Peter Levin’s Rethinking Markets

July 9, 2008

Types of variables, drop-down menus

Filed under: Data, Organizations — Peter @ 5:49 pm

Over at 37 Signals, they have a regular series detailing their design decisions. It is an insightful feature and an insightful blog.

Their latest discussion is about how they managed a question on their support forms. I want to drop some research methodology on this problem. While their discussion is about how to design a feedback form, it is also about the kinds of questions you should ask on a survey. And it would benefit from a discussion of categorical/nominal variables, ordinal variables, and interval-level variables. Yep.

So, terms. Categorical variables (also called nominal variables) are those variables with 2 or more ’states’, but without an intrinsic ordering. Male/female is categorical, as is eye or hair color, race, what school you went to. Ordinal variables are those variable with two or more states that have an ordering to them. Low/medium/high are ordinal variables. Less than HS, HS, some college, BA is ordinal. Interval-level variables are ordered, and the distance between categories is evenly spaced. Income, height, and years of education are all interval-level variables.

The difference between categorical/nominal variables and ordinal variables is the hierarchical ordering of the latter. What school you went to is nominal, but tiered ranking of what school you went to is ordinal. Tiered ranking may be ordinal, but amount of school endowment is interval-level. And quantitative variables are a hint that the variable is ordinal or interval, but not decisive (zip codes are nominal, for instance).

So, back to 37 Signals. What they want is some variable that would be easy to understand (from the customer perspective) and helpful to process (from the company perspective). Their first attempt looked something like this:

It takes time to think through what my state of mind is, because the items are almost ordered, but not really. Confused, worried, upset, and panicked are not points on a continuum, they are just different states of being. The question is asked as a categorical variable question. But it is one that they reallywanted to be an ordinal variable question. They tried to solve the problem by formalizing an ordinal variable, and putting a numbered ordering system on it to make it clearly so:

This is easier to deal with as a customer, since you can sort of pick up your relative state of panic. In other words, you pick up that there is a rough ordering very quickly, and the numbers help a lot in this respect. But alas, what’s good for the customer was no good for 37Signals. The reason is that while they began by wanting to know the subjectivity of the customer, what they really really wanted to know was, ‘how important is this problem for our company?’. Reasonable, but different. This is their final solution:

They have a reason for this, and it is a decent one:

Now, if something’s broken, we can spot it and fix it right away. A system failure is much more important to us (and our customers) than a feature request or general feedback. This method lets us prioritize these queries accordingly, instead of treating them like they’re all the same.

However, this final solution kind of sucks, I think. The problem is that it moves priority from the customer to the company, while giving an illusion of giving control to the customer. That is, the variable is categorical/nominal for the customer, but ordinal for the company. In other words, what is important to the company is more important than what is important to this particular customer. This is probably even more true for those customers for whom everything for them is the most important thing in the world. And yet.

I think perhaps a better solution splits the question into two, which provides space for both ‘urgency for the customer’ and ‘urgency for the organization’.

At the risk of adding yet another item to your survey/form, you have solved both problems with some cognitive ease: customers are defaulted to medium (which is easy for people to just ignore/skip over or shift with little cognitive difficulty), which would allow the organization to give its own priority to the categorical variable. If the customer changes the default to ‘not urgent’, this still stands. If the customer makes their own priority ‘urgent’, then the organization has some discretion on whether to treat this as ‘urgent for us’ or not, but at least has a sense of the panic level for the customer.

I’m sure there is an aesthetic here as well, but the general lesson should be two-fold. 1) Consider carefully the meanings behind your survey variables. Categorical variables often require thinking about, particularly as the category options become large. Ordinal and interval variables (which create an ordering) are easy, until they are too refined. Let’s say you are at a hospital, and a doctor asks you ‘how do you feel?’ Sorting through a list of adjectives that describe your feelings sucks. And assessing your level of pain between 1 and 7 is easier than between 1 and 1000.

The thing is, sometimes what is important to you is not what’s important to the doctor. If you feel throbbing, it’s not lethal. If you feel numbness, it is. In this case, the options are categorical to the patient, but ordinal to the doctor.

Which leads to 2) If you want your customers’ opinions, it may behoove you to give them a way to tell these to you. In the medical example, what kind of pain and how much does it hurt are two questions; patients care more about the second, even if doctors care more about the first. So don’t ask what kind of pain without asking how much does it hurt. Even if this saves the patient’s life, they will still be pissed at you for dismissing their subjective reality.

May 16, 2008

Commensuration across commodities

Filed under: Markets, Organizations, Prices — Peter @ 11:10 am

Commensuration, the making comparable of qualitative differences via a common third metric, is valuable for its theoretical contributions to cultural economic sociology. It is a process that makes some things visible and hides others, resulting in an extremely impressive if underrated shaping of the social world. Qualitative distinctions across individual student applicants to college, for instance, are wiped out, replaced by test scores, GPA’s, and comparable lists of extracurricular activities. These social realities can be re-made visible (ie a system whereby individuals are judged as individuals with a whole portfolio), but then easy comparisons are made more difficult.

It is also central to the making of commodities, as I’ve argued before. But if you are deciding how to make real-world investments, it is worth understanding the criteria by which the commodities you are interested in are judged. This is not a direct ‘buy company x’, ’sell company y’ kind of argument, just a way to help understand where experts are coming from. It is also where experts are most likely to be wrong in their misapplication of measures to the values they are measuring. That’s the Moneyball argument, that the ways that players were being commensurated were at best inaccurate.

In any case, I thought I’d post a table of what I have in mind, and see if it leads anyplace interesting. This is what blogs are for, right?

In these cases, the idea is that a simple quantified measure is not sufficient; you need to know enough content to understand the criteria used to make the transformative assessments of qualities through quantities. And though VaR has beautiful problems, it is in fact the ways that assessments across different kinds of financial instruments are made; likewise centrality, price per square foot, etc.

Incidentally, this conception I think bridges some of the more highfalutin discussions of performativity and social studies of finance to the more mundane world of organizations and work. But that’s not my point right here and now.

January 20, 2008

Another name for random. Or luck.

Filed under: Institutional, Markets, Organizations — Peter @ 3:43 pm

An anthropologist attempts to explain variation in how investment banks fared in the current credit crisis. Gilian Tett argues that three elements account for it: 1) successful firms have hands-on management (meddlers); 2) successful firms have management who rose through the ranks via trading desks rather than sales or legal; 3) successful firms have a ‘culture of power’ whereby firm members see themselves as tied to the firm rather than the business line, which creates a culture of accountability.

Alternatively, Michael Lewis noticed the way that Goldman Sachs has profited by the dramatic increase in credit defaults. Effectively, someone higher up in the firm made a series of dramatically-large trades against the CDOs that everyone else (including GS) was creating, marketing, and purchasing. In other words:

Enter two smart guys who trade Goldman’s proprietary books to argue to the CEO and chief financial officer that the subprime market feels soft and that Goldman should short it. This they do, in such massive quantities that they more than offset the long positions in subprime held throughout the rest of the firm, leaving Goldman short the subprime market and in a position to make billions when it crashes. End of story.

And it’s a good story. But consider what it implies. Their own traders and salespeople in subprime mortgages and related securities had put Goldman in exactly the same position as every other Wall Street firm: long subprime mortgages.

The only difference between Goldman and everyone else was that Goldman had, in effect, an entirely separate enterprise, sitting on top of the firm, with the power to reverse the judgment of its own supposed experts in various markets. They were able to do this, apparently, without ever saying a word about it to their own traders. Instead of telling the fools trading subprime mortgages that they are wrong, and that they should unwind their positions, they simply offset their trades.

This does not imply anything about the management team, where they come from, or the firm’s culture. Instead, it describes a firm where higher-up risk managers have the ear of people in power, and this allowed them to cancel out the stupidity of the rest of their own firm.

Or, perhaps this is all a fancy way of saying that there is a huge amount of luck and randomness happening at the organizational level in perhaps the most important core sector of the contemporary economy.

January 15, 2008

Insight from Meyer and Rowan to your Organizational Life

Filed under: Culture, Organizations — Peter @ 3:33 pm

In discussion with a colleague about how to strategically manage life in an organization, I was drawn into thinking about how cultural institutionalism would motivate a strategy. Most organizations have pretty positive stories to tell about themselves - if they didn’t, they have organizational commitment issues. My advice is simple:

1) Learn what the story is that an organization tells about itself.
2) Tell that story.

This seems trivial, and maybe in a sense it is. But if a university’s story about itself includes a commitment to great teaching, you will not succeed there by disrespecting teaching. You may not have to be a great teacher (i.e., there may be disconnect between an organization’s story and how it rewards its members), but you cannot believe that teaching doesn’t matter.

If an organization sees itself as putting customer needs first and providing an awesome user experience, even your justifications based on costs should be couched in terms of user experience and customer needs.

There is nothing cynical about this.