The Predictioneer's Game: Using the logic of brazen self-interest to see and shape the future. Bruce Bueno de Mesquita

Not within the traditional category of a financial book, Bueno de Mesquita's the Predictioneer's Game claimed, "that it is possible for us to anticipate actions, to predict the future, and, by looking for ways to change incentives, to engineer the future across a stunning range of considerations that involve human decision making" (p. xiv). Such knowledge should improve financial decision making. Based on game theory and using models, the author processes information on his subjects' self interest and determines what the subjects will do and why. Bueno de Mesquita acknowledged the limitations of this method. Some problems find better solutions with applied game theory or statistical forecasting.

The audit project that the author engaged in for Arthur Andersen in 2000 to assess the risk that some of their clients would engage in fraud pricked my interest. According to Bueno de Mesquita, his models with publicly available data on companies could "predict the likelihood of fraud two years in advance of its commission" (p. 116). Enron landed in the high risk category. The following flags signal fraud--decreases in dividends, management compensation packages below expectations, the size of institutional investor ownership, the number of directors, among others.


The author presented the steps for predictions with credibility. First, structure the question addressed into the choices or options available to the subject. Second, acknowledge the environmental context, the " 'what if' questions . . . background conditions . . . scenarios" (p. 49) that would influence the subject. Finally, gather the facts. The author lists four:

1. Identify every individual or group with a meaningful interest in trying to influence the outcome. Don't just pay attention to the final decision makers.
2. Estimate as accurately as possible with available information what policy each of the players identified in point 1 is advocating when they talk in private to each other--that is, what do they say they want.
3. Approximate how big an issue this is for each of the players--that is, how salient is it to them. Are they so concerned that they would drop whatever they're doing to address this problem when it comes up, or are they likely to want to postpone discussions while they deal with more pressing matters?
4. Relative to all of the other players, how influential can each player be in persuading others to change their position on the issue.

In a simple example of the process, the author suggested interviewing subjects via a survey on a simple question, such as which movie would be their preference movie A or movie B and rate the "salience" (p. 53) of the question on a scale to the subjects. Their responses demonstrate their position, the strength of their conviction to the position, and the power they bear. By making a decision, the subject exhibits the basic premise of game theory, that self interest motivates individuals. Another primary motivator, according to the author, is the desire for glory, "the ego satisfaction that comes from the recognition by others that they played an important part in putting a deal together" (p. 55). Another formula for predicting entails employing the weighted mean: "multiply the influence of each player (calling influence I) by his or her salience (S) and multiply that result by the numerical value of the position each player advocates (p), then add those totals up for all of the players and divide that total by the sum of the influence time salience for each of the players (sum of I x S x P)/(sum of I x S)" (p. 59). These manual methods, with a 75 percent accuracy rate do not replace the more exact computer models. Bruce Bueno de Mesquite applied his methods to various situations, described in the remainder of the book.

Bogle, J. C. The little book of common sense investing. Hoboken, NJ: John Wiley & Sons, inc.

CEO and founder of the Vanguard Mutual Fund Group, John C. Bogle wrote on the first page of chapter 1 his essential thesis: "Successful investing is all about common sense . . . the best way to implement this strategy is simple . . . buying a fund that holds this market portfolio, and holding it forever. Such a fund is called an index fund" (p. xi-xii). By purchasing an index fund, which contains a basket of stocks, the investor distributes the risk of depending on one company's performance to multiple companies. Furthermore, by maintaining the account for the long term, the investor reaps the rewards of compounding returns. He attested that the holders of individual stocks "returns have probably lagged the market by about 2.5 percentage points per year" (p. xiv); owners of mutual funds have fared worse. Bogle argued that this plan conforms to "Occan's Razor: When there are multiple solutions to a problem, choose the simplest one" (p. 25).

If those of us near retirement age had followed Bogle's advice, we would have amassed, according to him, enough income to adhere to the prescription of holding bond positions equal to your age, 20 percent at 20 and 70 percent at seventy. Itching to own individual stocks? Bogle recommended that to satisfy the urge, allot only 5 percent of a portfolio to personal choices.

Offering a comprehensive strategy for marketing a small business, Diamond suggested some "Quick Tips" throughout the book. Regarding websites, a "Quick Tip" advised, "make sure your website and other venues include multiple information formats, audio, video, white papers that detail a successful case study, etc. Have plenty of downloadable PDFs, articles, photos of the product, etc. Consider conducting teleseminars and webinars where people can ask questions: (p. 63).

Deliberately establishing an email marketing campaign necessitates a plan. Diamond begins her discussion about a mailing list by stressing the need for a mailing list. The choices are building one from stratch or buying one. She documented these steps to growing a list:
"Put a sign-up link for your newsletter at the bottom of all the emails you send.
Offer a free issue of your newsletter in exchange for an email address.
Put a sign-up box on your website home page (make it easy to see).
Put links to your sign-up page on everything you've published online.
Create online ads that send users to the sign-up page
Sign up for a variety of directoryt listings
Let all you colleagues and firends know how to find you online
Comment on blogs similar to your own and link back to your blog or website
Devleop coregistrations or reciprocal links with partners who have your sign-up link on their thank you page
Promote your site at speaking engagements
Hand out business cards at trade shows.
Use autoresponding tools.

To engage in a web site check, ask yourself these questions posed by Diamond:
"Has the size of your website grown substantially in the last year?
Is 25 percent or more of the contect outdated or unnecessary
Are you procrastinating about using social media marketing tactics on your site?
Does your website design reflect old business objectives--not what you are focusing on now?
Do you have 'one size fits all' content for everyone who visits you site?
Do your headlines and copy talk about features and not benefits?
Are you reluctant to determine how visitors use your site, so you don't look at any web statistics" (pp. 88-89).

Her comprehensive approach entails 7 steps:
1. Niche "narrowly define your audience segments" who will I market to? Find out their information viewing styles. Demographics psychographics persona, a cusotmer profite in order to build targeted marketing tactics . . . a profile of your customer. (Allen Cooper, 1999, The inmates are running the asylum)
2. Brand, "harnessing the power of keywords" How does my customer perceive me vs my competition identity, consistency, trust, pricing Positioning questions--am i first, am i bigger, am i the only one in my category, do I have credentials to support my claims, do I state quantifiable differences, can I redefine my product category Taglines (what is this about)
Logos
3. Story, entertaining stories from blogs, videos, and podcasts What do I tell my customer so they understand my company and product. Stories your customers care about, what do my customers worry and care aobut, what are my customer's expectations for my product or service, which media do my customers perfer (video, audio, text), where do they get their informaiton (magazines, newspapers, blogs, etc.) Capture your success stories
4. Content, "materials to educate and sell your products effectively . . . sconstant stream of new and valuable information"
5. Search, "to build a keyword list and figure out how to approach optimizing your website
6. Tactics, "social media tactics and thetried and true marketing tactics that will help you jump ahead of your competition.
7. Results"setting up your web analytics and what measures to analyze to encourage profits" (pp. 108-109).

Rating your email marketing campaign: get an independent evaluator, assess effectively of weekly or monthly mailings, audios and videofeatures to mailings, make reading your newsletter pay off for your customer every time. Always offer discounts, value free content, use your support area to launch new newsletters. FAQs and support would be a welcome change from all the marketing newletters.

Benefits of Article Marketing--establishing backlinks. One of the ways search engines find you is by the volumn of your backlinks, links that point back to your site from other places on the Web. The more backlinks you have, the higher you will rank on the results page.

Producing quality articles (p. 201)
It requires a bit of effort to continually generate quality articles, but it's worth it. There are several ways togenerate articles:
Take all the press releases, white papers, and other content you have and turn them into articles.
Repurpose your newsletter content into articles
Repurpose your blog posts into articles. (Make sure to vary the content so it's not exactly the same."
1. Focusing the business purpose should help you determine what to write
2. Decide which of the three main business purposes you are focusing on: (1) branding--concentrate on how your new product or service upholds you high standards (2) lead generation, demonstrate that youahve the knowledge to solve a particular problem (3) improved search engineranking and increased site traffic, quantity of articles and not quality.
Make the length 300 to 600 words.






Diamond, S. (2008). Web Marketing for Small Business: Seven steps to explosive business growth. Naperville, IL: Sourcebooks, Inc.

The inefficient stock market: What pays off and why (2d ed.) Robert A. Haugen

Haugen employed factors, such as dramatic changes in production, interest rates, or inflation to predict stock returns. He divided the eras of finance into three--old, modern, and new finance. He designated the theme of new finance as inefficient markets and its paradigms as "inductive ad hoc factor models" (p. 3). In addition to Haugen's use of factors, other writers applied factors for predictions of risk (Chen, Roll & Ross) and behavior (Kahneman & Tversky). Three disciplines contribute to the understanding of factor models, statistics, econometrics, and psychology.

After discrediting the other methods, Haugen detailed the expected-return factor model and the five classes that it encompasses--risk, liquidity (measures of cheapness), profitability, and technical elements. Because many factors constitute each class, I will not list them all here. One example, however, is the liquidity factors--market capitalization, market price per share, trading volume/market capitalization, and trading volume trend. The author admitted that this list did not exhaust the universe of factors, such as insider trading.

To calculate expected return with factor information, the author instructed the investor to execute the following steps: "you multiply the stock's factor exposure by the projected payoff to the factor. This gives you the component of total expected return coming from the particular factor" (p. 50). This is the formula:
factor exposure X projected factor payoff = factor component of exposure return
"After doing this for each factor, you add up all the components to get the total relative expected return for the stock" (p. 50). This calculation does not incorporate trading costs. Regarding payoffs, the author states "The cheaper the stock, the better the outlook for future returns . . . then other things--including price -- being equal, the outlook for future return improves with more profitable companies in the portfolio" (p. 47).

In the chapter, "Super stocks and stupid stocks", the author graphs the factors to demonstrate the application of his theory. First, the author charts returns on a scale of deciles of 1 to 10, based on risk. He drew six graphs, decile risk characteristics, size and liquidity characteristics, technical history, current profitability, profitability trends, and price level. Decile stocks constitute the stupid stocks and decile 10, the super stock. These stocks exist within a range between true abnormal profit and priced abnormal profit. Furthermore, the author attests that "stocks ranking low in book-to-price ratio are likely to be relatively profitable" (p. 94). Comparing value and growth stocks, the author wrote "while growth stocks have been priced as though they will be able to sustain their relative profitability, this assumption has not been validated by actual corporate performance even during the period over which they enjoyed superior performance in terms of their market price" (p. 95). The author ends by explaining the strengths of the factors, cheapness and the profitability of the company, to increase expected return.

Haugen, R. A. (2002). The inefficient stock market: What pays off and why, 2d ed. Upper Saddle River, NJ: Prentice Hall.

Cheapness Factors:
Earnings to Price Ratio
Earnings to Price Trend (five year monthly time trends throughout)
Book to Price Ratio
Book to Price Trend
Dividend to Price Ratio
Dividend to Price Trend
Cash Flow to Price Ratio
Cash flow to price trend
Sales to Price Ratio
Sales to Price Trend

Financial Intelligence for Entrepreneurs: What you really need to know about the numbers

To manage successfully a portfolio, an investor should think like an entrepreneur. This book details the fundamentals of finance in a simple, yet comprehensive overview and cites current examples to elucidate principles. Because understanding finance entails a basic knowledge of accounting and typical accounting statements, the book covers the income, balance sheet, and cash flow statements. The balance sheet discloses fundamental questions about a company--its solvancy, the degree of liquidity, and the annual growth or decline of equity.

For a deeper interpretation of the numbers, the authors present the formulas for profitability, leverage, liquidity, and efficiency. A discussion of finance would not be complete without explaining return on investment (ROI). The authors weigh the strengths and weaknesses of the three methods for calculating ROI, the payback method, the present value method (NPV), and the internal rate of return method. They demonstrate the value of engaging in all three calculations in financial analysis, but view NPV as the most accurate measure of ROI. The authors argue the importance of managing balance sheet levers--days sales outstanding (DSO) and inventory. Finally, the authors address cash conversion, the speed with which a company collects its cash.

The authors end the book by stressing the importance of having a financially literate company, educated workers who understand how their work habits and actions impact the company's bottom line, a message equally applicable to a family and its members.

Berman, K. & Knight, J. (2008). Financial Intelligence for Entrepreneurs: What you really need to know about the numbers. Boston, MA: Harvard Business Press.
http://www.financialintelligencebook.com/

John M. Morris and Virginia B. Morris: The Wall Street Journal Guide to Understanding Money and Investing (1999)

This book lives up to its intention as an introduction to the basics of money and investing. It begins with the history of the monetary system in the United States and elsewhere, explains stocks, stock exchanges, the market and its cycles, bonds, mutual funds, and futures and options.
Full of charts, tables, and graphics, it provides illustrations and examples of concepts and financial processes, such as what happens during a purchase of stock on the New York Stock Exchange. Additionally, it shows correlations--the cause and effect relationship between weak and strong dollars on international stock purchases.

The book offered investment strategies, using options. As the authors stated:

"You can use options conservatively to increase your income or to limit your risk.
The most popular income-producing strategy is selling covered calls. You write call options on a share-for-share basis against stocks you own. If someone exercises the calls, you meet your obligation to sell by handing over your stocks. The goals of covered calls are to provide some protection if the stock price falls, establish a selling price above the current market price or increase your income in a sideways market, when prices move up and down within a very small range.
Writing cash-secured puts is another income-oriented approach. You sell a put for each 100 shares of stock an investor is willing to buy at a special price. Then, as security, you invest an equivalent amount in U.S. Treasury bills or a money market account. If the put is exercised, you liquidate that investment and use the cash to buy the stock"(pp. 144-145).

I plan to read more recent editions of this book, to make a comparison of the information they contain. Stay tuned!

Morris, K. M. & V. B. Morris. (1999). The Wall Street Journal Guide to Understanding Money and Investing. New York: Lightbulb Press, Inc. and Dow Jones & Co., Inc.

Time-Driven Activity-Based Costing

Kaplan, R. S. & Anderson, S. R. (2007). Time-driven Activity-Based Costing : A simpler and more Powerful Path to Higher Profits. Boston, MA: Harvard Business School Press.

Robert Kaplan, best known for his work on the Balanced Scorecard, and Steven R. Anderson wrote this book to demonstrate how enterprise resource planning (ERP) systems enable companies to assess at the transaction level the time consumed in steps of processes. Specifically, time-driven activity-based costing measured the "cost and profitability of producing and delivering their products and services, and managing their customer relationships" (p. xi).
The Balanced Scorecard, equally as necessary for companies to evaluate their progress, reveals how companies create value for employees, shareholders, customers, and investors.

If a company realized a low total-cost strategy, activity-based costing enables managers to accurately measure the costs of significant processes. If a company has not gaged the profitability of their customers, activity-based costing provides insight into that information. According to the authors, customer profitability influences other customer metrics, "such as satisfaction, retention, and growth, to signal that customer relationships are desirable only if these relationships generate increased profits" (p. xii).

Traditional standard cost system employed three cost factors--labor, materials, and overhead. With increased automation, the authors argued that allocations of costs under this system became distorted. Activity-based costing corrected these distortions "by tracing these indirect and support costs first to the activities performed by the organization's shared resources, and then assigning the activity costs down to orders, products, and customers on the basis of the quantity of each organizational activity consumed" (p. 5).

Anderson improved on the activity-based costing model with the 'time-driven activity-based costing' (TDABC). Finding the data gathering to support the conventional model "time-consuming . . . costly . . . subjective . . . . difficult to validate . . . local . . . not easily updated . . . theoretically incorrect when it ignored the potential for unused capacity" (p. 7), TDABC modified the conventional system "by eliminating the need to interview and survey employees for allocating resource costs to activities before driving them down to cost objects (orders, products, and customers).

Time-driven activity based costing involves a two step process. The first, "the TDABC model calculates the cost of supplying resource capacity . . . personnel, supervision, occupancy, equipment and technology" (p. 8). "It divides this total cost by the capacity--the time available from the employees actually performing the work--of the department to obtain the capacity cost rate" (p. 8). The second step, "TDABC uses the capacity cost rate to drive departmental resource costs to cost objects by estimating the demand for resource capacity . . . that each cost object requires"(p. 8).

PRACTICAL APPLICATION

Capacity cost rate = Cost of capacity supplied
----------------------------------------------
Practical capacity of resources supplied


Capacity cost rate = $567,000
------------------------------------------------
630,000 minutes = $0.90 per minute

TDABC estimates of customer related activities:
Process customer orders : 8 minutes
Handle customer inquiries: 44 minutes
Perform credit check: 50 minutes

TDABC COST DRIVERS
-------------------------------------------------------------------------
Activity Unit time (minutes) Rates (at $0.90/minute)
----------------------------------------------------------------------------------------
Process customer order 8 $ 7.20
Handle customer inquiry 44 $39.60
Perform credit check 50 $45.00
Used capacity
Unused capacity (8.2)

As a tool for future decision making, the TDABC allows managers to develop trends of data over time. Modifications to the tool occur from new activities, for example, changes in time due to more complicated or custom processes, changes in cost rates, due to automation or increased efficiencies, such as the implementation of quality programs. Therefore, the system adapts to changes in circumstances.

To estimate processing time, the first principal of TDABC, enterprise resource planning systems aid companies in accumulating data, such as cubic meters, kilograms, gigabytes, and bauds. Global positioning systems and radio frequency identification devices facilitate accumulating data. Having detailed and complete business process diagrams simplifies calculating time estimates. The author argued that the granularity at the transaction level provided greater accuracy for users of TDABC. Recommending steps for implementation, the authors suggested the following: "begin with the most costly processes . . . define the scope of the process . . . determine the key drivers of time . . . use readily available driver variables . . . start simple . . . engage operational personnel to help build and validate the model" (p. 36).

The second principal, aggregating the cost of capacity supplied, consolidates all department costs--"the compensation of frontline employees and their supervisors; occupancy, technology, and other equipment costs; and the costs of corporate staff functions that support the work performed" (p. 41). How companies determine these costs vary depending on the nature of the business and the degree of specificity desired. For example, equipment costs can apply historical, replacement costs, or the "opportunity cost of the investment in the equipment"(p. 43). The second part of this equation, practical capacity, "can be estimated somewhat arbitrarily or studied analytically. The arbitrary approach assumes that practical capacity is a specified percentage, say, 80 or 85 percent, of theoretical capacity" (p. 52). Similarly, equipment might register 15 to 20 percent downtime. Enterprise resource planning systems might record actual repair time, startups, downtime, vacation and sick time for equipment and employees. Although actual costs from accounting systems supply readily available numbers, some firms elect to use budgeted, normalized costs.

The remainder of the book covered the implementation of TDABC and some case studies, of organizations as diverse as an historical black university (HBU), for-profit companies, and not-for profit organizations. The authors address the transformation of customers from unprofitable to profitable with the TDABC system. They end the book by responding to frequently asked questions.