Financial Tables; 3) Key Metrics

COLORCODE

Financial Model Formatting - 3 Core Best Practices

Alibaba operates three of the largest digital platforms in China: e-commerce, cloud and payments. We estimate Alibaba Group (BABA:NYSE 9988:HKG) to be valued at up to US$900 billion based on a Sum Of The Parts (SOTP) valuation of its various operating segments:

#### Alibaba Group SOTP Valuation (2021)
![alibaba sotp](//images.ctfassets.net/vwq10xzbe6iz/5JX9uAgNOkj85xN3eJWyA8/16003aacd7bc9972fb8da8e3a55152a6/alibaba_sotp.png)

This article analyses Alibaba’s two main operating segments that represent up to 88% of the group valuation (Taobao/ Tmall and Alibaba Cloud) and shows how you can formulate your own valuation and thesis. To learn the fundamentals of valuing any technology company refer to [this article with a case study of how to value YouTube](https://mannhowie.com/youtube-valuation). 

__Key Sections:__
1. [China E-Commerce Market Share](#industry)
2. [Taobao/ Tmall Valuation](#taobao)
3. [Alibaba Cloud Valuation](#cloud)

## <a name="industry"></a>1. China E-Commerce Market Share
China dominates global online spending. Over 57% of total global online spend happens in China with an estimated +1 billion online shoppers spending over US$2.8 trillion annually. Online spending in China alone is more than 70% more than the next 10 countries combined.

#### Global E-Commerce Spend by Country (2021 Forecast) & China E-Commerce Market Share by Company (2020 Actual)
![global ecommerce](//images.ctfassets.net/vwq10xzbe6iz/5RpP7NWgAWsBH0A4nt048d/f2e7b2c21f59148f2c90ad8d99d618e0/global_ecommerce.png)

China is likely to continue to dominate global online spending the next decade and beyond. Relative to the United States, China has 5x the online shopping population and is still only at 20% of US GDP and Income per capita. Across e-commerce there are two economies: China and the Rest of the World.

Within China, e-commerce is dominated by three players: Alibaba, JD.com and Pinduoduo. Alibaba’s annual Gross Merchandise Value (GMV) across its two platforms Taobao and Tmall in China alone is more than all annual online spend across the US, UK and Japan combined. 

#### China E-Commerce Major Players
![china ecommerce table](//images.ctfassets.net/vwq10xzbe6iz/2vOtxucZPBnNJvlZH9KklU/c8ed8fe3cda225faf94169a6df37080a/china_ecommerce_table.png)
Across the three major Chinese players Alibaba maintains its dominant position. However newcomer pinduoduo has grown considerable share in a very short period focusing on a new trend in e-commerce in China, lower basket value social commerce.

## <a name="taobao"></a>2. Taobao / Tmall Valuation
Alibaba’s largest and most profitable segment is its e-commerce marketplace platform in China known as Taobao and Tmall. We value this segment at RMB 4 trillion (US$ 624 billion) representing 80% of the entire valuation of Alibaba.

### What is Taobao and Tmall?
With over 811 million active annual customers, Taobao is effectively the internet platform for e-commerce in China. Nearly all merchants and businesses that sell to Chinese consumers have an online store on Taobao. 

There are two main platforms within the one Taobao mobile and web app: Taobao and Tmall with a total GMV split 50/50:

- __Taobao__ is a marketplace platform where any merchant, person or small business can set up an online store and sell to the Chinese population.

- __Tmall__ is a B2C platform reserved for brand companies where they can set up their own dedicated stores. Most international brands selling into China will transact through their Tmall stores vs their own online shops.

#### Taobao vs Tmall
![taobao vs tmall](//images.ctfassets.net/vwq10xzbe6iz/4QhVDL6MlaqeWzoag1v54z/9ee6f6d521faa305e273bfd0f4407907/taobao_vs_tmall.png)

Alibaba’s e-commerce business model is marketplace-based and facilitates transactions between buyers and sellers. Unlike Amazon and JD.com, Alibaba does not purchase and resell inventory nor does it own or operate its own fulfilment and distribution centres. It is the sellers responsibility for organising delivery to the buyer either direct or via Alibaba’s network of 3rd party logistics providers (via its global Cainiao logistics business).

### How does Taobao Tmall generate revenue?
Ads and commissions:

- __Ads (70% of e-commerce revenue)__: merchants buy keywords and display ads on Taobao and Tmall to attract traffic and purchases to their stores. Ad monetization represents 2-3% of GMV transacted through the platform. Alibaba’s high margin ad revenue model is similar to Google’s cash cow Search business.

- __Commissions (30% of e-commerce revenue)__: merchants pay commissions on transactions through the Tmall network as part of hosting their stores on the largest e-commerce platform in the world. Commission monetization represents ~1% of GMV.

### What is the growth thesis for Alibaba China E-Commerce?
The e-commerce market in China is now highly mature with over 50% of retail sales done online and Alibaba maintaining the dominant share. Having been the dominant e-commerce platform in China for the last decade we expect overall growth to slow. 

Having said that, we still expect Alibaba to remain the dominant e-commerce platform in China and expect Alibaba’s annual GMV to grow another 50% over the next decade and ad monetization to increase from ~3% to +3.5%.

We can represent these assumptions as key operating metrics to arrive at a forecast annual revenue by the end of 2030 of RMB 521bn (US$82 bn), up from ~RMB 300bn (US$47bn) ending 2020.

#### Alibaba China Retail Marketplace Revenue Model (RMB)
![alibaba retail revenue model](//images.ctfassets.net/vwq10xzbe6iz/7AgIVJxBlV9K6uenKzyOX9/af5ab81611f9c3a6cba49f4a7b23d585/alibaba_retail_revenue_model.png)

### China Retail Marketplace DCF Valuation
We arrive at our RMB 4 trillion ($USD 624 bn) valuation for Alibaba’s China e-commerce business applying the following key assumptions:
- __EBITA margins__: remain stable at 72% given the high margin operating model of its ad ad and commission businesses. We expect Alibaba’s other segments to operate at break-even largely to support its high margin e-commerce segment (e.g. Cainiao logistics) 
- __Tax rate__: long term effective tax rate of 20% (China based)
- __Stock Based Compensation__: while non-cash we treat this as an expense as it’s largely a substitute for compensating staff. We expect SBC to remain at 25% of total revenue going forward to attract key talent
- __Reinvestment (Net Capex)__: assume a capital-light sales to capital ratio of 1.5 (in line with Alibaba historical and compares to 1.9 for Alphabet) meaning for every one dollar of incremental annual revenue growth, Alibaba will reinvest 66% back into the business for future growth
- __Discount rate__: assume 8% discount rate, low by historical standards but higher now given subdued global interest rates
- __Long term growth rate__: 3.5% above global GDP long term GDP growth of 2-3% as China is still expected to grow faster than the rest of the world for the next decade

#### Alibaba China Retail Marketplace DCF Model (RMB millions)
![alibaba retail dcf](//images.ctfassets.net/vwq10xzbe6iz/3em6HkDrD1MyZwUDTEdslh/e15b1815727f85c2aadc60bb3221838d/alibaba_retail_dcf.png)

## <a name="cloud"></a>3. Alibaba Cloud Valuation
Alibaba’s second most valuable operating segment is its cloud computing business Alibaba Cloud. We conservatively value this segment at RMB 390 billion (~US$60 billion) on the basis it continues to dominate the Chinese market but will face stiff competition globally particularly given political concerns in western economies around hosting of data by Chinese domiciled companies.

### What is Alibaba Cloud?
Alibaba Cloud is the 4th largest cloud computing provider globally and the largest in the Asia Pacific with +40% share in China. It sells cloud-based compute and storage infrastructure services to businesses looking to host their applications and data primarily in China (although it operates globally).

#### Global Public Cloud Infrastructure Services Spend 2020

![global cloud spend](//images.ctfassets.net/vwq10xzbe6iz/77Vqh2ZPUOpbpsZ2EmAFer/5f135f4d953b45be2e4716c4d5588999/global_cloud_spend.png)

Alibaba Cloud is similar to Amazon Web Services offering similar competing offers often at even lower prices when hosted in China vs AWS. It has a clear advantage over the other hyperscale cloud providers within China given its significant existing presence in the Chinese market and wider local market support.

### Alibaba Cloud DCF Valuation
Our RMB 390 billion (US$ 60 billion) DCF valuation for Alibaba Cloud is based on the following key assumptions:
- __Revenue__: Achieve revenues similar to that of current AWS levels by 2030, largely driven by growth in the local Chinese and Asian market. Alibaba is following in the similar footsteps as AWS (~7 years behind) as both the local market leader and without competition from global hyperscale providers. However growth is expected to slow as we expect international growth to be more difficult
- __EBITA Margin__: Achieve similar EBITA margins of +30% as AWS as it reaches scale and continues to reinvest for growth
- __Tax and SBC__: Effective tax rate of 20% and lower stock based compensation expense as % of revenues vs Alibaba China Retail as lower proportion of costs represented by people
- __Reinvestment Rate__: Sales to capital ratio of 1.5 continuing to reinvest 66% of net revenue growth back into the business each year
- __Discount and growth rate__: 8% discount rate and 3.5% LT growth rate in line with Alibaba China Retail

#### Alibaba Cloud DCF Valuation (RMB millions)
![alibaba cloud dcf](//images.ctfassets.net/vwq10xzbe6iz/1yolWWSzSGMD3dC1BOLU7j/d8fa2dedd86c7bde6d2fa70393c5700c/alibaba_cloud_dcf.png)

Alibaba operates three of the largest digital platforms in China: e-commerce, cloud and payments. We estimate Alibaba (BABA:NYSE 9988:HKG) to be valued at up to US$900 billion based on a Sum Of The Parts (SOTP) valuation of its various operating segments.

global ecommerce

How Much is Alibaba Worth? US$900 billion in 2021

People drawn to startups are often attracted to the rapid build and growth phase. But, the associated tax that comes with this is __*uncertainty*__, with common symptoms being decision making paralysis, poor incident response and unconsidered risk taking.

![decision-making](//images.ctfassets.net/vwq10xzbe6iz/65MLYg8MZeUGcK4kerw2nz/644cfc8087154f28267fad6fbdfa1f56/decision-making.png)

Here are 3 useful decision making frameworks startups can use to tackle each of these scenarios:

1. 🤷‍♂️ __What Next?__ -> [Peer Plus One Framework](#1)
2. 😱 __Oh Crap!__ -> [Incident Response Framework](#2)
3. ⚠️ __Should/ Shouldn't We?__ -> [Risk Assessment Framework](#3)

### <a name="1"></a>1. What Next? -> Peer Plus One Framework
Decision making paralysis causes people to go back and forth on the same problem and can create anxiety, animosity and demotivate teams.

![peer](//images.ctfassets.net/vwq10xzbe6iz/3CI9Usyz8VOQY0CjFM5f4q/7acc50bb9a2ca810c955adcaa1d9f833/peer.png)

The late Andy Grove (Intel CEO) in his seminal 1983 book [High Output Management](https://www.amazon.com.au/High-Output-Management-Andrew-Grove/dp/0679762884) laid out two decision making frameworks to help drive a decision and break paralysis under two scenarios:
a. Technical/ Operational decisions
b. Complicated/ Strategic decisions

#### A. Technical/ Operational decisions
Andy made the syllogism that: 
1. People are most technical when they start their careers and are on the frontline engaging with customers or problems daily;
2. Managers who make decisions are further away from technical expertise and customers;
3. Peer groups are bad at coming to consensus and paralysed by fear of accountability

__Solution (Peer Plus One):__
To solve this, Andy supported having technical peer groups come up with solutions and options but someone one level senior to ratify or veto the decision. He coined this “Peer Plus One”.

#### B. Complicated/ Strategic decisions
For bigger, more complicated decisions (e.g. strategic or high risk), Andy proposed following a decision making framework all teams could use and answering 6 key questions in advance. It is summarised below with a problem scenario:

__Problem:__
Intel decided to expand its Philippine manufacturing plant but did not know where. Options included a more expensive space next to the existing site to take advantage of existing infrastructure or purchasing a new cheaper plot of land nearby that would require more construction. 

They were stuck in decision making paralysis. Let’s apply the framework below:

| Question | Example |
| ----- | ----- |
| 1. What decision needs to be made? |  Build a site next to an existing plant or purchase and build a new building in a new location? |
| 2. When does it have to be made? | Plant needs to be operational in 2 years so construction must begin within a month |
| 3. Who will decide? | A team that comprised project managers of the construction and operations team. Decision heavily impacted both teams so getting key representatives to evaluate options was important.  |
| 4. Who will need to be consulted prior to making the decision? | Key staff from both teams to be consulted on both options and implications |
| 5. Who will ratify or veto the decision? | Common report in this case being the CEO. Again this follows the “Peer Plus One” solution to drive the teams to come up with a solution | 
| 6. Who will need to be informed of the decision? | Chairman |

In addition to expedited decision making, a consistent framework gives the teams that come up with the options comfort that their decisions are assessed based on merit with key people consulted.

### <a name="2"></a>2. Oh Crap! -> An Incident Response Framework
Incidents are inevitable. But, reactionary decisions can be ineffective, create further unintended negative consequences and demotivate people.

![incident](//images.ctfassets.net/vwq10xzbe6iz/12c5E3mrpkiuonYX8SXd2c/17eb65bb40385cafe5b99212cc4bc15d/incident.png)

An effective incident response should seek to solve the real problem in a timely manner. Here is an framework applied to a scenario problem:

__Problem:__
The Head of Marketing signed a multiyear $2m marketing software license without seeking CEO/ Board approval. The Head of Marketing is also a sibling of the CEO/ Founder. While within the marketing teams budget, the software was deemed to be non-critical and an unjustified business expense at this stage.

| Stage | Question | Example |
| ----- | ----- | ----- |
| 1. Define Problem  | What incident needs to be resolved? | Significant unauthorised procurement by a member of the leadership team |
| 2. Investigate | What is the scope of the investigation required and who will lead? | Find out who authorised what and why. What frameworks were in place. Decide whether CEO should be removed from investigation due to conflict | 
| 3. Freeze | What immediate action should be done to minimise the impact? | Curtail delegations in procurement across all teams? Not clear if this is one-off or systemic | 
| 4. Remediate | How can we remediate/ resolve the incident? | Seek legal advice on validity of software license |
| 5. Action | What action should be taken following investigation findings? | What action should be taken on the Head of Marketing (formal notice/ termination)? Is an overhaul of the procurement procedure warranted? |
| 6. Message | What message should be communicated and to whom? | Does this warrant an all staff message on procurement policy and outcome of investigation or just to the marketing team? |

Following a consistent framework can help people remain calm and assess the underlying problem. Across all stages it is important to be clear on timeline and assign clear responsibilities and next steps. 

### <a name="3"></a>3. Should We/ Shouldn’t We? -> Risk Assessment Framework
Poor risk taking can lead to negative consequences and similarly missed growth opportunities. Upside gains and downside risks from decisions are often shared disproportionately across teams. This can lead to poor communication and resentment.

![risk](//images.ctfassets.net/vwq10xzbe6iz/1PJ39gRZFbxpICuLz5pNS6/ed103945ebca7553f5602ffa46adbff1/risk.png)

Risk is often associated with danger and hazards. Risk management should not be confused with risk avoidance. The word “Risk” has its origins in the early Italian verb “riscare” meaning “to dare or to venture upon and take a chance”. A clear risk assessment framework can help teams make informed decisions in pursuit of growth.

Here is a simple risk assessment framework with an applied problem:

__Problem:__
The sales team wants to offer a guarantee of software uptime delivery for an enterprise account and will promise a refund and added technical support if not achieved. The sales team believes this will help get the deal over the line. The delivery team is not confident of achieving the uptime and does not currently have resourcing for technical support. The teams are at an impasse.


| Stage | Question | Example |
| ---- | ---- | ----- |
|1. Identify | What are the key risks? | Uptime is not achieved. | 
| 2. Consequence | What is the consequence of the risk occurring? | 1) Customer requests refund. 2) Reputational damage from customer telling market about inability to deliver uptime | 
| 3. Likelihood | Assuming the risk occurs what is the likelihood of the consequence? | 1) Medium: customer may ask for refund but unlikely to need technical support. 2) Low: unlikely customer would tell broader industry | 
| 4. Controls | What controls can we put in place to limit the consequence? | Split the financial refund (if any) across the cost centres across the sales and delivery team. | 
| 5. Assessment | Assess the residual risk with controls in place and determine if risk/ reward is acceptable. | Financial risk is lowered as sales team agrees to take less future commission if delivery team unable to achieve result. Reputational risk is low and customer deemed unlikely to tell broader industry. The gain of signing this enterprise account will have a greater upside on brand. |

Beyond minimising downside risk, an effective risk assessment framework can benefit startups with increased:
- __Confidence__: provides entire company with greater confidence towards strategic objectives while managing blind spots
- __Communication__: carefully considering and communicating risks/ reward helps improve team collaboration and drives faster decision making 
- __Compliance__: being aware of and meeting legal and regulatory requirements of relevant decisions


3 useful decision making frameworks startups leaders and boards can use to tackle uncertainty in startups: 1) Peer Plus One Framework; 2) Incident Response Framework; 3) Risk Assessment Framework.


decision-making

3 Decision Making Frameworks Startups can use to Navigate Uncertainty

A Director is a person generally appointed by a company’s shareholders to attend, participate and vote in Board meetings and oversee [the role and function of a Board](https://mannhowie.com/board-role).

## 5 Basic Fiduciary Duties of a Director
> A Director has a ‘fiduciary relationship’ with a company which is a duty of fidelity and trust to always act in the best interests of the company as a whole and not oneself or a third party. 

In performing their role, a Director is subject to five key duties and obligations under corporation law, and the company’s constitution:

1. ✅Good Faith & Best Interests
2. ✅Act for Proper Purpose
3. ✅Avoid Conflicts of Interest
4. ✅No Misuse of Position or Information
5. ✅Exercise Care & Diligence
  
## Acting with Loyalty and Good Faith
The first four fiduciary duties relate to acting with loyalty and good faith. Below is a summary with breach examples:

| 	Fiduciary Duty	 | 	Description	|	Breach Example	|
| ------------------ | --------------------------	| ------------------------------------ 	|
| __1. Good Faith & Best Interests__ | Decision making on behalf of the best interests of the company as a whole | ❌ Vote influenced by an appointee or major shareholder |
| __2. Act for Proper Purpose__ | Doing things for their intended purpose in the interests of the company as a whole rather than a collateral benefit | ❌ Issuing shares to dilute a shareholder vs raising proceeds for a valid purpose |
| __3. Avoid Conflicts of Interest__ | Must not place oneself in actual or potential possibility of conflict | ❌Not disclosing material interests in a takeover company or competitor |
| __4. No Misuse of Position or Information__ | Must not misuse position to gain an advantage for oneself or someone else or to cause detriment to the company | ❌Insider trading. Setting up a competing company. Phoenix activities |

## Exercising Care and Diligence
Simply acting with loyalty and good faith is not a sufficient liability defence. A Director must also act with skill, care and diligence in overseeing strategy, risk and management of a company. 

At a minimum a Director should exercise care and diligence across these four areas:
1. ✅Familiarity with business
2. ✅Read Board papers
3. ✅Make enquiries
4. ✅Board approvals

| 	Care & Diligence	 | 	Description	|	Breach Example	|
| ------------------ | --------------------------	| ------------------------------------ 	|
| __Familiar with business__ | Become and stay on top of the business and financials | ❌Not understanding how business operates. Insufficient accounting knowledge. |
| __Read Board papers__ | Request and read all Board papers in advance, carefully review Board minutes | ❌Relying on opinions of other Directors. Disputing minutes in hindsight. |
| __Make enquiries__ | Question management and seek external advice on issues that have significant potential to harm company | ❌Relying on management reports. Lack of reported risks |
| __Board approval__ | Important strategic decisions, contracts and announcements should be brought to Board  | ❌No risk appetite framework. Not reviewing material market announcements |

## Statutory Duties & Liabilities
In addition a Director faces statutory duties and liabilities dependent on the legal jurisdiction:

| Statutory Duty/ Liability | Breach Example |
| --------- | ---------- |
| __Insolvent Trading__ | ❌Incurring further debts of any kind if a company is unable to pay all its debts as and when they become due and payable (including employee pay) |
| __Continuous Disclosure__ | ❌For listed companies not immediately disclosing a material contract loss |  
| __Tax Laws__ | ❌Un-remitted employee withholding tax or retirement contributions | 
| __Competition & Consumer Law__ | ❌Cartel behaviour. Truth in advertising |
| __Work Health & Safety Law__ | ❌Breach of work health and safety regulation (face imprisonment for reckless breaches) |
| __Anti-Discrimination Law__ | ❌Discrimination in relation to age, disability, union, race, sex etc |
| __Environmental Law__ | ❌Federal and state environment protection legislation |

## What are the Consequences of Breach of Directors’ Duties and Laws?
#### __Criminal sanctions__  👮
Imprisonment dependent on the severity of the outcome and if directors found to have acted dishonestly or recklessly in failing to comply with duties. Not protected under insurance and indemnification

#### __Civil sanctions/ Disqualification__ ⚖️
Liable for civil penalties including fines, class action lawsuits and disqualification as a director for long periods of time 

#### __Commercial/ Brand damage__ 📰
Reputational damage can damage the company as a whole well beyond the penalties imposed on its directors 

## How can Directors Best Protect Themselves Against Liability?
A Director should at a minimum follow these seven steps:

- ✅Always act in __good faith__ and best interests of the company as a whole and for proper purpose
- ✅Avoid/ disclose __conflicts of interest__
- ✅Exercise __care and diligence__ by reading Board papers, making proper enquiries and staying up to date with the business and industry
- ✅Engage __external advice__ where required but always make independent assessments
- ✅Avoid __insolvent trading__
- ✅Be familiar with the __laws of your industry__
- ✅Obtain __insurance and indemnification__



Five basic fiduciary duties of a Board member with breach examples. What are the consequences of a breach of Directors' duties and laws? How can Directors best protect themselves against liability?

board-role

What are the Fiduciary Duties of a Director?

Understanding the role of the Board of Directors and their interplay with Management can help you as an Executive make better strategic decisions.
1. [What is the role of the Board of Directors?](#role)
2. [What are the functions and responsibilities of the Board?](#function)
3. [What are the differences between Governance and Management?](#management)

## <a name="role"></a>1. What is the role of the Board of Directors?
To oversee and direct a company to deliver long term value for shareholders while meeting stakeholder expectations.
![board-role](//images.ctfassets.net/vwq10xzbe6iz/521sSM4bGcv8dMlcfIoeCi/27dead702d9ade7376f59a9631ebf909/board-role.JPG)

Companies basically consist of three parts:
1. Shareholders who provide the money and own the company;
2. Directors of a Board who act on behalf of shareholders to oversee and direct management; and
3. Management who perform day-to-day work and execution

![company-three-groups](//images.ctfassets.net/vwq10xzbe6iz/55boJ2GxC8gklHTYvEROis/b7812e8ac792ba8192686d42fadcaf94/company-three-groups.JPG)

A Board works to achieve its stated objectives through what is known as corporate governance. Corporate governance involves a set of systems, frameworks, strategies and processes to direct and control a company to meet the reasonable expectations of stakeholders.

![corporate-governance](//images.ctfassets.net/vwq10xzbe6iz/2UcDT2Y55Tlai9BDim0dBS/c077e68ed75f483ea2a75386f57a1399/corporate-governance.JPG)

The first known example of a Board was the East India Company in the 1600s which began with 218 shareholders following Royal Charter from Queen Elizabeth I. Its corporate governance structure consisted of a General Court which had voting rights and a Court of Directors made responsible for the running of the company with policy decisions requiring ratification by the General Court ([reference](https://www.kozminski.edu.pl/fileadmin/Kadra_i_Badania/Upowszechnienie_Nauki/Working_papers/dobija_d04_2009.pdf)).

#### East India Company Organizational Structure 1600
![eic3](//images.ctfassets.net/vwq10xzbe6iz/5ltb50L3mYMlf0yGyWlrpF/5f75d8cd9db1ff4a3e4e86d62db57257/eic3.jpg)
*[Source: shrimpamongwhales - organizational structure and army of the east india company](https://shrimpamongwhales.com/2018/01/07/organizational-structure-and-army-of-the-east-india-company/)*

## <a name="function"></a>2. Functions and Responsibilities of the Board
The Board is responsible for overseeing 2 main functions:
1. 💵Strategy and Performance; and
2. 💣Compliance and Risk

![board-function](//images.ctfassets.net/vwq10xzbe6iz/48Nm3cufQJhhP6KMPbqch8/9f8ae3c6c55852819289b069c4353202/board-function.JPG)

## <a name="management"></a>3. Governance vs Management
The role of management is to run the company and that of the Board is to see that it is being run well and in the right direction. This line is often blurred.

Directors should act only as a group and make joint decisions which are communicated to management and stakeholders (as they are all individually and collectively liable).



|    Area  | Management     | Board     |
| ---------- | ---------- | ---------- |
| __Strategy__      | Develop and recommend strategies and initaitives supported by research       | Work with and through CEO and management to develop high level strategy and goals       |
| __Performance__       | Execute, measure performance and deliver timely information to Board       | Oversight of management and company performance vs expectations set for shareholders       |
| __Resources__       | Identify and request resourcing/ budget to achieve targets       | Appoint,evaluate, guide and support CEO       |
| __Risk__       | Ensure risks are managed and reported       | Set risk appetite, framework and enquire vs management       |
| __Accountability__       | Keep Board informed, present options and recommendations       | Shareholder and stakeholder engagement. Act as external advocates e.g. fundraising and investor relations       |




What is the role of the Board? What are their functions and responsibilities? What are the differences between Governance and Management? Understanding the role of the Board of Directors and their interplay with Management can help you as an Executive make better strategic decisions.

The Role and Functions of Board of Directors

To understand the principles of valuation, imagine you are presented with an investment proposition. 

You can purchase a security that pays $100 per year over 3 years. At the end of the 3 year period you will be returned the purchase amount you paid. How much would you pay for this security?

#### Question: How much would you pay for this security?

![what would you pay](//images.ctfassets.net/vwq10xzbe6iz/4hI6KYT4dlAilQndBPVBiD/f072a0876d19d0273f7b871f1cd40819/Screen_Shot_2019-05-05_at_11.24.41_pm.png?h=300)

To answer this you must ask two questions:
1. How sure am I that I will get paid the total $300 plus my original amount?
2. What is my opportunity cost of purchasing this versus another investment?

To answer the first question, imagine that the counterparty is a reputable property manager and the cash payments are contingent on them making a profit for each of those 3 years.

The answer to the second question is a personal and subjective one. It is also the most important.

Let’s take two different people:
- __Person A__ has the opportunity to invest in bank term deposits that delivers 5% annual interest. They view the ability of the property manager to achieve profits as medium risk as many tenants are bricks and mortar retail. 
- __Person B__ for residency reasons cannot invest in local bank term deposits and can only invest in government bonds that deliver 2% annual interest. They in contrast, trust the track record of the property manager and view it as low risk.

__Person A__ may demand an annual rate of return of __10%__ given their perceived risk of the business and the comparable opportunity cost of investing in bank term deposits. From this we can calculate that __Person A would be willing to pay up to $1,000 for the security__ (i.e. $100 annual return divided by 10%).

__Person B__ on the other hand may only require a much lower rate of return of __5%__ given their trust in the property manager and that they do not have the same access to bank term deposits as Person A. Hence __Person B would be willing to pay up to $2,000 for the security__ (i.e. $100 annual return divided by 5%).

__Answer: This security is valued between $1,000 to $2,000. It depends on who’s buying.__

## What is the Discount Rate or WACC?
This rate of return is otherwise known as the *discount rate* or *Weighted Average Cost of Capital* (__WACC__) and is used to calculate company or asset valuations. It represents a theoretical aggregation of the rate of return all investors demand from investing in a company (both equity and debt holders). 

#### WACC Formula
![Screen Shot 2019-05-05 at 11.24.53 pm](//images.ctfassets.net/vwq10xzbe6iz/44HfXzVAZJcxTDCcK0676/86eccf1e2ae6e3b87ff0b98aef5a9067/Screen_Shot_2019-05-05_at_11.24.53_pm.png?h=300)

Without a discount rate you cannot calculate a valuation or price you should be willing to pay. Of course you can always determine a purchase price based on what you believe someone will pay for it in the future - that’s called speculation.

However, as an individual investor your rate of return is individual to you. Ignore the WACC formula. It is simpler to think of calculating your own discount rate as: 

> Your Discount Rate = the opportunity cost of investment in something safer + a premium to compensate you for the greater risk and uncertainty.

#### A Few Complications
In real life valuing companies are more complicated. Cash payments are derived from delivering a product or service of value to customers, managing resources cost effectively and management making good investment decisions. There is no certainty that the business will go on undisrupted in perpetuity. There is no guarantee that the amount you paid will be returned when you decide to sell. 

However, the principle remains the same. Effort should be spent on understanding the business, management and industry factors that drive future cash payments. Calculating the valuation is then a simple exercise of discounting those forecast cash payments by your own individual personal, highly subjective required rate of return. 


Understand the principles of intrinsic valuation. How to explain WACC to anyone. What are the most important factors when valuing a company. 

what would you pay

The Basics of Valuation

Don't ask "what" or "why" when users suggest features. Instead, ask "when did you last face this problem?”. This leads to quicker, better solutions.

![ask_when](//images.ctfassets.net/vwq10xzbe6iz/6IyPtJI4JfRmHsFoI1ODAk/03c6368f3bada5a73dbd04f552de1871/ask_when.png)

Here are two examples that illustrate the benefits of asking "when":
1. [Blocking contractors from deleting tickets](#permissions)
2. [Designing a custom dashboard for energy visualization](#dashboard)

## <a name="permissions"></a>1. Blocking Contractors from Deleting Tickets
See how "what", "why", and "when" can lead to different solutions when handling ticket deletions by contractor.

| Question     | Answer     | Solution     | Build cost     |
| ---------- | ---------- | ---------- | ---------- |
| What feature do you want?       | I don’t want contractors to be able to delete tickets       | Contractor role and permissions. Ticket assignee permissions. Admin role to set contractor permissions.       | $$$       |
| Why do you want this feature?       | I need access to all my tickets       | Archive folder before permanent delete. Make archive folder visible to admin users.       | $$       |
| When did you last face this problem?       | On the last project an external contractor on our team deleted a ticket by accident, thinking it would only be removed from his view       | Update delete confirm modal with a warning displaying the names of other users who will lose access to this ticket (social warning)       | $       |

## <a name="dashboard"></a>2. Designing a custom dashboard for energy visualization
Next, see how asking different questions shapes quicker, better solutions for an energy dashboard.

| Question     | Answer     | Solution     | Build cost     |
| ---------- | ---------- | ---------- | ---------- |
| What feature do you want?       | I want a custom dashboard to visualise my building's energy consumption       | Data integration. Widget customization. Chart types. Preset templates. Drag and drop functionality. Export capability. External sharing.       | $$$$$       |
| Why do you want this feature?       | I need to report on monthly energy deviations       | Data table view. A4 report generator. PDF export. Word export. Custom date range. Company logo. Custom formatting.       | $$$       |
| When did you last face this problem?       | At our last building tenant committee meeting I did not have the utility bills in time and couldn't include the monthly energy consumption figures in the excel sheet prior to the meeting       | CSV export of monthly consumption figures.       | $       |

### References
- Ryan Singer, and Chris Spiek (Hosts). (2017). Demand Thinking. [Episode 1: Feature requests aren’t demand](https://demandthinking.com/episodes/2017/7/23/episode-1-think-you-might-be-building-the-wrong-thing-youve-misinterpreted-demand).


Explore examples of revealing struggles from feature requests: 1) manage user permission; 2) custom visualization dashboard

ask_when

How to respond to product feature requests? Ask “When was the last time”

A REST API is the most common standard used between Clients (a person or application) who want to access information from the web from Servers (application or database) who have access to that information.

![rest-api](//images.ctfassets.net/vwq10xzbe6iz/5sBH4Agl614xM7exeLsTo7/9e84dce01735f155911e611c42c9793f/rest-api.png)

An Application Programming Interface (API) is a way for two computers to talk to each other over the web. For example, a delivery app can use the Google Maps API to support location tracking instead of building one from scratch. Or a recipe website can use an AI model to suggest alternative recipes based on the same ingredients using the ChatGPT REST API.

An API that follows the REST standard is called RESTful. Here are good practices when designing and using a RESTful API using the example of a survey app.

1. [Basic format](#basic)
2. [HTTP verbs](#http)
3. [URL endpoints](#url)
4. [Status codes](#status)

## <a name="basic"></a>1. Basic format 

The format of a RESTful API has three main components: 1) URL endpoint; 2) HTTP verb; and 3) Body.

__URL endpoint:__
Is a URL link that represents the resources we want to access. Resources can be text, images, documents or any data entry. For example, `example.com/surveys` allows us to view or create survey templates and `example.com/surveys/123/responses` allows us to do the same for all responses of survey 123.

__HTTP verb:__
Tells the server what we want to do with the URL endpoint resource. For example, a `POST` request means we want to create a new survey template and a `GET` request means we want to view an existing survey template.

__Body message:__
Is an optional custom payload which contains a message with the properties and values we want to use to create or update a given resource. 

For example, we want to create a new response for the survey 123 which we captured which includes a positive NPS score of 9, a short feedback message and the unique id of the respondent who gave the feedback. 

```json
// Request:
POST example.com/surveys/123/responses

// Body payload:
{
  survey_id: 123, 
  nps_score: 9, 
  feedback: "love the service", 
  respondent_id: 42
}
```

The server receives the HTTP request and returns a response that includes a HTTP status code and a response usually in JSON format. Here is an example request and response to a REST API server asking to read all the responses for survey 123:

__Request:__
```curl
GET http://example.com/surveys/123/responses
```

__Response:__
```json
// HTTP status code: 200
{
  survey_id: 123,
  survey_title: "nps onboarding survey",
  responses: [
  {
    response_id: 42,
    nps_score: 9,
    feedback: "love the service",
    respondent_id: 42
  }
  ...
 ]
}
```

## <a name="http"></a>2. HTTP verbs
There are 5 basic verb commands when making a HTTP request:
- __GET__: make a read only request to view either a single or list of multiple resources
- __POST__: create a new resource based on the payload given in the body of the request
- __DELETE__: destroy the given resource based on the id provided 
- __PUT__: update the entire fields of the resource based on the given body of the request or create a new one if not already exist
- __PATCH__: update only the fields of the resource if it exists

Most applications and resources will support all these commands. This is commonly referred to as a CRUD application:

| Acronym     | HTTP verb     |
| ---------- | ---------- |
| Create       | POST       |
| Read       | GET       |
| Update       | PUT & PATCH       |
| Delete       | DELETE       |

## <a name="url"></a>3. URL endpoints
A URL endpoint in a RESTful API represents any given object, data or service the API can access. For example, `example.com/surveys` represents the data for all survey templates and `example.com/surveys/123/responses` the data for all responses of a given survey.

URL endpoints should be grouped as pluralised nouns around the business data and objects and not verbs. For example, `example.com/surveys` and not `example.com/getAllSurveys`.

URL endpoints should include the unique identifier as a path after the pluralised noun when viewing, updating or deleting a single item. For example, `example.com/surveys/123`.

Organise URL collections in a logical hierarchy based on relationships. For example, users are most likely to access responses to a given survey template. This would be represented as `example.com/surveys/123/responses`. 

Here is a summary of good practice URL endpoints and how they interact with HTTP verbs:

| URL endpoint resource     | GET     | POST     | PUT     | DELETE     |
| ---------- | ---------- | ---------- | ---------- | ---------- |
| __/surveys__       | Retrieve all surveys       | Create a new survey       | Bulk update surveys (not advised)       | Remove all surveys (not advised)       |
| __/surveys/123__       | Retrieve the details for survey 123       | Error       | Update the details of survey 123 if it exists       | Remove survey 123       |
| __/surveys/123/responses__       | Retrieve all responses for survey 123       | Create a new response for survey 123       | Bulk update responses for survey 123 (not advised)       | Remove all responses for survey 123 (not advised)       |
| __/responses/42__       | Retrieve the details for response 42       | Error       | Update the details of response 42 if it exists       | Remove response 42       |

## <a name="status"></a>4. Status codes
Upon receiving a HTTP request in the basic RESTful format the server will return a HTTP status code along with any optional JSON payloads. Here are the most common HTTP status codes and their meaning:

| Status code     | Meaning     |
| ---------- | ---------- |
| 200 OK       | Request was successful.       |
| 301 Moved Permanently       | For SEO purposes when a page has been moved and all link equity should be passed through.        |
| 401 Unauthorized       | Server requires authentication.       |
| 403 Forbidden       | Client authenticated but does not have permissions to view resource.       |
| 404 Not Found       | Page not found because no search results or may be out of stock.       |
| 500 Internal Server Error       | Server side error. Usually due to bugs and exceptions thrown on the server side code.      |
| 503 Server Unavailable       | Server side error. Usually due to a platform hosting, overload and maintenance issue.       |


How web applications talk to servers: 1. Basic format; 2. HTTP verbs; 3. URL endpoints; 4. Status codes.

rest-api

REST APIs Explained - 4 Components

Cognitive biases can negatively impact your ability to think critically and make informed decisions. Once you are aware of them, it will help you identify and navigate them.

Here is an explanation of the 7 main types of cognitive bias, some examples and how you can navigate them:
1. [Survivorship Bias](#survivorship)
2. [Confirmation Bias](#confirmation)
3. [Framing Bias](#framing)
4. [Groupthink](#groupthink)
5. [IKEA Effect](#ikea-effect)
6. [Availability Bias](#availability)
7. [Commitment Bias](#commitment)

## <a name="survivorship"></a>1. Survivorship Bias
> Focus on the traits of the successful whilst ignoring the failures.

![survivorship-bias](//images.ctfassets.net/vwq10xzbe6iz/t9fd2snGayd6dZM2Dn9Js/5e615d3df42fa017582a58b9f06a0e57/survivorship.JPG)
This involves limiting our analysis to instances that have passed a success hurdle and not analysing those that didn’t pass the hurdle. This commonly occurs when we adopt key learnings from successful case studies yet remain blind to the unsuccessful instances who may have also followed the same learnings. 

### Examples
The famous [WWII case study](https://www.researchgate.net/publication/254286514_Abraham_Wald's_Work_on_Aircraft_Survivability) involves mathematician Abraham Wald who was tasked with identifying where to place more armour on fighter planes. The officers data of bullet holes in returning planes supported placing more amour on the fuselage vs the engine. However, Wald’s insight was to ask where the bullet holes weren’t - i.e. the engine. The surviving planes had fewer hits to the engine because those that were hit didn’t return.

A modern example would be to look at a customer acquisition funnel with a 10% activation rate. Common analysis would be to take key learnings from the behaviour and personas of this group to further lift activation. However, the greater insight would be to analyse the other 90% and ask why aren’t they activating? The latter is more challenging and often involves less access to data, but the payoff is greater.

### How to Navigate?
Ask questions about what other data and groups are missing. Identify the success hurdle and ask why others have not passed it.

## <a name="confirmation"></a>2. Confirmation Bias
> Focus on data to promote our existing beliefs.

![confirmation-bias](//images.ctfassets.net/vwq10xzbe6iz/3Fwt3vluPTrXkA41Yfj6Dx/585fec98fc5647b58a14f4d568b973c7/confirmation.JPG)
This involves seeking out information that validates our existing views and prior commitments. We also discount other information that may invalidate our views. Confirming evidence makes us feel good and people do what makes them feel good. The counter approach is the scientific method, which attempts to ask questions first before gathering evidence to either support or reject a hypothesis. The former is easier and faster, the latter is harder and time consuming.

### Examples
The CEO has a new idea to launch a new product and instructs a team to conduct market research and competitor analysis on the feasibility of this product. The market research team is limited in scope and risks being urged to validate the success of the CEO’s new product idea. A better task for the team would be to investigate what the best product would be to solve a particular problem.

### How to Navigate? 
Try and identify if there is a pre-existing belief (yours or otherwise). Reflect on information you have rejected. Ask others with a different viewpoint.

## <a name="framing"></a>3. Framing Bias
> Solving a problem based on the context it is presented.

![framing-bias](//images.ctfassets.net/vwq10xzbe6iz/1RJWOsPkQawJKKxYk8oIQM/6ee3c51d2e488ae5ecd40e1abd233596/framing.JPG)
The specific context a problem is framed/ presented can influence the options and choices available.

### Examples
The problem of low company profitability can be either framed as a need to cut costs or to increase revenue. The way the problem is framed will influence the options available (i.e. fire and restructure or enter new markets).

### How to Navigate? 
Ask what is the ultimate problem we are trying to solve. For example, ask what the outcome would be if we solved this problem. See if there are other solutions to achieving the same outcome.

## <a name="groupthink"></a>4. Groupthink

> The desire for group harmony leads to poor decision making.

![groupthink](//images.ctfassets.net/vwq10xzbe6iz/3BvESluOEJuRmYVODq44U1/12de08589e23649ad287ff3abba0912b/groupthink.JPG)
People tend to avoid conflict, particularly in the presence of a majority and people of authority. People assume others have made informed decisions and fear the risk of looking un-knowledgable in front of others. 

### Examples
The term groupthink arose from the [case study](https://www.bassberry.com/wp-content/uploads/Effective_SEC_Rulemaking_Letters2.pdf) of the failed US Cuba Bay of Pigs invasion. In 1961, the CIA presented to President Kennedy a Cuba invasion plan formulated under the previous administration. Kennedy accepted it and early objections were dismissed and eventually no objections or alternatives arose. Kennedy learnt from this and a year later during the Cuban Missile Crisis intentionally absented himself from initial meetings to encourage free discussion. Two teams were created to evaluate the options before presenting to Kennedy. 

### How to navigate? 
Be clear on the objective and values. Encourage other views to solve the objective.

## <a name="ikea-effect"></a>5. IKEA Effect
> Overvaluing things we place successful effort into

![ikea-effect](//images.ctfassets.net/vwq10xzbe6iz/1o8egJQ2qvuZqLQjsPpOSf/5c7e44c7d77fc37f809a05fe47b6d357/ikea-effect.png) 
The IKEA effect is a finding that people tend to ascribe a higher valuation towards self-assembled products compared to objectively similar products which they did not assemble ([see article for study](https://mannhowie.com/ikea-effect)).
### Examples
A product team has spent significant time developing a high fidelity prototype based on the sales team's feedback. It has the latest best practice design patterns. They have not shipped an early version yet. The IKEA Effect makes the team less likely to cull or dramatically change the product in response to real world usage. They are at risk of devoting resources to failing projects. 
### How to navigate? 
Treat your ideas like cattle, not like pets. Spike rough prototypes, talk to customers and run growth experiments.

## <a name="availability"></a>6. Availability Bias
> Overestimate the likelihood or frequency of an event when it is easier to recall

![availability-bias](//images.ctfassets.net/vwq10xzbe6iz/3xmF85xOP7EIdJWIa0tJ9D/e54863460e43ac8d37a49683182e7fd0/availability-bias.png)
People tend to assess the relative importance of issues by the ease of which they are retrieved from memory. Factors that influence memory include: recency, vivid emotion, and imagery.
### Examples
Tversky and Kahneman's famous 1973 study had participants listen to a list of 39 names being read and were then asked to recall whether the list contained more men or women. The list either had fewer names of famous women and more names of less famous men (e.g. Elizabeth Taylor vs William Fulbright) or a list with fewer names of famous men and a list with more names of less famous women (e.g. Richard Nixon vs Lana Turner).

Over 80% of the participants incorrectly judged the list with famous names to be more frequent in terms of gender. 

### How to navigate?
Look for different examples: seek out and compare counter examples of what is easier to remember. For example older vs recent instances, positive vs negative experiences, multiple instances of any memorable imagery.

## <a name="commitment"></a>7. Commitment Bias
> Following actions consistent with prior beliefs, words and actions

![commitment-bias](//images.ctfassets.net/vwq10xzbe6iz/64jQHFYz9cGi3m4paOJYvj/346f4a84c3224ec7e8b9601900999f1b/commitment-bias.png)
Following through with commitments help confirm self-image and avoid cognitive dissonance. They are most effective when they are active, public, effortful and viewed as internally motivated.
### Examples
At the height of the Cabbage Patch Kids craze in the 1980s the company was forced to halt its pre-christmas advertising after it was accused of over advertising and under-supplying toys. The strategy aimed to get parents to commit to their children of buying the toy in the lead up to Christmas. Then hoping parents would go to the store but left purchasing a different toy and then returning post Christmas to honour the original purchase commitment.
### How to navigate? 
Remind yourself it is ok to change your mind. Beware sales tactics that employ commitment bias to make prospects agree to a little purchase before a big purchase.

What are the 7 common types of bias: 1) Survivorship Bias; 2) Confirmation Bias; 3) Framing Bias; 4) Group Think; 5) IKEA Effect; 6) Availability Bias; 7) Commitment Bias.

survivorship

7 Types of Bias - Examples & How to Navigate

The person responsible for employee training and development is their direct manager. It is not a shared responsibility of the organization and should not be outsourced.
![employee-training](//images.ctfassets.net/vwq10xzbe6iz/7HzNVyRSlNcsPrmDJUxw8u/df11dc787065c48fd5fd6a32197991f3/employee-training.png)

This article argues why training is the manager’s job and how they can engage with others to take action to improve it:
1. [Why training is the manager’s job](#why-training)
2. [Benefits of manager training](#benefits-of)
3. [How managers can engage others to help train subordinates](#how-managers)

## <a name="why-training"></a>1. Why training is the manager’s job
Formel Intel CEO Andy Grove argues that as the manager is responsible for the output of the team, then if an employee is not doing their job it is the manager’s job to find out why and take action to improve it.

In his book High Output Management, Andy makes the syllogism that if you accept that:
1. Training, along with motivation, is the way to improve the performance of your subordinates; and
2. What you teach must be closely tied to what you practise, and that training needs to be continuous rather than a one-time event
3. Therefore it is clear that the who of training is you, the manager.

This means that the manager needs to be responsible and actively involved in the training of their subordinates rather than leaving it to HR or external trainers.

## 2. <a name="benefits-of"></a>Benefits of manager training
The two main benefits of a manager who trains is they are able to 1) better identify skills gaps; and 2) send the strongest positive culture:

### 1. Better identify skills gap
Managers are responsible for setting the team’s output (the what) and are closer to the alignment with the company’s objectives (the why). This is needed to both identify and prioritise the relevant skills and knowledge gaps which may often change.

### 2. Send the strongest positive culture
People look to managers as the “big dog’s” in the company, and culture often emulates their behaviour for better or for worse. A manager who invests their own time in training sends the message that continuous improvement and taking ownership trumps talent and finger pointing.

## 3. <a name="how-managers"></a>How managers can engage others to help train subordinates
Here is a summary of how managers may approach employee training with their subordinates and how to engage people in other divisions to assist.

| Person     | Manager Do’s ✅     | Manager Don'ts ❌     |
| ---------- | ---------- | ---------- |
| Manager (you)       |  <ul><li>Identify competency gaps and communicate why they are important to business objectives</li><li>Stretch employees circles of competence</li><li>Focus training and feedback on less vs more. Training should be compounding not one-off</li><li>Set time to continuously review work</li></ul> | <ul><li>Micromanage tasks</li><li>Blame employees for gaps</li><li>Criticise without giving examples of what good looks like</li><li>Provide too much information in a short period of time</li></ul>|
| Employee (subordinate)       | <ul><li>Review and QA their work to identify competency gaps</li><li>Listen to employee feedback to identify motivation gaps</li></ul>| <ul><li>Ask employee to propose external training seminars they are interested in (this puts burden on them)</li><li>Accept employee proposed training that misaligns with team output</li></ul>|
| HR      | <ul><li>Work with HR to align competency training with career and remuneration progression</li><li>Set better recruitment and hiring criteria for competency and coachability</li></ul> | <ul><li>Ask HR to propose learning and development plan</li><li>Ask HR to outsource to external training consultants</li></ul>|
| Subject Matter Expert       | <ul><li>Ask internal Subject Matter Experts (SMEs) with skills outside your circle of competence to assist with internal training and reading materials</li><li>Record training sessions with SMEs who are time poor</li><li>Regular catch-ups with SMEs to review employee participation</li></ul>| <ul><li>Ask SMEs to be responsible for training</li><li>Ask too much of SMEs that it may take away from their team’s output</li><li>Ask employee to engage directly with SME to level up</li></ul>|

## References
- Andy Grove (1995). ‘Why Training is the Boss’s Job (Chapter 16)’ In [High Output Management](https://www.amazon.com.au/High-Output-Management-Andrew-Grove/dp/0679762884)


Training and development is the manager’s job and should not be left to HR or outsourced. 1) Why training is the manager's job; 2) Benefits of manager training; 3) How managers can engage others to help train subordinates.

employee-training

Employee Training: Who is the Person Responsible?

Here are five rules of thumb to follow when designing user friendly data tables for a web app:
1. [First column readable](#first-column)
2. [Default sort by most common query](#default-sort)
3. [Place filters close to headers](#place-filters)
4. [View more fields using quick view](#view-more)
5. [Use pagination for more records](#use-pagination)

## <a name="first-column"></a>1. First column readable
Use human readable text for the first column. Do not use ids meant for record keeping. It should easily convey meaning about the record. It's ok if you have duplicate names.

![readable first column](//images.ctfassets.net/vwq10xzbe6iz/4kCSVKLBq2bitzrSZqmIQe/a42a5f8d0a2de31051a1ba0f662760b1/readable_first_column.png)

## <a name="default-sort"></a>2. Default sort by most common query
Decide what most users should first query when using your data table. Make this your default sort order when navigating to the table. Avoid sorting alphabetically by the first column.

![default sort by common query](//images.ctfassets.net/vwq10xzbe6iz/UK5tiCHmZK1qZXGhsJPzC/88e0b3dcfe8352e9e517b9296bdd3d08/default_sort_by_common_query.png)

__Bonus:__ 
Develop your data table to support dynamic urls for custom sort and filter options. Use this to design email campaigns for different tasks (e.g. follow up on overdue items, update your assigned items, shout out recently completed items).

## <a name="place-filters"></a>3. Place filters close to headers
Filters with good mapping should be placed close to the columns and headers that they control. Take advantage of spreadsheet conventions where column headers control sorting and filtering. Avoid advanced filter options placed outside your data table which can be hard to find and interrupt flow.

![filters close to headers](//images.ctfassets.net/vwq10xzbe6iz/7qD3btAg9jsuEvO6cP4La1/ae459bf2f3c38753749ad5ee9e5ff202/filters_close_to_headers.png)

## <a name="view-more"></a>4. View more fields using quick view

Show more fields and controls of a single record by using a quick view (side-panel or modal). Place your edit and delete controls inside the quick view. Avoid collapsible accordions. They are inconsistent with table headers and cause user cleanup issues.

![view more quick view](//images.ctfassets.net/vwq10xzbe6iz/3Jo30qeyHzCNh3LwUKRN5W/ff9b753cae1199caeab198fba74081b4/view_more_quick_view.png)

## <a name="use-pagination"></a>5. Use pagination for more records
Decide on the max rows each user should see then add pagination to indicate how many more records remain. Avoid “load more” buttons and infinite scroll. This causes issues of relocating records and false sense of completed search.

![use pagination](//images.ctfassets.net/vwq10xzbe6iz/6JMex6tpn6SA7IZS1fg6mU/a2a87b6e84712ef694db83dd5a034ed9/use_pagination.png)

## Conclusion
Data tables should help users find, compare and update data. Follow design patterns that help your users best achieve these goals.  

### Reference
- Data Tables: Four Major User Tasks ([Article](https://www.nngroup.com/articles/data-tables/)) Nielsen Norman Group 
- Infinite Scrolling: When to Use it, When to Avoid it ([Article](https://www.nngroup.com/articles/infinite-scrolling-tips/)) Nielsen Norman Group


Data tables in web apps should help users find, compare and update data. 5 best practices: 1) First column readable; 2) Default sort; 3) Filters close to headers; 4) Quick view more fields; 5) Pagination

readable first column

Data Table UX: 5 Rules of Thumb

Here are five rules of thumb you can apply to common UI design challenges when building web applications:

1. [Use defaults](#use-defaults)
2. [Obvious settings](#obvious-settings)
3. [Show progress](#show-progress)
4. [Avoid interruptions](#avoid-interruptions)
5. [Flat hierarchy](#flat-hierarchy)

## <a name="use-defaults"></a>1. Use defaults
Provide default values to guide users on the most common choices or behaviour you want to encourage.

![use defaults](//images.ctfassets.net/vwq10xzbe6iz/58lgklls1TQqgvFstGDF0B/938dffbe618bb3d424cf8c3acac015c4/use_defaults.png)

Defaults reduce the number of choices and decision fatigue users must face. They provide context as to the next decision required. Attempt to reduce the number of inputs you require by collapsing optional values. 

## <a name="obvious-settings"></a>2. Obvious settings
Settings should be obvious and unambiguous. Use radio buttons or checkboxes to indicate whether a setting is active. Where possible opt for binary settings instead of multiple states (e.g. flash mode on/ off vs flash mode auto, on or off).

![obvious settings mode](//images.ctfassets.net/vwq10xzbe6iz/7n6LxMmrztHcv9hRjouZbx/82419567536619908d199d5c20f16ebd/obvious_settings_mode.png)

Clearly label preference settings with positive active labels. Avoid negative labels. Checkboxes should enable things, not disable them.

![obvious settings preferences](//images.ctfassets.net/vwq10xzbe6iz/4HvT2YSTTMnzQFeQ5Wvh8x/c3551e5ea801c581972cfff1ede51a9c/obvious_settings_preferences.png)

## <a name="show-progress"></a>3. Show progress
Feedback should be immediate to communicate to users that the action has been received. When feedback cannot be immediate, use loading spinners for short waits (<10 seconds) and progress loaders for long waits (>10 seconds).

![show progress](//images.ctfassets.net/vwq10xzbe6iz/dMSFEcZYTeCzT6K5bx3LL/ce2eb70fb73b68448425fe946840141b/show_progress.png)

## <a name="avoid-interruptions"></a>4. Avoid interruptions
Avoid interrupting users' workflow by making decisions to allow slips with ways to undo. Allow slips with the use of less intrusive toasts vs intrusive warning confirm modals.

![avoid interruptions](//images.ctfassets.net/vwq10xzbe6iz/51iV8AagtUtyl8UeASDp8W/a41fb967b86ee1455f6d21a701419849/avoid_interruptions.png)

## <a name="flat-hierarchy"></a>5. Flat hierarchy
Use flat instead of deep hierarchies. Content is more discoverable if it is not deeply nested inside hierarchies. People are good at naturally grouping categories based on labels without relying on deep nesting.

![flat hierarchy](//images.ctfassets.net/vwq10xzbe6iz/4AoNBBWhKfLtA0ouDCSYjC/9a4ca81d0feb42cbadff92b4e566e7d4/flat_hierarchy.png)

### References
- The Power of Defaults ([Article](https://www.nngroup.com/articles/the-power-of-defaults/)) - Nielsen Norman Group
- Flat vs Deep Website Hierarchies ([Article](https://www.nngroup.com/articles/flat-vs-deep-hierarchy/)) - Nielsen Norman Group
- Designed for Use: Create Usable Interfaces for Applications and the Web (2016) ([Book](https://pragprog.com/titles/lmuse2/designed-for-use-second-edition/)) - Lukas Mathis


UI design patterns for web apps: 1) Use defaults; 2) Obvious settings; 3) Show progress; 4) Don’t interrupt; 5) Flat hierarchy


show progress

User Interface Design: 5 Rules of Thumb

The IKEA effect describes how people come to overvalue things in which they have successfully put effort into. This cognitive bias can pose risks to organisations in the form of sunk cost effects and “not invented here” syndrome.

![ikea-effect](//images.ctfassets.net/vwq10xzbe6iz/1o8egJQ2qvuZqLQjsPpOSf/5c7e44c7d77fc37f809a05fe47b6d357/ikea-effect.png)

This article explains when and why the IKEA effect emerges and introduces four ways you can defend against it.
1. [What is the IKEA effect?](#what-is-the-ikea-effect)
2. [Pitfalls of the IKEA effect](#pitfalls-of-the-ikea-effect)
3. [Four ways to avoid the IKEA effect](#ways-to-avoid-the-ikea-effect)

### <a name="what-is-the-ikea-effect"></a> 1. What is the IKEA effect?
The IKEA effect is a finding that people tend to ascribe a higher valuation towards self-assembled products compared to objectively similar products which they did not assemble.

A study by Norton, Mochon and Ariely ([2011 paper](https://www.hbs.edu/ris/Publication%20Files/11-091.pdf)) found participants who self-assembled an IKEA storage box (Builders) valued the purchase price 63% higher than those who inspected the same pre-assembled box (Non-Builders). Similarly, the Builders also rated liking the box 55% more than Non-Builders. 

__IKEA Effect Experiment A - Perceived value of IKEA storage box by Builders vs Non-Builders__

|   Measure   | Builders (Self-assemble)     | Non-Builders (Inspect pre-assembled)     | % Difference     |
| ---------- | ---------- | ---------- | ---------- |
| Willingness To Pay (0-100 cents scale)       | 78       | 48       | 63%       |
| Liking of Box (1-7 scale)       | 3.8       | 2.5       | 52%       |

*Participants: N = 50*

In another experiment one group of participants were asked to create origami (Builders) and another asked to inspect their creation (Non-Builders). Similar to the first experiment, the Builders valued their creation 360% higher than the Non-Builders who ascribed close to no value to the origami (“nearly worthless crumpled paper”).

__IKEA Effect Experiment B - Perceived value of origami creation by Builders vs Non-Builders__

|  Measure    | Builders (Self-create)     | Non-Builders (Inspect creation)     | % Difference     |
| ---------- | ---------- | ---------- | ---------- |
| Willingness To Pay (0-100 cents scale)       | 23       | 5       | 360%   
*Participants: N = 106*

### <a name="pitfalls-of-the-ikea-effect"></a> 2. Pitfalls of the IKEA effect
The IKEA effect explains broadly why people may come to fall in love with their own ideas. With the effect strongest when people expend a greater amount of their own effort and perceive their effort as successful.

The IKEA effect has negative implications for organisations more broadly as a contributor to two key organisational pitfalls:
- __Sunk cost effects__: people continue to devote resources to failing projects in which they have previously invested
- __“Not invented here” syndrome__: people refuse to use perfectly good ideas developed elsewhere in favour of their own, often inferior internally-developed ideas

Here are some examples of how the pitfalls could occur:

| Team     | Effort     | Pitfall ⚠️     |
| ---------- | ---------- | ---------- |
| Fund Manager       | Creating a company financial model with industry and market share forecasts       | Perceiving company to be more valuable than it may be even when forecasts are not met       |
| Sales Executive       | Developing a sales slide deck on a unique selling proposition       | Selling the solution instead of listening for customer struggles       |
| Product Designer       | Building high fidelity prototype of MVP product       | Over Indexing visual design feedback and distracting from focus on user goals       |
| Growth Marketer       | Developing Account Based Marketing strategy based on LinkedIn research       | Avoid comparing cost of acquisition vs other more effective initiatives like SEO and direct prospecting       |

### <a name="ways-to-avoid-the-ikea-effect"></a> 3. Four ways to avoid the IKEA effect
Here are four ways you can avoid and defend against the IKEA effect.

#### 1. Acknowledge your unconscious bias
In the IKEA effect study, participants were found to be unaware of their unconscious bias. 92% of the participants when asked said they would pay more for pre-assembled products compared to self-assembly. This was in direct contradiction of their actions in the study. 

Acknowledging you are prone to the cognitive bias of the IKEA effect can be the most effective way to mitigate against it. When completing an effort on a solution or idea, admit to yourself that you probably love it more than other solutions, because you worked on it.

#### 2. Spike rough prototypes
The IKEA effect study found that the effect was strongest only when the effort was successful. Failure to complete tasks had corresponding negative psychological consequences. People ruminate more on tasks they failed to complete than on those they successfully completed, leading to negative affect and regret.

Spike rough prototypes and MVPs to test ideas early. Embrace sharing ideas that you are embarrassed with so it will be easier to cull.

#### 3. Talk to customers
Framing your solutions and efforts towards the customer struggle can help mitigate your bias against any one solution.

Talking to customers is the best way to achieve this. Learn how to conduct user interviews to surface customer's struggling moments and understand why they don't love their current solutions ([example user interview questions](https://mannhowie.com/user-interviews)).  

#### 4. Run growth experiments
Growth experiments can help mitigate against [confirmation bias](https://mannhowie.com/cognitive-bias#confirmation) by setting the discipline to state the problem statement, hypothesis and success criteria upfront before expending effort on a solution. Learn how to run your own growth experiment in this tutorial ([How to run a growth experiment](https://mannhowie.com/growth-experiment)).

The Build, Measure and Learn framework popularised by Eric Ries in his book [The Lean Startup](http://theleanstartup.com/book) explains how to apply a learning and feedback loop to measure the success of products and solutions.

__Sources__
- Norton, M. I., Mochon, D., & Ariely, D. (2012). [The IKEA effect: When labor leads to love.](https://www.hbs.edu/ris/Publication%20Files/11-091.pdf)
- Ries, Eric. [The Lean Startup. (2011)](http://theleanstartup.com/book)


When and why the IKEA effect causes people to overvalue their own ideas. Examples of organisational pitfalls of the IKEA effect. 4 ways you can defend against the IKEA effect: 1) Acknowledge your unconscious bias; 2) Spike rough prototypes; 3) Talk to customers; 4) Run growth experiments

ikea-effect

The IKEA Effect - Why people fall in love with their own ideas

Product, marketing and sales teams can learn to run growth experiments to validate new strategies in the real world before incurring significant resource investment.
![guess_vs_experiment](//images.ctfassets.net/vwq10xzbe6iz/40uy9hD2VDsloevHEODX5m/7231e7f18856fa8c00e0f9eaef7347ec/guess_vs_experiment.png)

[Confirmation bias](https://mannhowie.com/cognitive-bias#confirmation) is a psychological tendency where we seek information that validates our existing beliefs as well as avoiding contradictory information. This bias often causes teams to waste resources on initiatives that validate existing views but are ineffective in the real world.

This article explains the 4 key steps of a growth experiment and a practical example of how you can run your own growth experiment quickly and cost effectively:
1. [Hypothesis](#hypothesis)
2. [Trigger](#trigger)
3. [Action](#action)
4. [Measure](#measure)

Imagine we are in the product marketing team of a B2B software startup that provides a tool for capturing customer complaints called Capturo.

## <a name="hypothesis"></a>1. Hypothesis
Set a hypothesis early. Start by identifying a customer struggle and business outcome of what you are trying to achieve. Form your own explanation as to what is causing the customer struggle and come up with a solution as to what could ease that struggle. [User interviews](https://mannhowie.com/user-interviews) are an effective tool at this stage if you have the time.

It is important at this stage to avoid the pitfall of falling in love with your explanation and solution. Focusing on the struggle will allow you to run a new growth experiment if the current one fails.

### __Example Hypothesis__
__Struggle:__ Our new users are observed to create a lower number of customer complaint forms on the platform than our existing users which is leading to lower product engagement and complaints captured.

__Explanation:__ We suspect two core reasons: 1) New users are unfamiliar with the types of questions to ask to gather complaints; 2) New users lack the time or know-how to digitise their existing questions into our platform.

__Solution:__ Our proposed solution will address the first explanation of new users not knowing what questions to ask. We will research and propose the most frequently asked questions to address customer complaints by service type (e.g. contact centre, restaurant, consultation).

__Hypothesis:__
> “Teaching new users the most commonly asked customer complaint questions relevant to their business will help them create more forms on the platform and gather more customer complaints”

## <a name="trigger"></a>2. Trigger
Establish a trigger point to communicate with your customer around their struggle and your proposed solution. The most effective mediums are email and calling customers directly. In-app banners, notifications and user flows are expensive if you do not already have the infrastructure in place. As this is a growth experiment we do not need to worry about solutions that don’t scale yet. 

The three most important components of a trigger:
1. __Audience:__ identify your target audience. Start with bigger groups, segmenting at this stage will be time consuming and take longer to gather results
2. __Message:__ keep consistent with your original hypothesis. There is no need to A/B test on a small scale but avoid message variation overkill
3. __Timing:__ identify the best time to contact your users to get their attention. Be sparing for when you trigger again due to lack of response

### __Example Trigger__
__Audience:__ our growth experiment will be to email new users who have created two forms or less in the platform from their first three months of joining

__Message:__ “Real examples of customer survey questions [Dental Practices] are using in Capturo” or “Top 6 customer survey questions [Dental Practices] ask in Capturo”

__Timing:__ Send when admin users are most active on the platform (for example mid-week mornings)

## <a name="action"></a>3. Action
Establish an action that you can measure based on the trigger. This can include opening a link to an article, registering interest via a form, logging in to the platform to perform an activity, emailing or calling back to respond.

Without creating an action it will be difficult to measure the success of your growth experiment.

### __Example Action__
Create a webpage link in the email which takes a user to the top customer survey questions.
E.g email link.
“View top 6 customer survey question examples”

## <a name="measure"></a>4. Measure
Measure and track the performance of the trigger and action stages. Start simple and use a spreadsheet to track key results. Free or cheap email tracking plug-ins are an effective way of tracking email open and click-through rates.

Once you feel you have gathered enough insight (can take a few weeks) assess the results and determine if your hypothesis was correct. Within the same experiment you can go back and modify the trigger and action to gather more data if needed.

### Example Measure
Create a spreadsheet with columns to track the following:
User contact email and id
- Email message sent
- Date and time sent
- Date and time opened email (use email tracking tools)
- Date and time opened link (use email tracking tools)
- Already sent (Y/N)
- Created a new template (Y/N) (check manually each week)

After measuring the performance assess engagement metrics for example:
- Total users contacted
- Average contact count per user
- % email open rate
- % click through rate
- % users creating new template

__Happy case__
If the % click through rate and % users creating a new template is good we have quickly validated that knowing the right questions to ask can help boost form creation. We now have an improved business case for investing more resources in-app to build onboarding tours in the form creation stage.

__Sad case__
If the % open rate is poor after adjusting for message and timing then the solution of our hypothesis is likely incorrect. We can go back to our original hypothesis and form a solution for our second explanation (e.g. already know what questions to ask but don’t have the time to create a new form). 


4 steps to a successful growth experiment: 1) Hypothesis; 2) Trigger; 3) Action; 4) Measure. Practical example for how teams can run growth experiments quickly and cheaply.

guess_vs_experiment

How to Run a Growth Experiment - Learn the 4 Steps

![fininte state machine](//images.ctfassets.net/vwq10xzbe6iz/6JNh1Rpi6a1VUnTux03TzW/c69b8b54a1be48ec820cec8e721163af/fininte_state_machine.png)

Finite State Machines allow cross-functional teams to visually design complex logic before committing expensive resources to design and code implementation.

It is a powerful tool for product teams and business owners to communicate on customer requirements in order to identify rabbit holes and poor UX early in the process.

They have been widely used in electrical engineering and in the logic design of electronic devices for decades. 

To illustrate the power of Finite State Machines, imagine we have been briefed by the business to build a customer feedback form widget.

## Phase 1 - Simple Feedback Widget
The first phase of our brief is for a simple feedback widget that will do the following:
- Ask for positive or negative feedback
- If positive display a happy success message
- If negative display an apology
- Allow user to cancel the feedback form

We can visualise this simple application using Finite State Machines below:
![phase1](//images.ctfassets.net/vwq10xzbe6iz/3aRVidpZK6c6qevtvEWLfB/9a09666917aeeddc3170c9a4ef80cfcf/phase1.png)

Our application has 4 states:
1. __START__ - our initial state where a user can click to begin the survey
2. __RESPONSE__ - where a user is asked for a positive or negative response and where they can cancel to go back to START
3. __POSITIVE CONFIRM__: an end state upon a user clicking POSITIVE
4. __NEGATIVE CONFIRM__: an end state upon a user clicking NEGATIVE

Our 4 states are also characterised by 4 events and transitions which are conditional upon the current state the application is in.

Our application also triggers actions such as saving the rating and updating the message upon certain events and entering different states.

Once the logic and user flow has been agreed we can easily convert this to design and code stage. In the examples below we use the open source library [XState](https://xstate.js.org/docs/) by [David Khourshid](https://github.com/davidkpiano) to codify our Finite State Machine and use ReactJS to render our UI.

<iframe src="https://codesandbox.io/embed/feedbackphase1-stkhm?fontsize=14&hidenavigation=1&theme=dark&view=preview"
     style="width:100%; height:500px; border:0; border-radius: 4px; overflow:hidden;"
     title="feedbackPhase1"
     allow="accelerometer; ambient-light-sensor; camera; encrypted-media; geolocation; gyroscope; hid; microphone; midi; payment; usb; vr; xr-spatial-tracking"
     sandbox="allow-forms allow-modals allow-popups allow-presentation allow-same-origin allow-scripts"
   ></iframe>

## Phase 2 - Negative Feedback Reason
The business has now come back asking for us to capture the main reasons for negative feedback.

Our application now must:
- Ask the user to select the main reason for negative feedback (Service, Product, Price)
- Also allow a user to select POSITIVE again if they accidentally selected NEGATIVE

With Finite State Machines we can easily modify and expand our logic without breaking any previous logic:
![phase2](//images.ctfassets.net/vwq10xzbe6iz/38VI5AsXioynO833DlaAzM/9f8c7edb547374d6044b6bff26400c85/phase2.png)

Our application has a new __NEGATIVE FEEDBACK__ state which allows a user to select from three of the main reasons for the negative response (SERVICE, PRODUCT or PRICE). Upon selecting an event the reason is captured and the state transitions to the NEGATIVE CONFIRM end state and displays an apology message.

We have now also added a new POSITIVE event which a user can click on to transition directly to the POSITIVE CONFIRM end state.

Our team can now confidently update our application with the new business logic:

<iframe src="https://codesandbox.io/embed/feedbackphase2-lg6sy?fontsize=14&hidenavigation=1&theme=dark&view=preview"
     style="width:100%; height:500px; border:0; border-radius: 4px; overflow:hidden;"
     title="feedbackPhase2"
     allow="accelerometer; ambient-light-sensor; camera; encrypted-media; geolocation; gyroscope; hid; microphone; midi; payment; usb; vr; xr-spatial-tracking"
     sandbox="allow-forms allow-modals allow-popups allow-presentation allow-same-origin allow-scripts"
   ></iframe>

## Phase 3 - Advanced Feedback
The business comes back wanting to direct users to contact sales for pricing discussions if they select PRICE as a negative response. In addition they want to capture any other reasons for negative feedback.

Our application must now grow in complexity to handle the following:
- If user selects PRICE as a negative response, send to different end state with pricing discussion CTA
- New OTHER option for a user to select with ability to leave comment

Once again we modify our Finite State Machines to expand our logic
![phase3](//images.ctfassets.net/vwq10xzbe6iz/6wb9cvXQflR8QIBGul2SOU/b8e775fd2c86f028a3c4652602219969/phase3.png)

Our application has now added two new states:
1. __PRICE CONFIRM__: end state when a user selects PRICE as a negative response. We will display a contact number for pricing discussions. Creating a new end state provides us with flexibility if the business may want to display discount offers or ask the user for more contact information in the future
2. __COMMENT__: when a user selects OTHER as a new reason for their negative response. This state includes three events where a user can UPDATE COMMENT to capture the reason, SUBMIT COMMENT to transition to end state and CANCEL to go back and select a different reason

Once again, our Finite State Machine is able to handle increasing complexity without breaking previous logic. Our designer and developer team can now confidently work on implementing the new logic:

<iframe src="https://codesandbox.io/embed/feedbackphase3-8y5dx?fontsize=14&hidenavigation=1&theme=dark&view=preview"
     style="width:100%; height:500px; border:0; border-radius: 4px; overflow:hidden;"
     title="feedbackPhase3"
     allow="accelerometer; ambient-light-sensor; camera; encrypted-media; geolocation; gyroscope; hid; microphone; midi; payment; usb; vr; xr-spatial-tracking"
     sandbox="allow-forms allow-modals allow-popups allow-presentation allow-same-origin allow-scripts"
   ></iframe>

## Future Complexity
Our application will naturally grow in complexity as business and user requirements evolve. 

Examples may include:
- Ask for feedback for positive response
- Invite user to add users after a positive response
- Ask user to provide the name of the poor service representative
- Introduce a passive response in addition to positive and negative
- etc.

With Finite State Machines we can confidently continue modelling this advanced complexity into our design and visually see how it interacts with previous functionality.


How Finite State Machines allow cross-functional teams to visually design complex logic before committing expensive resources to design and code implementation.

fininte state machine

Finite State Machines - A Common Tool for Product Owners, Designers & Developers

Why do most startups fail to find product market fit? 
![beware_solutions_seeking_problems](//images.ctfassets.net/vwq10xzbe6iz/2rGuWsynYvglJNeJeWcQoz/b11da185061ef24f957efe1f9683d4f8/beware_solutions_seeking_problems.png)

Because our [confirmation bias](https://mannhowie.com/cognitive-bias) creates tunnel vision towards our existing solutions. Instead we should frame our focus on solving the user’s struggle.

Here are 5 questions you can ask in user interviews to validate if your startup has found product market fit.

Imagine we are a startup building solutions for mortgage brokers.

## 1. What progress are you trying to make in X?
__*Example:*__
__Q.__ What progress are you trying to make in finalising loan applications?

__A.__ I’m looking for my team to close more loans and shorten the bank approval times.

## 2. What is your biggest struggle when trying to make progress in X?
__*Example:*__
__Q.__ What is your biggest struggle in getting bank approvals completed on time?

__A.__ Document gathering with our customers. A single important lost or incomplete document can slow the whole process down and cause frustration amongst both lenders and borrowers, both of whom are our customers.

## 3. Tell me about the last time you encountered this struggle?
*__Example__*
__Q.__ Tell me about the last time you encountered this struggle? (create a timeline of the event as if you were in their shoes)

__A.__ Last month one of our new starters had a backlog of 10 applications with one of our newer lenders. An applicant customer did not submit a key piece of information that the new lender required but this only came to light a couple of weeks after the applicant had already submitted all the documents we asked. The lender was frustrated that we missed the information (as they said they had asked us for this before) and the applicant was livid as they had already terminated their rental lease.

## 4. What solutions have you previously tried?
__Example:__
__Q.__ What solutions have you previously tried to avoid or manage this struggle?

__A.__ We’ve used shared cloud storage solutions like Google Drive and Dropbox, onboarding checklists to make sure we don’t miss things and our CRM tool to keep track of emails.

## 5. What didn’t you love about those solutions?
__Example:__
__Q.__ What don’t you love about those solutions you’ve previously tried?

__A.__ Some of the tools create more work for our team in managing the document workflow and version control, we still have to review all the documents to make sure they are complete. As a result we still rely heavily on email to follow-up and confirm next steps with both lenders and customers but then it’s easy for us to miss things and drown in emails.

## Bad User Interview Questions
User interviews to find product market fit should be framed around the user’s struggle and not solution ideas. 

Bad user interview questions include:
- What ideal solution would you like to solve your struggle? ❌
- Do you have any feedback on our solution? ❌
- Would you use this solution if we offered it? ❌
- What do you think we could do to improve your process? ❌
- Do you know anyone else in your company who would use our solution? ❌

## User Interview Insights
Following the insights from our 5 user interview questions we are now better able to frame the struggle for our mortgage broker manager as:

> “Communicating between lenders and customers the missing information needed to complete a loan application”

Solutions we can now explore to solve the problem could include:
- Assignees for onboarding docs (whose court is it in now) 💡
- Automatic email reminders of incomplete docs 💡
- Auto-logging emails to capture a digital chat history 💡
- Identify which docs have not been updated in a while 💡

Framing the challenge around the user struggle allows us to continue iterating on solutions to help users make progress instead of being fully invested into one solution. 

⚠️ Beware solutions seeking problems.


5 user interview questions to validate product market fit: 1) What progress are you trying to make?; 2) What is the hardest thing about making progress?; 3) Tell me about the last time you encountered the struggle; 4) What solutions have you previously tried? 5) What didn’t you love about those solutions?

beware_solutions_seeking_problems

5 Questions to Ask to Find Product Market Fit - User Interviews

Inversion is a mental model of framing a problem from an opposing objective in order to solve the original problem.
![inversion](//images.ctfassets.net/vwq10xzbe6iz/61qV3DFcVLXMoW1R899hWB/db5a16bc87fc56ff29624d857bbed49f/invert_image.png)
It is a favourite trick of famous value investor Charlie Munger. He gives an [example of how the inversion process](https://youtu.be/_uacTl8Lv_U) helped him in his early career become a better meteorologist:

> “When I was a meteorologist in World War II, they told me how to draw weather maps and predict the weather. What I was actually doing was clearing pilots to take flights. 
> 
> I just reversed the problem. I inverted, __I said:__ __suppose I want to kill a lot of pilots. What would be the easy way to do it__? And I soon concluded that the only easy way to do it was to get the planes into icing conditions they couldn’t handle or to get the pilot into a place where he’d run out of fuel before he could safely land. 
> 
> So I made up my mind I was going to stay miles away from killing pilots by either icing or getting them sucked into conditions where they couldn’t land. I think that helped me be a better meteorologist in World War II. I just reversed the problem.
> 
> Algebra works the same way. Human beings should do the same thing in their ordinary walks of life. Just constantly invert. You don’t think about what you want. You think about what you want to avoid. When you think about what you want to avoid, you also think about what you want. And you just go back and forth all the time.”

This article looks at how others have used the inversion process to innovate big ideas and new solutions in both life and growing start-ups.

## Productivity
In solving the problem of decluttering one’s life, Marie Kondo frames the challenge of effective tidying __not as what we want to get rid of__, but instead __choosing what we want to keep__.

The big idea of the [KonMari Method](https://konmari.com/what-is-konmari-method/) is to keep things that spark joy: “Does this spark joy? If it does, keep it. If not, dispose of it.” 

By reframing the problem she was able to develop her tidying techniques as “involving only two essential actions: discarding and deciding where to store things.”

## Product Innovation
In solving the problem of product innovation, Bob Moesta and the late Clay Christenson frame the question __not as what new features do customers want__, but instead understand __what struggles they experience with their current solution__. 

The big idea behind their innovative [Jobs To Be Done (JTBD) framework](http://jobstobedone.org/) is understanding the struggles a customer faces in making progress in their lives and innovating around those struggles.

By reframing the problem in understanding the struggle, Bob Moesta innovated his JTBD framework to look at “four forces of progress” where progress only occurs when:

> (__Push__ of the current struggle + __Pull__ of the new solution) > (__Habit__ of the old solution + __Anxiety__ of the new solution).

## Project Management
In solving the problem of delivering meaningful work on time and on spec, Ryan Singer from Basecamp frames the challenge __not as how long will it take to execute__, but instead __how much time do we want to spend__. 

The big idea of [Shape Up](https://basecamp.com/shapeup) is to focus less on estimates and more on appetite in order to narrow down problems and design outlines of solutions that fit within constraints of appetite.

By reframing the problem based on appetite, Basecamp’s Shape Up techniques focus on setting bounded solutions using fat marker sketches and addressing risks and rabbit holes early on. All the techniques are designed to set guardrails based on appetite to de-risk projects from derailing or growing in scope.


How Charlie Munger used the inversion process to save the lives of pilots during WWII. How inversion helps frame innovative solutions in productivity, product design, and project management.

inversion

Invert, Always Invert - Find out how to kill pilots

Uncle Bob's famous [Clean Architecture](https://blog.cleancoder.com/uncle-bob/2012/08/13/the-clean-architecture.html) is a way to write resilient software.

Resilient software is divided into layers, underpinned by business logic and is independent of technologies. It should be:
1. **Independent of Frameworks**. Libraries and frameworks should be treated as tools and not dependencies.
2. **Testable**. Can be tested without external dependencies.
3. **Independent of UI**. You can easily switch CLI for Web or RasberryPi.
4. **Independent of Database**. Switch out SQL for MongoDB.
5. **Independent of any external agency**. Business rules don't know anything about outside world.

![The Clean Architecture diagram](https://blog.cleancoder.com/uncle-bob/images/2012-08-13-the-clean-architecture/CleanArchitecture.jpg)

In practice, choice of technology should be the last decision you make or code you write (e.g. database, platform, framework).

By following clean architecture, you can write software today that can be easily switched out for different technologies in the future.

## Practical Example of Clean Architecture in Node.js
This is an example of a simple CRUD application with layered software and separation of business logic vs technology. 

It is a simple API for creating `students` and `teachers` and includes validation, persistence and UI. It includes examples using different interfaces (CLI and Web), databases (in memory, MongoDB), and libraries (validation).

[Click here for github repo.](https://github.com/howardmann/clean-node)

*Note: this application is different to the Clean Architecture diagram above but attempts to achieve the same outcome.*

### Software layer overview
The application is separated into three layers. Inner layers cannot depend on outer layers and outer layers should only depend one layer in:

- **Inner Layer**
  - **Models**. Handles the creation, validation and reading of our entities (students and teachers). Note that this should be custom logic and not include the DB implementation of models (e.g. in Mongoose DB ORM, their models should be encapsulated in the DB layer below). Our model schemas live here. 
  - **DB**. Our choice of DB (in memory, MongoDB, SQL), this is independent of the model. Note that in Clean Architecture this is considered an outer layer framework, but for practical applications I find it easier to place it inner and have the data-access layer depend on it rather than injecting it in.
- **Middle Layer**
  - **Data-Access**. Handles transfer between the DB (like an ORM). Depends on the model to validate and create the entity in DB. The key is to have a consistent & custom API that all outer layers communicate with. Testing here will ensure that replacing or using multiple DBs doesn't break anything further upstream. 
- **Outer Layer**
  - **Drivers**. Represents the UI or interface (Web or CLI). It communicates only with the data-access layer.

### Example application structure
```bash
============= INNER LAYER =====================================================================
models                    // create new entity by validating payload and returning new read only object 
  L student
    L index.js            // dependency inject schema/ validation library
    L index.test.js       // tests makeStudent()
    L student.js          // simple model takes info, validates and returns read only object
    L student-schema.js   // student validation schema
  L teacher
    L index.js
    L teacher.js
    L teacher-schema.js
  L validator             // wrapper around JOI validation library
    L index.js            // consistent API if ever to switch out a new validation library
    L index.test.js       // tests for validation schema for all models

db                        // db connection and adapter
  L memory                // in memory JSON
    L students.js         
    L teachers.js         
  L mongodb               // mongodb alternative
    L connection.js       // connection library
    L seeds               // seed library
      L students-seeds.js // async seed students db
    L models
      L student.js        // models specific to mongodb. this is different to our business logic models which handle tests and validation

============= MIDDLE LAYER =====================================================================
data-access               // think of it as our internal ORM (logic for our use-cases lies here)
  L students-db           
    L index.js            // other controllers and drivers rely on this API (findStudent, listStudents, addStudent)
    L memory              // in memory
      L index.js          // expose the memory implementation of findStudent, listStudents, addStudents
      L serializer.js     // serializes to DB specific properties (e.g. serial > id, year > grade)
    L mongodb             // mongodb ORM
      L index.js          // uses mongoose implementation of findStudent, listStudents, dropAll etc.
      L serializer.js     // serializes _id to id
    L postgresql          // TODO: Illustrative
    L airtable            // TODO: Illustrative
  L teachers-db           // per students-db above

============= OUTER LAYER =====================================================================
drivers
  L cli                   // cli driver depends on data-access students-db
  L webserver             // express web-server
    L routes
      L index.js          // routes paths
      L students.js       // requires our data-access students-db
      L teachers.js       // per above
    L server.js
```

### Practical approach
In practice, we can defer technology decisions by writing our application in the following order:
1. Start with models, schema and validation. Write test spec.
2. Defer DB decision by using in-memory JSON store
3. Create a data-access API that depends on model and in-memory DB. Write test spec.
4. First tech decision: UI interface (e.g. web or CLI). Depend on above data-access layer. Write integration test spec. 
5. Second tech decision: DB choice (MongoDB, SQL). Replace in-memory DB store. Write data-access methods specific to the DB choice. Ensure previously written test specs pass.

### Models
Our model is a simple factory function that validates a payload (dependency injected validator) and returns a new object with getters.

```javascript
// models/student/student.js
let buildMakeStudent = function(studentValidator) {
  return ({
    name,
    age,
    grade,
    prefect = false
  } = {}) => {
    let {error} = studentValidator({name, age, grade, prefect})
    if (error) throw new Error(error)

    return {
      getName: () => name,
      getAge: () => age,
      getGrade: () => grade,
      isPrefect: () => prefect
    }
  }
}

module.exports = buildMakeStudent
```
While the model schema is dependent on a validation library and breaks the Clean rules, I find it easier to understand the model by having the schema inside the model. (Note: see the repo for an example of how the validator could be separated into its own software entity).

```javascript
// models/student/student-schema.js
let Joi = require('joi')

module.exports = Joi.object().keys({
  name: Joi.string().required().error(() => 'must have name as string'),
  age: Joi.number().error(() => 'age must be a number'),
  grade: Joi.number().error(() => 'grade must be a number'),
  prefect: Joi.boolean().error(() => 'prefect must be a boolean')
})
```

We then dependency inject the validation library into the model. Note we use a wrapper for the validation library to make it easier to switch out libraries in future.

```javascript
// models/student/index.js
let buildMakeStudent = require('./student')
let studentSchema = require('./student-schema')
let studentValidator = require('../validator/')(studentSchema)

let makeStudent = buildMakeStudent(studentValidator)

module.exports = makeStudent
```

Write two sets of unit tests for our model. First testing the validation library for valid vs invalid payloads and relevant error messages. And second testing the creation and read only of the model entity.

```javascript
// models/validator/index.test.js
studentValidator
  [] validates name:string:required, grade:number, age:number, prefect:boolean 
  [] returns error messages if invalid

teacherValidator
  [] validates name:string:required, subject:string, tenure:boolean
  [] returns error messages if invalid
```

```javascript
// models/student/index.test.js
makeStudent
  [] throws error if invalid payload
  [] must have name
  [] can have grade
  [] can have age
  [] sets prefect to false by default
```
### Data-Access
The data-access layer is one of the most important. We should feel confident to easily replace DBs.

Here we need three key components
1. API and test spec
2. Serializers to adapt custom DB to our model schema
3. DB implementation of the API and passing of test

Start with how we think the outer layers will communicate with the data-access layer and what they should expect to get.

```javascript
// data-access/students-db/index.test.js
// example test spec
studentsDb
  - listStudents() lists students
  - findStudent() find single student by id
  - findStudentsBy() finds all students by property
  - addStudent() inserts a student
  - throws error if student payload invalid
  - deleteStudent() deletes a student
  - dropAll() drops students database
```

Write a serializer which adapts the custom DB schema with our model schema.

```javascript
// data-access/students-db/mongodb/serializer.js
// e.g. mongodb stores property id as _id
const _serializeSingle = (student) => {
  return {
    'id': student._id,
    'grade': student.grade,
    'name': student.name,
    'age': student.age,
    'prefect': student.prefect
  };
};

const serializer = (data) => {
  if (!data) {
    return null
  }
  if (Array.isArray(data)) {
    return data.map(_serializeSingle)
  }
  return _serializeSingle(data)
}

module.exports = serializer
```
Write custom DB implementation of the test spec API. Here is an example of an in-memory implementation (which you should start with) and a MongoDB version. Note: the advantage of writing a test spec is you can focus on simply writing code that just has to work.
#### In-memory data-access:
```javascript
// data-access/students-db/memory/index.js
let STUDENTS = require('../../../db/memory/students') // DB
let makeStudent = require('../../../models/student/index') // model
let serialize = require('./serializer') // serializer custom to db

let listStudents = () => {
  return Promise.resolve(serialize(STUDENTS))
}

let findStudent = (prop, val) => {
  if (prop === 'id') { prop = 'serial' }
  let student = STUDENTS.find(student => student[prop] == val)
  return Promise.resolve(serialize(student))
}

let findStudentsBy = (prop, val) => {
  let student = STUDENTS.filter(student => student[prop] == val)
  return Promise.resolve(serialize(student))
}


let addStudent = (studentInfo) => {
  let student = makeStudent(studentInfo)
  let newStudent = {
    serial: STUDENTS.length + 1,
    year: student.getGrade(),
    name: student.getName(),
    age: student.getAge(),
    prefect: student.isPrefect()
  }
  STUDENTS.push(newStudent)
  return findStudent('serial', newStudent.serial)
}

let deleteStudent = (id) => {
  return findStudent({id})
    .then(student => {
      if (student.id == id) {
        STUDENTS = STUDENTS.filter(student => student.serial != id)
        return {
          id,
          status: 'success'
        }
      }
      return {
        status: 'fail'
      }
    })
}

let dropAll = () => {
  STUDENTS = [];
  return STUDENTS;
}

module.exports = {
  listStudents,
  findStudent,
  findStudentsBy,
  addStudent,
  deleteStudent,
  dropAll
}
```
#### MongoDB data-access:
Note for our MongoDB data-access implementation we depend on the DB from the inner layer. The DB includes MongoDB specific implementation of the model and DB connection.

We write a dropAll function for the purposes of writing a test spec that can be used across any DB choice. E.g. beforeEach test we would drop the DB and seed items for testing.
```javascript
// data-access/students-db/mongod/index.js
let Student = require('../../../db/mongodb/models/student')
let makeStudent = require('../../../models/student/index') // model
let serialize = require('./serializer') // serializer custom to db

let listStudents = () => {
  return Student.find({})
    .then(serialize)
}

let findStudent = (prop, val) => {
  if (prop === 'id') {
    prop = '_id'
  }
  return Student.find({[prop]: val})
    .then(resp => {
      return serialize(resp[0])
    })
}

let findStudentsBy = (prop, val) => {
  return Student.find({[prop]: val})
    .then(serialize)
}

let addStudent = (studentInfo) => {
  let student = makeStudent(studentInfo)
  let newStudent = {
    name: student.getName(),
    grade: student.getGrade(),
    age: student.getAge(),
    prefect: student.isPrefect()
  }
  return Student.create(newStudent)
    .then(serialize)
}

let deleteStudent = (id) => {
  return Student.findByIdAndDelete(id)
    .then(resp => {
      return {
        id: resp._id.toString(),
        status: 'success'
      }
    })
    .catch(err => {
      return {
        status: 'fail'
      }
    })
}

let dropAll = () => {
  return Student.remove()
}

module.exports = {
  listStudents,
  findStudent,
  findStudentsBy,
  addStudent,
  deleteStudent,
  dropAll
}
```
### Drivers
Finally we write our drivers whose only dependency is our data-access layer. The drivers should not communicate directly with the model or db.

Any changes to the inner layer will cascade up and as a result there should be less testing done on the outer layers. E.g. if we were to test changes to the model schema in the driver layer we would need to rewrite our tests here as well.

```bash
drivers
  L cli
    L index.js
  L webserver         // express webserver
    L routes
      L index.js
      L students.js   // depends on students data-access layer
      L teachers.js   // depends on teachers data-access layer
    L server.js       // depends on routes
```

Writing Clean Architecture in Node.js. REST API Tutorial using MongoDB, Express and other best practices. How to write software that lasts and can be independent of technology choice.

Howie Mann
Startup Strategy
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