Niche Positioning Lessons From A Sad Clown Who Doesn’t Talk But Sings His Ass Off

Niche Positioning with Puddles Pity Party. Hit play.

 

That is Puddles Pity Party – a one man cover band. Puddles has nearly 400,000 followers on YouTube, many 20+ million view videos, 140,000 monthly listeners on Spotify, and he performs all around the world. Just last week he sold out the Palace of Fine Art Theatre, a 962 seat venue in San Francisco. Puddles was also an America’s Got Talent quarterfinalist in 2017.

How on earth did this happen? And how can you replicate Puddles’ odd but tremendous success?

This post will dissect how Puddles has positioned himself over time and identify lessons that might be applicable to your endeavors.

Be Remarkable

I love you – You’re unique, you’re interesting, you’re different, and people are going to remember [you]. – Howie Mandel

Puddles is remarkable – literally.

And that’s why during Puddles’ America’s Got Talent audition the judges had such high praise for his performance. Heidi Klum commented, “very unexpected, very original, very different, and I want to see more.” Even Simon Cowell had nice things to say.

Some call Puddles’ performance a gimmick. And yes, the juxtaposition is remarkable: a sad, mute clown who sings so beautifully that you can’t help but smile. But what may have started as a gimmick has turned into millions of people (and maybe you) falling in love with a fantastic performer and supporting his art.

Puddles differentiated himself so that he could stand out. Ironically, in order to be heard Puddles chooses to not speak, making his singing voice come off that much louder by further exaggerating the juxtaposition.

Hit play below and keep reading. This song should take you to the end of this article – just another 4 minutes.

 

Niche Down

Puddles wasn’t born Puddles.

Puddles Pity Party is Mike Geier – the 54 year old 6’ 8” baritone. He’s obviously a talented vocalist but that’s not enough to succeed these days.

Here’s Geier in 1994 performing Disney’s I Wan’na Be like You (The Jungle Book) with one of his previous bands, The Useless Playboys.

While entertaining, Geier’s performance isn’t unique. Geier hadn’t found his niche yet. So he kept experimenting – searching for what clicked with audiences.

Geier experimented with a lot of personas. He was Big Mike, Kingsized, Greasepaint, part of the Swing Noir band called the Useless Playboys, and a part of many other acts and groups along the way.

Puddles Pity Party Ancestor - 2009

From what I can tell, Puddles was a minor character in Geier’s repertoire for a long time before taking center stage. YouTube videos from 2009 and 2010 feature Puddles, but not our 2018 Puddles. Those videos feature a “missing link” Puddles, bridging a gap between Geier and the Puddles we know today.

Puddles’ evolution seemed to accelerate when Geier was performing at a cabaret in Seattle called Teatro ZinZanni. Geier could experiment in front of an audience every night and continuously make small improvements.

Feedback Loops

Tight and frequent feedback loops are undervalued. When done properly, tight and frequent feedback loops force you to 1) put your work out there, 2) listen to your audience’s response, and 3) to try new things in order to improve.

The problem, of course, with tight and frequent feedback loops is that you have to put your work out there, listen, and try new things – which requires a lot of motivation, time, energy, and persistance.

Iterate

When you’re just beginning, it’s important to start narrow – to do one thing well. You’ll get increasingly better at whatever it is you’re doing. But you also have to experiment and try new things.

To find the right niche, you may have to search and search and search. Hard work and persistence may pay off: You might discover your niche, your product-market fit, and become a ten-year “overnight” success like Puddles.

One obvious challenge here is balancing focus with experimentation. I think the best remedy is to be intentional – maybe even scientific – with your experiments. A “pivot” is holding most variables constant while changing others. Plant one foot while you find a better position for the other.

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The Anatomically Modern Puddles

A 2012 interview with Geier hints at a nearly modern Puddles. All of the Pagliacci hallmarks were there – white face paint with red accents and the baggy clown suit. But we also see Puddles’ trademark “P” crown and his operatic singing style.

Puddles Pity Party Artifacts - 2012Source

And by late 2012, there’s no doubt that Geier has found product-market fit for Puddles.

So we have some understanding of Puddles ancestry, but what makes a good niche?

Seek a Niche that’s Worthwhile

People want to be entertained. Puddles delivers because Geier understands entertainment. He understands fans, culture, originality, comedy, presence, and performance. And he studied and emulated one of the greats – Elvis – for years.

But your niche can’t just be worthwhile to your future customers. In order to compete long term, your niche has to be worthwhile to you too – financially and artistically.

Puddles’ niche may be focused but it’s not small.

Puddles has enormous appeal. His covers of pop songs cut cross both time and genre – attracting fans of David Bowie, Lorde, Elvis, R.E.M., Sia, Queen, Tears for Fears, Radiohead, Johnny Cash, Twenty One Pilots, Coldplay, and even a mashup of STYX + Disney’s Frozen.

Seek a Niche that’s Under-served

Niching down sends a signal to your customers that you’re dedicated to a specific thing that they care deeply about.

Go after a market that’s under-served. Your market will be thrilled that someone is finally paying attention to them and reward you with their time, attention, and money.

Going after an under-served market lets you deliver disproportionate value immediately. When you over-deliver, your fans will be evangelical, bringing others into the fold and reducing your customer acquisition costs.

Seek a Niche that’s Defensible

There’s no lack of great singers out there – in fact it’s a competitive, cut-throat market for up-start singers. Supply is much greater than demand for talented vocalists. That’s the core reason why Geier didn’t have Puddles-level success as Big Mike, Kingsized, Greasepaint, or the Useless Playboys.

But as Puddles, Geier is in a category of his own – a great position to defend from competition.

I dare you to copy Puddles. You will fail. You’ll fail because blatantly copying his ideas will make you look ridiculous. You can never be an exact clone of Puddles anyway because he’ll always be the original and you’ll always be the copy.

When considering a niche, think about defensibility. There are many ways to defend your position in a competitive landscape. Ideally, one feature of your position would be an element of self-defensibility.

Summary

When you’re starting something new, seek out a niche – a niche that’s remarkable, worthwhile, under-served, and defensible. Experiment and iterate, holding on to what works and leaving behind what doesn’t. Once you find a valuable position in your competitive landscape, ruthlessly exploit it, cautiously grow it, and begin to invest in your next move. Land and expand.

I agree with Simon Cowell. I think Puddles is “fantastically brilliant” and I think his strategy for finding and owning a niche has been a success that will continue to pay off for Geier, his team, and his fans.

PS: If you have another 4 minutes, I’ll leave you with one final video from 2014 (Dancing Queen by ABBA). I want you to note how many people are recording him in this tiny coffee shop in 2014. Puddles is safe, fun, and worthwhile – the formula for sharability – a concept I lifted straight from Ryan Holiday’s Perennial Seller.

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Your 2 Min Week in Review – March 19, 2018

Review of the week of March 19, 2018:

Dropbox has successfully IPO’d

Dropbox raised it’s expected price range mid week and ended up selling shares to institutional investors at $21. The shares (Nasdaq: DBX) JUST started trading now and the price immediately popped $9 to $30, a 44% increase.

I think Dropbox is a hot potato that you won’t want to be left holding but I’ll be keeping an eye on how things go. Personally, I’m more excited about the Spotify IPO in early April (more below).

Liquidating Toys”R”Us

The 70 year old brick and mortar toy retailer is liquidating its assets and hundreds of stores will close worldwide over the next few weeks. While Amazon is delivering the smiles these days, Toys”R”Us has one final gift for us grown-up kids: The story of their rise and fall.

Category Killer

A Category Killer is a sector specialist that leverages their narrow focus to gain a competitive edge over less focused firms through increased bargaining power, pricing tactics, large selection, and strong branding. It’s believed that Toys”R”Us was the very first category killer.

How Putin Protects His Power

Putin has been elected for another 6 year term as President of Russia. Key take away: In order to protect power, first focus on getting the right pieces to the right place at the right time. Then worry about covering your tracks and making things look legitimate.

Spotify IPO

Spotify plans to skip the most expensive and stressful parts of an IPO in early April by directly listing their stock on the market (DPO: Direct Public Offering) and letting current shareholders and would-be buyers do what markets do best: price discovery. I’m excited for this one!

The Facebook Freakout

I’ve learned that the vast, vast majority of people have no clue what the Facebook freakout is all about. Don’t be one of them – get the facts. A few hours after I published my piece on the situation, Zuck posted an adept statement – walking the tightrope of trying to please shareholders, employees, and user. This morning’s Exponent podcast has a fantastic recap and analysis.

IPO Meltdown

Speaking of IPOs and Facebook, I wrote about the crisis that happened during the Facebook IPO back in 2012 and a few tips for how to manage crisis. This pairs nicely with my post a few weeks back: The Anatomy of a Disaster.

Autonomous Car Killed Pedestrian

The first pedestrian fatality involving an autonomous car happened this week. More people are going to die because of self-driving cars. But these deaths are the cost of saving more lives.

Autonomous Cars Will Kill People

Earlier this week a woman was hit and killed by an autonomous car in Tempe, Arizona while she was crossing the road with her bike.

The accident is very sad and my heart goes out to the victim’s family and friends.

If you read my recent piece on the anatomy of disasters, you’ll recognize several of the common features here – although on a smaller scale.

The pedestrian was crossing a 5-lane, 45 MPH street in an area where drivers wouldn’t normally expect pedestrians. The autonomous car, operated by Uber, obviously failed to detect the pedestrian and stop in time. The “safety driver” wasn’t focused on the road or prepared to stop the vehicle.

And it didn’t help that it was very dark outside, this section of the road was unlit, and the pedestrian had no lighting or reflectors to make herself seen.

I’ve seen the video of the accident and it’s terrible. Unfortunately, I think that even an experienced driver would have hit the woman too.

More People Will Be Killed

In 2016, 37,461 people were killed in motor vehicle accidents. That’s over 100 people killed a day in the US. (National Highway Traffic Safety Administration)

Driving is an incredibly dangerous activity that we’ve made extremely safe through a lot of hard work over the past 5 decades. Currently the most accident-prone component of driving is us – humans.

We’re often slow, make poor choices, and drive when we’re tired, inebriated, and distracted. In theory, computers would make for much better drivers than humans.

If we are able to develop autonomous cars that are safer than human-driven cars, then I think we’ll be morally obligated to use them.

But that means that more people will die while we develop that capability. In the meantime, we need to have the courage, patience, and wisdom to get there – because it’ll be worth it when we do.

The Facebook Freakout

A new slice of Facebook users finally understand how much data they’ve been handing to Facebook over the years. By the way, if this piece gets you all riled up, leave a comment here.

Summary:

  • Facebook gave politically motivated parties access to user data.
  • This isn’t unusual. It’s what Facebook does and what users signed up for.
  • You are not Facebook’s customer. You are Facebook’s product.
  • The days of “click first and asks questions later” are over.
  • Facebook will most likely come out of this unscathed or stronger.

Time to Read: 2 Mins 58 Sec

What Actually Happened?

In short, Facebook did what Facebook has always done: sell access to its users to 3rd parties.

Cambridge Analytica, an organization that wanted to build “psychographic profiles” of US citizens in order to help politicians capture more votes, created a Facebook App. The app directly asked questions about “the issues” and stored user responses.

But the app also asked users to grant permission to Cambridge Analytica to access their Facebook data. Users accepted willingly. If a user didn’t grant permission, then Cambridge Analytica didn’t have access to that user’s data – yet.

There’s another way to get your Facebook data though: your friends.

This Is Too Abstract

Let’s get concrete. Let’s talk about Aaron and Betty – Facebook friends. Say Aaron is foolish enough to take this survey from Cambridge Analytica and agrees to give up a whole bunch of data about himself. Betty, who just happens to be “friends” with Aaron on Facebook, is part of Aaron’s network and data. So while Cambridge Analytica got explicit access to data about Aaron, Facebook also gave them some data about Betty.

To be clear, Cambridge Analytica didn’t get all of Betty’s data in this case – just a subset of her data.

Who Owns the Data?

In my mind, at least three parties own pieces of Betty’s data: Betty, Aaron, and Facebook. If Facebook chooses to sell their data (about you and your friends), then you’ve already given them permission to do so when you signed up. Further, Betty gave Aaron access to some of her data when she accepted his friend request.

(BTW, I’m using the word “sell” pretty loosely throughout this article. Facebook doesn’t really sell data anymore. But they do monetize their data in all sorts of ways that make it difficult to get network information without paying for something – usually an advertisement or promotion.)

What’s really confusing about all of this is that it feels like Facebook is selling Aaron’s access to Betty’s data. But they’re not. Facebook is selling their data.

You’re Not the Customer, You’re the Product.

But I wouldn’t be mad at Facebook. Facebook is in the data business.

Selling metadata about individual nodes isn’t very interesting anymore. What’s interesting is the edge data – information about how nodes are connected. But what’s most interesting is predictive edge data – information about how nodes might be connected now or in the future.

Said another way, Facebook’s business model is selling access to swaths of the social fabric. You are not the customer. You are the product.

So What Should Facebook Do?

Currently, their brand is a little more tarnished in the public eye and the stock has lost about 10% of it’s value. But honestly, I don’t see a probable scenario where Facebook loses much more here:

  • If Zuck and Facebook remain silent (or pander), then this whole thing may blow over in a few days/weeks as the media grasp for more salacious (and easier to consume) news.
  • If it doesn’t blow over, then government regulations will likely be passed in order to “crack down” on Facebook’s “misdeeds.” While this might not be ideal for TheZuckBook.com, Facebook will end up writing much of the regulations – regulations that will make creating competitors to Facebook very difficult.

The worst thing Zuck and Facebook can do is come out with some controversial statement that keeps them in the news cycle longer. Barring that or some other crazy revelations, I think Facebook will be just fine and that this is just another #FacebookFreakout.

One thing I can say very confidently though: we should all be grateful that Zuck is the CEO of Facebook instead of Theranos founder and fraudster, Elizabeth Holmes.

Let’s Have a Conversation!

Here.

PS

  • There are a lot of details that feel important about this story (ie: Cambridge Analytica said they were doing “research” – whatever that means; Facebook asked them to delete data and they lied about doing so; Cambridge Analytica paid some users to incentivize them to grant their Facebook permissions…etc). But these things aren’t the core issue and bad actors aren’t new or unexpected.
  • Also, there’s still a lot we don’t know about this situation. It’s very possible we’ll learn things that will change my thoughts and analysis. #disclaimer.
  • PS: Follow Straty on Facebook! (jk)

Sources & Further Reading

The Spotify IPO, an IPO Meltdown, and Melting Down Toys”R”Us

It’s Tuesday, March 20, 2018 and today we’re talking about: the Spotify IPO, an IPO Meltdown, and Melting Down Toys”R”Us. Avg read time: 4 min 45 sec. But you’re better than average.

ToysRUs Liquidation Bankruptcy

 

Spotify IPO

Dropbox isn’t the only company about to have its initial public offering. Spotify – the 11 year old music streaming service – is set to IPO in the next few weeks as well. But Spotify is doing things their own way. The Stockholm, Sweden company is doing a direct listing.

This means that Spotify isn’t spending millions to hire an investment bank, isn’t creating new shares to sell, isn’t doing a roadshow to woo potential institutional investors, isn’t setting an offering price, and isn’t selling newly issued shares to institutional investors the night before the IPO so they can then sell those shares on the public market the next day.

On April 3, 2018, current Spotify shareholders will be able to sell their shares directly on the New York Stock Exchange. This Direct Public Offering (DPO) is somewhat rare.

Maybe most importantly, Spotify won’t be raising money with this DPO since they’re not creating new shares and not actually selling any either. Only existing shareholders will be able to sell shares and only they will receive money for those shares. Finally – and this might be the coolest (and riskiest) part – buyers and sellers will have to discover prices without the guidance of an investment bank’s guesstimate. #priceDiscovery!

While both the Dropbox IPO and the Spotify DPO are worth paying attention to, only one is music to my ears. For more information, watch Spotify’s Investor Day for over 2 hours of details.

“Without deviation from the norm, progress is not possible.”
― Frank Zappa

This segment was inspired by The Indicator on March 19, 2018.

IPO Meltdown

Speaking of IPOs, I came across this great HBR story Monday that I’d never heard before about the Facebook IPO in 2012. Apparently the Nasdaq had a crisis while the stock was supposed to be trading live for the first time.

As the start of trading approached, hundreds of thousands of orders poured in. But when 11:05 arrived, nothing happened.

The computer code that was supposed to facilitate the exchange of billions of dollars for the IPO was reporting that something was wrong. Nasdaq managers decided to disable the check that was failing and move forward with the big day.

When the validation check was removed, trading started, but the workaround caused a series of failures. It turned out the check had initially picked up on something important: a bug that caused the system to ignore orders for more than 20 minutes, an eternity on Wall Street. Traders blamed Nasdaq for hundreds of millions of dollars of losses, and the mistake exposed the exchange to litigation, fines, and reputational costs.

The managers screwed up. They pushed forward when they should have stopped.

The Anatomy of a Disaster

A few weeks ago I wrote a long-form piece called The Anatomy of a Disaster where I dissected the worst industrial accident on US soil in 25 years. Nasdaq’s Facebook IPO crisis follows a similar pattern. While I focus more on causes and prevention in my piece, the HBR piece on the Facebook IPO touches more on what to do when you’re already in a disaster. Two great tips they give are:

  1. Learn to stop. When faced with a surprising event, we often want to push through and keep going. But sticking to a plan in the face of surprising new information can be a recipe for disaster.”
  2. Do, monitor, diagnose. Sometimes stopping isn’t an option. If we don’t keep going, things will fall apart right away. What can we do then?” If a patient has stopped breathing, start “with a task, such as intubating the patient. The next step is monitoring: you check if performing the task had the expected effect. If it didn’t, then you move onto the next step and come up with a new possible diagnosis. And then you go back to tasks because you need to do something — for example, administer medications or replace the bag — to test your new theory.”

(The HBR guest writers were András Tilcsik and Chris Clearfield, who recently published Meltdown: Why Our Systems Fail and What We Can Do About It)

Toys”R”Us, Part II

Yesterday I wrote about the Toys”R”Us liquidation. My prototyping, Neuroscientist brother, Tim, pointed out that the phrase category killer is a bit confusing. I wrote back:

Category killer doesn’t mean that a company killed the category.. it means that they dominated (or co-dominated) it due to their focus and scale.

Toys”R”Us was a category killer because they niched down on one thing and one thing only. So while 70 years ago the mom & pop corner stores or Macy’s or Sears may have had a toy section or toy aisle, they didn’t know toys well, their selection was bad, they couldn’t sell toys cheaply, they had no leverage with toy manufacturers, they weren’t known for selling toys, and they didn’t really care about toys to begin with.

There were other toy stores, but they were small operations, making toys in the back, or only able to buy from local toy manufacturers. They were focused but had no efficiency, no scale. There was a huge opportunity for the first chain toy store – a big-box toy store – that could bring together focus, scale, efficiency, and brand.

Toys”R”Us Becomes Category Killer

History.com published a nice piece Monday about the history of Toys”R”Us. Returning from WWII, Charles Lazarus’ intuition told him that America was about to have a lot more babies. After opening a baby furniture store in his father’s bike repair shop, customers started asking for toys. As parents kept returning to buy toys for their growing children, Lazarus got out of the children’s furniture business and went all in on toys.

Big-box stores like Toys ‘R’ Us astonished the era’s consumers, who had simply never seen stores that big and crammed with merchandise. “What Lazarus really captured was this sense of American abundance after the war and after all those years of depression,” says Richard Gottlieb, founder of Global Toy Experts and an authority on the toy business.

From Wikipedia: “At its peak, Toys “R” Us was considered a classic example of a category killer, a business that specializes so thoroughly and efficiently in one sector that it pushes out competition from both smaller specialty stores and larger general retailers.”

Sadly, after Lazarus retired, Toys”R”Us began to lose it’s way. In 2005, Bain Capital, KKR, and Vornado Realty Trust announced a leveraged buyout (LBO). And as is typical for these types of private equity plays, the cost cutting began.

But as Toys ‘R’ Us dialed back its offerings, it cut back on the magic, too. When Toys ‘R’ Us changed its focus from the toys themselves to undercutting the competition, “You didn’t get the elation anymore,” says Gottlieb. “They failed because they ceased to love toys.”

Had Toys”R”Us remained focused on their core values and competency, I think they could have adapted and weathered the back-to-back storms of Walmart (the biggest big-box store) and Amazon.

Toys”R”Us, Category Killers, Putin & Dropbox

It’s Monday, March 19, 2018 and today we’re talking about: Toys”R”Us to Liquidate All US & UK Assets, the Concept of Category Killers, Putin Preserving Power, and Dropbox to IPO on Friday.

Toys”R”Us Liquidation

Toys”R”Us filed to liquidate all of its US and UK assets last week after filing for bankruptcy last September. The 70-year-old retail toy store has 875 stores in North America, 100 stores in the UK, and 64,000 employees.

I was a Toys”R”Us Kid. My parents never took me there or bought me toys, but I sure loved their commercials growing up. I can hear the jingle now. But what happened to all of those happy snaggletoothed 80’s and 90’s kids with their beloved over-priced plastic? Apparently they grew up, had kids themselves, and then didn’t take them to Toys”R”Us either.

Customers have been choosing Walmart, Target, and Amazon over the past few decades, systematically demolishing several brick and mortar retail sectors: records, books, consumer electronics, office supplies, and now toys. That’s Tower Records (defunct), Virgin Records (defunct), Barnes & Noble (Feb 2018: layoffs), Borders (defunct), Best Buy (March 2018: shutting down 250 Best Buy Mobile stores), Staples (March 2014: closing 225 stores), and OfficeMax (May 2014: closing 400 stores).

Now, my childhood dream of simply stepping foot inside of a Toys”R”Us is crumbling before my eyes. It seems likely that all 1600 stores world wide will be closed, franchised, or liquidated. And I predict that any franchises will be doomed from the start without the ongoing support of the corporate brand.

I guess we’re all Amazon kids now..

Category Killers

Like the top dogs of each of the other industries above, Toys”R”Us was considered a “category killer.” Category Killers are deep specialists in a sector who leverage their narrow focus to gain a competitive edge over less focused firms through increased bargaining power, pricing tactics, large selection, and strong branding.

UPDATE: Category Killers came up again in detail here.

76.6% of Votes For Putin

Vladimir Putin was re-elected Sunday as President of Russia for another 6 year term. He has been either President or Prime Minister of Russia since 1999 when Boris Yeltsin resigned and choose Putin as his successor.

It’s widely believed that – despite Putin’s popularity in Russia – the results are not what they seem. The 67.5% turnout is suspiciously high and reports of ballot-box stuffing and forced voting have already surfaced.

Alexei Navalny, Putin’s biggest political opponent, was barred from even running in the election after being convicted of embezzlement. The charges are believed to be politically motivated and retaliation for Navalny’s anti-corruption campaigns. The 7 other candidates in the race appealed only to niche populations and had no serious hopes of winning the election.

And while term limits (of 2 consecutive 6-year terms) prevent him from running for President again in 2024, Putin can just “sit out” for a term as Prime Minister – exactly like he did in 2008. Assuring that one of his puppets would become President and allow him to govern from the Prime Minister’s seat was easy in 2008 and could be just as easy in 2024.

But regardless of interference allegations, Putin was already assured victory before the election. I mean, he only held one campaign event. So why interfere with a race you’re supposed to win?

Mandate. Putin and his allies can now point to a 67.5% voter turnout and a 76.6% victory as a mandate from the Russian people to rule however he sees fit. Keep an eye out for new policies and announcements as Putin enters his 2nd “lame duck” term.

Putin consistently proves that in order to maintain power you must get the right pieces to the right place at the right time. Being secretive and covert is a nice-to-have.

Dropbox IPO

Dropbox is poised to IPO this Friday. Offering shares at a price of $16-18, the cloud-storage company is attempting to raise up to $650 million. On the high end, the company would be valued at $7.1 billion – 30% lower than it’s peak in 2014.

While I like Dropbox and am one of the 11 million paying customers (of 500 million), the competition is fierce in the cloud storage market and the company has really struggled to clearly differentiate itself from competitors and launch other high-value services for small and medium size businesses.

To me, Dropbox is yet another case of Silicon Valley Hot Potato… it’s fun to get your hands on stock for a bit, but if you want to make money after the first few rounds, you’d better not be left holding it when the music stops. The question for current and would-be investors is: Has the music already stopped?

The Elephant in the Brain by Robin Hanson

Hidden Motives with Robin Hanson

The following quote from Robin Hanson is from Hidden Motives, an episode of the Waking Up podcast with Sam Harris. The topic is primarily Hanson’s new book, The Elephant in the Brain: Hidden Motives in Everyday Life, co-written with Kevin Simler.

Our usual institutions let us pretend to be trying to get the thing we pretend to want while actually – under the surface – giving us the things we actually want.

Policy analysts typically try to analyze how to give policy reforms that would give us more of the things we pretend to want. And we’re usually uninterested in that because we know we don’t actually want more of the things we pretend we want.

If you could design a policy reform that let us continue to pretend to get the things we pretend to want while actually getting more of the things we actually want, we’d like that. But we can’t admit it. If we stumble into it, we’ll stay there.

But if the policy analysts were just to out loud say “Well this is a system that will give you more of this thing that’s what you actually want. But admit it.” We don’t want to admit it. And then we won’t want to embrace that.

So yes, what we want to do is pay for the appearance of the thing we’re pretending to want and we’re often paying a lot for that appearance.

– Robin Hanson

The Elephant in the Brain: Hidden Motives

The Elephant in the Brain Hidden Motives in Everyday LifeGreat quote from Robin Hanson about how we’re often not honest with ourselves about our hidden motives and what that means for our policies regarding education, guns, healthcare, immigration, inequality, capitalism, and corporatism.

Hanson’s accessible book focuses on motives and norms but also covers selfishness, hypocrisy, norm violation, cheating, deception, self-deception, signaling, counter-signaling, social status (separated into dominance and prestige), power, money, and loyalty.

My 3 biggest takeaways from Hanson’s conversation with Harris were:

  1. How frequently we are dishonest with ourselves about our motives
  2. When it comes to what people want, you’re better off watching their actions than taking their word
  3. It’s okay to be agnostic on things you haven’t looked into deeply – you’ll probably be happier too.

Finally, Hanson is also known for his work in predictive markets and forecasting. If that’s also of interest to you, check out: Why are we so so so bad at finishing projects on time?

 

Why are we so so so bad at finishing projects on time?

Why don’t we learn from past experiences when it comes to planning new projects? Why aren’t even our best laid plans realistic?

Surely you’ve noticed this – whether it’s getting your taxes done, that big presentation for work, or planning your wedding.

Why do 80-90% of mega projects run over budget and over schedule?

Why has it taken – for example – nearly 100 years to expand the Second Avenue Subway in NYC? The original project was expected to cost 1.4 billion dollars (a 1929 estimate in 2017 dollars) and now with Phase 1 completed ($4.5 billion to build just 3 of the 16 proposed stations), Phase 2 is expected to cost $6 billion.

This phenomenon has been dubbed The Planning Fallacy – the topic of today’s Freakonomics podcast and the inspiration for this post.

Don’t have 45 minutes to listen? Keep reading.

Why do we fall for The Planning Fallacy again and again?

  • When planning a project we naturally focus on the case at hand, building a simulation in our minds. But our simulations are rosy, idealized, and don’t account for all of the complexities that will inevitably unfold.
  • We also focus on succeeding, not failing, creating an optimism bias. This means we don’t think enough about all the things that can go wrong.
  • We’re overly confident, believing in our abilities and the old “this time will be different“ line too much.
  • We ignore the complexity of integrating all of the parts of a project together.
  • We intentionally misrepresent a project’s plans in order to get it approved.
  • We rely too heavily on our subjective judgement instead of the facts and past empirical data.
  • And of course: incompetence, fraud, deliberate deception, cheating, stealing, and politicking.

Interested in why things fail? Read The Anatomy of a Disaster.

So how do we plan better?

  • Use past projects – even if they’re not exactly comparable – as a benchmark for projects being planned.
  • Track and score the difference between forecasts and outcomes.
  • Get stakeholders to put skin in the game, creating rewards and penalties for good and bad performance. #IncentivesMatter.
  • Use data and algorithms to reduce human biases.
  • Use good tools to help you focus. Asana co-founder Justin Rosenstein warns against “continuous partial attention” – a state of never fully focusing on any one thing.

Success Building Software

I build projects for a living – mostly product strategy and software for start-ups or innovation groups within larger companies. I plan and execute on projects everyday and I still struggle with the planning fallacy in other areas of my business (did I mention my corporate taxes are due in 7 days?).

But the secret sauce to my successes building products has always been to 1) have personal expertise in what’s being planned and built, 2) refine and go over the plans until your eye bleed looking for possible pitfalls, and 3) have a clear and easy-to-follow process to keep you focused on the right thing at the right time.

Terms & Concepts

The Planning Fallacy – Poorly estimating the timeline, quality, and budget of a planned project while knowing that similar projects have taken longer, cost more, or had sub-par results.

The Optimism Bias – Focusing on the positives of a situation over the negatives.

Overconfidence – Thinking that we’ll perform better than we actually will.

Coordination Neglect – Failing to account for how difficult it is to coordinate efforts and combine all of the individual outputs into one complete system.

Procrastination – Choosing to do things that we enjoy in the short term instead of the things we think will make us better further down the road. In the episode, Katherine Milkman called procrastination a “self-control failure” – my new favorite phrase.

Reference Class Forecasting – Using past and similar projects as a benchmark for how your next project will perform.

Strategic Misrepresentation – Underestimating the costs and over representing the benefits of a project.

Algorithm Aversion – The big thing that Katy Milkman thinks is holding us back from using “data instead of human judgement to make forecasts” better.

Interviewees

Image Source

BP Texas City Explosion Aftermath

The Anatomy of a Disaster

When I first started working at the nation’s largest refinery my boss didn’t have any great projects ready for me so he sent me to “Shift Super” training. There were only 4 of us students – me and 3 unit operators, each with at least 20 years of experience. I was only 19 years old and I barely knew anything about anything.

Each shift supervisor runs a big chunk of the refinery: 2-4 major units. But shift supers needed to know how to supervise any of the 10 or so control centers safely, so on my first day of work I was learning how the entire refinery operated. It felt like a lifetime’s education crammed into 5 days.

BP Texas City ISOM Unit Process Flow Diagram

 

After Shift Super training, I began to see more and more of the refinery with my own eyes. What had been a precise line drawn from one perfect cylinder to another perfect cylinder was actually a rust covered 6-inch pipe baking in the Texas heat transporting high-octane, extremely flammable raffinate from a 170 ft separation tower to a temporary holding tank.

Fear of Disaster

One evening – about 2 weeks in – as the refinery was becoming a real place to me, I had this moment of pure panic while driving home.

With so many things that could go wrong at any moment, how was the refinery still standing? How had it even made it until now? Any minor mistake – in the design, production, construction, or operation of any pipe or vessel – could result in a huge disaster. Would the refinery even be there when I returned tomorrow morning?

I couldn’t sleep. The next morning the refinery was still there. And the next. And the next. And my fears slowly morphed into amazement. My refinery was the largest, most complicated system I had ever attempted to wrap my brain around.

BP Texas City Refinery Explosion

But just 29 miles away from my refinery, investigators were trying to piece together what happened during the nation’s worst industrial disaster in nearly 2 decades.

Fifteen people had been killed and 180 injured – dozens were very seriously injured. The cause of each fatality was the same: blunt force trauma.

Windows on houses and businesses were shattered three-quarters of a mile away and 43,000 people were asked to remain indoors while fires burned for hours. 200,000 square feet of the refinery was scorched. Units, tanks, pipes were destroyed and the total financial loss was over $1.5 billion.

BP Texas City Explosion Aftermath

The BP Texas City Refinery Explosion was a classic disaster. A series of engineering and communication mistakes led to a 170-foot separation tower in the ISOM unit being overfilled with tens of thousands of gallons of extremely flammable liquid raffinate – the component of gasoline that really gives it a kick. The unit was designed to operate with about 6,000 gallons of liquid raffinate so once the vessel was completely filled, 52,000 gallons of 200 °F raffinate rushed through various attached vapor systems. Hot raffinate spewed into the air in a 20 foot geyser. With a truck idling nearby, an explosion was immanent.

This video from the US Chemical Safety Board (CSB) is easy to consume and well done. The 9 minutes starting at 3:21 explain the Texas City incident in detail:

I’ve studied this and other disasters in detail because in order to prevent disasters we have to understand their anatomy.

The Trigger

The trigger is the most direct cause of a disaster and is usually pretty easy to identify. The spark that ignited the explosion. The iceberg that ruptured the ship’s hull. The levee breaches that flooded 80% of New Orleans.

But the trigger typically only tells a small part of the story and it usually generates more questions than answers: Why was there a spark? Why was highly flammable raffinate spewing everywhere? Why was there so much? What brought these explosive ingredients together after so many people had worked so hard to prevent situations exactly like this?

While the trigger is a critical piece of the puzzle, a thorough analysis of a disaster has to look at the bigger picture.

When The Stars Align

The word disaster describes rapidly occurring damage or destruction of natural or man-made origins. But the word disaster has its roots in the Italian word disastro, meaning “ill-starred” (dis + astro). The sentiment is that the positioning of the stars and planets is astrologically unfavorable.

One of the things I learned from pouring over the incident reports of the Texas City Explosion was that disasters tend to only happen when at least 3 or 4 mistakes are made back to back or simultaneously – when the stars align.

Complex systems typically account for obvious mistakes. But they less frequently account for several mistakes occurring simultaneously. The stars certainly aligned in the case of the Texas City Refinery Explosion:

  • Employees and contractors were located in fragile wooden portable trailers near dangerous units that were about to start up.
  • The start-up process for the ISOM unit began just after 2 AM, when workers were tired and conditions were not ideal.
  • The start-up was done over an 11 hour period meaning that the procedure spanned a shift change – creating many opportunities for miscommunication. Unfortunately, the start-up could have easily been done during a single shift.
  • At least one operator had worked 30 back to back 12 hour days because of the various turnaround activities at the refinery and BP’s cost-cutting measures.
  • One liquid level indicator on the vessel that was being filled was only designed to work between a certain narrow range.
  • Once the unit was filled above the indicator’s upper range, the indicator reports incorrect values near the upper range, misleading operators regarding the true conditions of the liquid level. (ie: at one point the level indicator would report that the liquid levels in the tower were only at 7.9 feet when they were actually over 150 ft)
  • A backup high level alarm located above the level indicator failed to go off.
  • The lead operator left the refinery an hour before his shift ended.
  • Operators did not leave adequate or clear logs for one another meaning that knowledge failed to transfer between key players.
  • The day shift supervisor arrived an hour late for his shift and therefore missed any opportunity for direct knowledge transfer.
  • Start-up procedures were not followed and the tower was intentionally filled above the prescribed start-up level because doing so made subsequent steps more convenient for operators.
  • The valve to let fluids out of the tower was not opened at the correct time even though the unit continued to be filled.
  • The day shift supervisor left the refinery due to a family emergency and no qualified supervisor was present for the remainder of the unfolding disaster. A single operator was now operating all 3 units in a remote control center, including the ISOM unit that needed special attention during start-up.
  • Operators tried various things to reduce the pressure at the top of the tower without understanding the circumstances in the tower. One of the things they tried – opening the valve that moved liquids from the bottom of the tower into storage tanks (a step that they had failed to do hours earlier) – caused very hot liquid from the tower to pass through a heat exchanger with the fluid entering the tower. This caused the temperature of the fluid entering the tower to spike, exacerbating the problems even further.
  • The tower, which was never designed to be filled with more than a few feet of liquid, had now been filled to the very top – 170 feet. With no other place to go, liquid rushed into the vapor systems at the top of the tower.
  • At this point, no one knew that the tower had been overfilled with boiling raffinate. The liquid level indicator read that the unit was only filled to 7.9 feet.
  • Over the next 6 minutes, 52,000 gallons of nearly boiling, extremely flammable raffinate rushed out of the top of the unit and into adjacent systems – systems that were only designed to handle vapors, not liquids.
  • Thousands of gallons of raffinate entered an antiquated system that vents hydrocarbon vapors directly to the atmosphere – called a blowdown drum.
  • A final alarm – the high level alarm on the blowdown drum – failed to go off. But it was too late. Disaster was already immanent.
  • Raffinate spewed from the top of the blowdown drum. The geyser was 3 feet wide and 20 feet tall. The hot raffinate instantly began to vaporize, turning into a huge flammable cloud.
  • A truck, idling nearby, was the ignition source.
  • The portable trailers were destroyed instantly by the blast wave and most of the people inside were killed. Fires raged for hours, delaying rescue efforts.

Man-made disasters don’t just happen in complex systems. The stars have to align. But the quality of the mistakes matters a lot. Had even one key error above been avoided or caught, this incident wouldn’t have happened. In this case, overfilling the unit by 150,000 gallons of nearly boiling flammable raffinate, set off a chain of events that guaranteed disaster.

The Snowball Effect

Not all mistakes are made equally. Several of the errors in the Texas City Refinery Explosion compounded: Had operators followed the start-up procedure and not filled the tower beyond the designed level, had the tower been better designed to communicate liquid levels over a broader range, had the valve draining the tower been opened at the correct time, had the operators communicated properly between shifts… Had any one of these mistakes been avoided, the tower wouldn’t have been over filled and this disaster would have been prevented.

Miscommunication errors seem to have a special way of compounding and spiraling out of control.

While preventing some of the other mistakes might have mitigated the damage done, failing to understand the quantity of raffinate in the tower ultimately caused the disaster at Texas City.

Preventing Disasters

Think about the complex systems you care about in your business and life. List the raw ingredients for a disaster. What information do decision makers and operators need in order to react appropriately?

Identify the singular points of failure and the obvious triggers. Brainstorm scenarios – both common and uncommon – in order to better understand how different mistakes could interact with one another and how they could snowball out of control.

Pay attention to both the system’s design and the human errors – especially communication errors – that will inevitably arise during normal operation. Think about how you can design the system to be more resilient without sacrificing too much efficiency. What brakes can you build into the process to slow down snowballs?

Where do you need warning alarms? What are the right set-points for each alarm? How vocal do the alarms need to be? What happens when the alarms fail? How often will you test or double check your alarms?

Summary

Disasters tend to happen within large and complex systems. Usually, the immediate cause of a disaster – the literal or figurative spark or trigger – can be readily identified. But there’s almost always a bigger picture, a series of mistakes and errors that led to that spark or gave that spark power. Some of those mistakes set off bigger and bigger problems, which can snowball into something truly catastrophic.

Bottom Line: Understanding the anatomy of a disaster in your world is the first step to designing better systems, procedures, and training to help mitigate damage or prevent disasters altogether.

Bonus Content

Hungry for a little more? Check out this patron-only bonus content on disasters.

Sources & Further Reading

If you’re really curious about the details of the Texas City Refinery Explosion, check out the 2 reports I read when studying the incident: 1) US Chemical Safety Board’s (CSB) 341 page report. 2) BP’s 192 page report from BP.

Bad Tactics in Baseball

Bad Tactics: Baseball & the Boardroom

“At the opening of the 2002 season, the richest [baseball] team, the New York Yankees, had a payroll of $126 million while the two poorest teams, the Oakland A’s and the Tampa Bay Devil Rays, had payrolls of less than a third of that, about $40 million.”

For the Oakland A’s the exact number was $41,942,665. Oakland won 103 games that regular season, while the Texas Rangers had only won 72 and spent $106,915,180. This phenomena was somewhat common actually. Many of the richest teams in Major League Baseball were not delivering results while the Oakland A’s were… consistently.

Let’s look at this another way. Teams have to spend a minimum of $7 million on payroll and a team that’s spending the minimum payroll is expected to win about 49 games during the 162 game season. So, on a dollar-per(-marginal)-win basis the A’s were spending about $650,000 per win while Texas was spending about $4.3 million for each win. What explains this nearly 7x delta in ROI?

The two word answer is simple: Bad Tactics.

Traditional Tactics

Baseball is a sport steeped in tradition and the decade preceding the 2002 season saw teams payrolls rise by tens of millions of dollars per team, up to a 400% increase. These new costs meant that more people were paying attention to how effectively this money was being spent.

In 2002, the vast majority of MLB scouts were still judging players by whether they had a “good face” and by the 5 Tools – running, throwing, fielding, hitting, and hitting power. These subjective metrics were used in place of the enormous data sets that baseball had been collecting since the invention of the box score in 1845.

The data was clear. In 2002, RBIs (runs batted in), stealing bases, bunts, batting average, slugging, foot speed, high school players (vs college), and old (vs new/fresh) pitching arms were all tremendously over-valued in players – and it showed in their salaries.

The following were underpriced: High pitches per at-bat – which wore down pitchers – walks, and any other activity that got a hitter on base instead of out. So despite the availability of the data, the statistics to make sense of it, and the computing power to crunch the numbers, looks and luck were still being priced over results.

The human mind played tricks on itself when it relied exclusively on what it saw, and every trick it played was a financial opportunity for someone who saw through the illusion to the reality.

Baseball teams simply insisted on using bad tactics – which of course amounts to bad strategy. But reliance on knowably bad tactics happen outside of baseball too.

Insider vs Outsider CEOs

A recent episode of the Freakonomics podcast (How to Become a C.E.O.) illustrates another example of reliance on subjective decision making when good, relevant data is available:

A 2009 academic study, which analyzed established public companies from 1986 to 2005, found that internally promoted C.E.O.’s led to at least a 25 percent better total financial performance than external hires.” A 2010 study by Booz & Company similarly found that, in 7 of the 10 previous years, insider C.E.O.s delivered higher market returns than external hires. And yet: external hiring seems to be on the rise: in 2013, between 20 and 30 percent of boards replaced outgoing C.E.O.’s with external hires; a few decades ago, that number was only 8 to 10 percent. Outside hires also tend to be more expensive: their median pay is $3 million more than for inside hires. So, an external hire will, on average, cost you more and perform worse. And yet that’s the trend.

Overpay & Underdeliver

Why do companies overpay for inferior results? Why do baseball teams?

I think the biggest reasons is fear. The fear of humiliation and failure drove both baseball management and corporate boards into the bad tactics of over-paying for inferior results. When you focus on avoiding failure instead of finding success, you’re less likely to see new opportunities and adapt.

There’s also an issue of misaligned incentives at work too. In baseball, owners and managers care more about not being embarrassed by their performance than about wins. A losing team can still be profitable and have a great return. In the business world, board members and CEOs are often scratching one another’s backs and giving one another high paying jobs instead of focused on increasing shareholder value.

And, of course, it’s not always clear who’s delivering value, who’s slacking, or who’s just getting lucky or unlucky – in both a corporate environment and on the baseball diamond.

Recognizing Bad Tactics

So how do you recognize bad tactics?

1) Define what’s important to you.

For boards, they want CEOs who will deliver returns for a fair price. For baseball teams, regular season wins are the key to having a shot at the world series.

2) Look at the data & try to understand how different actions affect the outcomes you care about.

If there’s no data or bad data, start investing in this area. Try to put a value on different skills or results (on-base percentage, walks, or market-cap). How are different variables connected? What’s currently undervalued and what’s overvalued?

3) Ask hard, even contrarian, questions and seek out different perspectives.

Challenge the norms within your sector, culture, or league. Don’t be different just to be different but understand that the standard approach – or even your entire industry – might be severely under-optimized. Seeing reality through the illusion is incredibly valuable.

4) Be honest with yourself.

Embrace your findings. Act on them. Yes, that probably means risking failure.

Moneyball

I was inspired to write this post after reading Michael Lewis’ Moneyball. While I haven’t been a baseball fan since I was about 9 years old, listening to Bill James (one of the key players in all of this) on Russ Robert’s EconTalk got me really excited about the story of the Oakland A’s 2002 season – which was made into a very popular movie as well. I highly recommend reading Moneyball – which uses baseball as an analogy for the tactical and strategic failings of many organizations.