system map on Ray Yang, Ph.D.

Dalio's Micro-economic 'Machine' and Short-term and Long-term Debt Cycles

Sat, 18 Apr 2020 00:00:00 +0000

1. Backgroud

Ray Dalio at Bridgewater Associates has provided a model (in narratives in his book and an animation video), which illustrates how the macro-economy and the banking system work in a mechanical way like a machine. I converted the model into a system map. Bridgewater’s performance and track record have proved the quality of his decision making, which allows him to be consistently correct in betting on what happens next in the economy.

2. Mapping the Micro-economic ‘Machine’

In this system, there are two essential components, the short-term debt cycle (the solid grey lines) and the long-term debt cycle (the red dotted lines). Debt creates money. Borrowing creates cycles. We enjoy economic growth until the system creates more credit than the real income-generating produtivity.

When interest rate hits zero, and the central bank can no longer stimulate the economy with a lower interest rate, we come to the end of the long-term debt cycle and enter into the stage of deleveraging and reflation (a.k.a. “the lost decade”). Next, we will wait and see if the government can execute a beautiful deleveraging (by controlling the rate of money-printing relative to the growth of debt).

Aim, Think, and Act: System Maps for Mental State

Tue, 31 Mar 2020 00:00:00 +0000

We all walk around and live a life based on a set of internal assumptions and logics in our minds, which continuously process the information from the external reality and produce the results in life. If you don’t like the results in your life, simply change your mind, and life will change for you.

The three system-maps below illustrate three types of self-motivators (about future, past, and present) and the corresponding pitfalls to avoid. Remember, if you don’t take effort to make your mind work in a better way, it will continue to work in the old way, keep falling into the pitfalls, and produce the same results that you hate.

Aim High and Prevent ‘Stopping Search’

Keep aiming high.
Search more (frequency) and search farther (space).
Don’t estimate the time needed for making improvement based on the current solution.

The first type of self-motivator is goal-setting. For the future, not only you need to have a CLEAR goal, but also you need to make it CHALLENGING¹ and even seem impossible². Aiming high generates aspiration, which will trigger SEARCH behavior³. The more you keep aiming high, the more frequently and farther you search for alternative solutions. It is natural and typical that you don’t find a solution each time you search. But the more you search, the more likely you will experience an epiphany and find the ONE idea among a series of many ideas to improve your condition effectively and drastically. Keep aiming high, because the fulfillment of your aspiration from an improvement of your condition will also weaken your aspiration.

The pitfall: not to repeatedly and frequently energize your aspiration by keeping a clear and challenging goal, because it may seem to take a long time. You develop a false belief when you estimate the time needed to make improvement based on the current rate of progress. It seems to take a long time because you have not yet found the solution to expedite your growth. Finding a solution requires more search. More search is driven by your aspiration, which is energized by your goal. Take as much time as you need to set your goal. Write it on your wall.

Think Deep and Prevent ‘Shifting Burden’

Employ fundamental solutions.
Expect the DELAY to use the right solution to solve the right problem.
Avoid quick fix (e.g. instant gratification).

The second type of self-motivator is problem-solving. Your success is the way you spend your time doing your BEST—the way you take the talent you were born with and all the knowledge and skills you’ve since developed in the past and using them toward a problem at present. We have limited mental capacity to mobilize rationality and need time to reason⁴. It takes time for us to think through to find the most important problem to solve. It also takes time to find the fundamental solution—the right one. If you use the right solution to solve the right problem, you also solve all the problems. It is once and for all.

The pitfall: not to take time and think deep enough to find the fundamental solution. This critical step only requires patience. But since there is a DELAY for the fundamental solution to takes effect in addressing the problem, your emotional thinking and physiological drive will offer a quick fix. The less patience you have, the more you are tempted to use the quick fix. However, the quick fix, such as an instant gratification or a duct tape, can only solve your current problem by shifting the burden to the near future—leaving you with more problems to solve. Think hard before you act.

Act Fast and Prevent ‘Eroding Goals’

FOCUS on the action.
Expect the DELAY.
FIX the goal (and never compromise).

The third type of self-motivator is action-taking. A quote by Jack Welch: “you pick a general direction and implement it like hell.” Expect the DELAY for the action taken to take effect. Live in the PRESENT. Focus on the task flow⁵, in which you are fully immersed in a feeling of energized focus and enjoyment in the process. This is a simple 3-step process: fix your goal in your mind, rest your focus in the action, and let the action take its course to improve the condition.

The pitfall: not to focus on the action with a fixed goal but too much on the gap between your current condition and your goal. It is easy to think fast than act fast. Usually when people don’t act fast, they think too much. The more you move your mental energy away from the action to worry about the condition, the more psychological stress you imprudently develop, urging you and tempting you to compromise your goal. When you tune your mind into such a compromise channel, the delay for action to improve condition will seem forever and become so hard to endure. If you don’t like a mixed feeling of relaxing and helpless, fix your goal and focus on your action, not your condition.

Locke, E. A., & Latham, G. P. 2002. Building a practically useful theory of goal setting and task motivation: A 35-year odyssey. American Psychologist, 57(9): 705–717.↩
Collins, J. C., & Porras, J. I. 1996. Building your company’s vision. Harvard Business Review, 74(5): 65.↩
Cyert, R. M., & March, J. G. 1963. A behavioral theory of the firm. Englewood Cliffs, NJ, 2.↩
Simon, H. A. 1997. Models of bounded rationality: Empirically grounded economic reason, vol. 3. MIT press.↩
Nakamura, J., & Csikszentmihalyi, M. 2014. The concept of flow. Flow and the foundations of positive psychology: 239–263. Springer.↩

System Mapping in Business Modeling

Thu, 28 Feb 2019 00:00:00 +0000

In the past several years, I spent quite some time coaching college students in the business major on their individual/team projects. These include business model design (BUS146), strategic audit (BUS109), and marketing plan (BUS103). In each quarter, there are around 100 students enrolled in BUS103/BUS109, and 50 in BUS146. And they typically select different companies and different entrepreneurship ideas to work on.

At some point, I realized it is crucial for them to quickly “model” a business so they can have a very clear picture of how businesses work. I also usually suggest they put all their thoughts on one paper. So they can have the big picture without missing out any important information. This is where “system mapping” can come in handy.

It involves three simple steps. First, brainstorm the essential components in a business system. Second, identify the causal linkages and loops. Third, mark the positive/negative relationships (and the leverage in the system). I find that most students can master this skill very quickly and can generate a good graph with some practice.

I also push for simplicity, as I notice the more I ask them to succinctly define the components, the more they move away from perceptual experiences to critical thinking. Such a map can be a helpful starting point for us to keep questioning ourselves on further facts, proofs, and underlying mechanisms.

Here is an example of a generic “precision online marketing” model (e.g., Google, Facebook, Youtube, etc.), made with iGraph.