Sunk Cost, Loss Aversion, and Cannibalism: Lean Muppet Series Post 3

After losing an “I” and his tie, this New York baker is ready for Cookie to leave.

I cannot count the number of times I, as a consultant, have been called in to diagnose an obvious problem.Cookie Monster...now he has an obvious problem.While we would all like to see many of our current television hosts eaten by monsters, it's clear to even little kids that Cookie Monster would be better served by eating pie than Guy Smiley.Pie is the optimal solution. But at least as far as we see, Cookie Monster has chosen Smileycide as the solution to his problem, and is committed to it.We often identify a solution, create a plan, then commit to a number of actions to achieve that plan. With each action we take, alternatives psychologically become more unpallatable.You can see in the future, Cookie Monster catching up and actually eating Guy Smiley and then saying, "Hmmmm, me no like eat Guy Smiley after all." But each time Cookie Monster chases Guy, he finds that he's invested more of his time and energy into Project EatGuy and is less likely to stop.Psychologists and economists call this the "sunk cost fallacy," and even though every MBA student in the world learns about it, we still see it happen.In lean manufacturing this is a specific type of waste called "muda," work that we do that adds no value.  In this case, chasing something considered inedible is not going to result in a delicious snack.But I'd like to focus on a different lesson - one more fudamental that, if we strive to solve it, we'll eliminate muda anyway.Lean teaches us to avoid inventory. Inventory is the stuff we create, are in the process of creating, or are the parts for the things we anticipate creating.I remember in 1979 my father was involved in creating a business incubator in our hometown called Triangle East. It was in the abandoned Geer Mobile Home plant. All my father's projects were family projects and so at one point I found myself going through the old plant cleaning up. The was inventory everywhere - desks, chairs, doors, bolts, and so forth. Tons of inventory that we either recycled (such that we could in 1979), threw away, or served as fascination for a 14 year old boy. All of it constituted waste because it would never be used to biuld a mobile home.In knowledge work we build up conceptual tons of inventory. Reports, files, software code, policies, processes, procedures, half explored ideas, concurrent tasks... all these things decrease our ability to complete work or to ship products.But the more conceptual inventory we create, the more sunk costs we perceive. The more sunk costs there are, the less likely we are to improve. Psychologists call this tendency "loss aversion."We can illustrate this idea with this ridiculous equation:

Y = Cookie Monster's hungerG = the perceived value of eating Guy SmileyCx = the number of times Cookie Monster chases Guy around the counter

Cx * Y = G

Note that while the actual value of eating Guy Smiley will be zero, the perceived value of eating him increases with every iteration.What's worse is that if Cookie's goal is partially achieved, he is unlikely to learn from it, but will actually become more entrenched. So, say he catches Guy Smiley and eats an arm (who knew the Muppets could be so dark?), he will work harder because loss aversion is telling him "you missed the tasty part."Our stakes may be higher in the non-felt world, but the scenarios are no less ridiculous. Pets.com is the classic example where free shipping of discounted cat litter attracted tens of millions in VC money and much more at IPO. Anyone not caught up in dot com fever could see that building a business model around shipping bags of clay (maybe the only thing worse would be bags of lead) was not likely to produce profits.Another quick point here is that while Cookie Monster was never the brightest bulb in the Muppet marquee, he was and remains a nice guy. By nature he does not cannibalize other muppets. He had simply bought into an idea and found himself in a sunk cost spiral.Always look for the pie.This is third in a series of Lean Muppet Posts: For a list of Lean Muppet posts and an explanation of why we did this... look here -> Lean Muppets Introduction

One Day’s Idea is Another Day’s Waste

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On my travels through startups and the corporate world I see small to gross acts of negligence. They usually come in the wrapper of something like, “because that’s our process.” Metrics are gathered for the sake of reports no one acts on. Information is collected to feed otherwise ignored databases. People fill out forms to protect the company from a long-forgotten infraction.Policies and processes we adopt over time are corporate inventory. We have to maintain them, administer them, and be annoyed by them. All these actions are waste.The tricky thing here is that all policies can be defended by “what if” arguments. “We can’t get rid of that policy … what if someone does something bad?”Well, what if someone does something bad? How likely is that to occur?We know for certain that the waste is making the group less effective when subjected to the policy. What is the likelihood of your What If?A gross example of this is airport delay post 9-11. The 9-11 hijackings had nothing to do with airport screening points. They were a systemic breakdown (and a highly improbable one) of the global intelligence network. Yet, the 631,939,829 people who flew in 2010 all were delayed at least one hour by needing to get to the airport early, stand in line, and subject themselves to security policies. At about 40,000 as an average income, this quickly pencils out to about 12.5 billion dollars worth of delay every year. That delay can be easily compounded by the lost time of collaboration that people have endure by leaving the office early.The What Ifs here are obvious. But so are the costs. Are there better ways of dealing with terrorist threats than incurring billions of dollars in passenger delay?Other examples are regular reports that show the progress of various business metrics. One company we visited generated a weekly report of dozens of pages and nearly 100 metrics every week. Not only did report generation take more than a combined 40 hours to produce (an obvious cost), it delayed the very projects it was trying to measure. In the end, the overwhelming number of charts, graphs, and numbers created a culture of managing by the numbers while totally ignoring what was really happening. Managers would comb through the document until they found the metric or two that went in the wrong direction, then they’d come to find out why.More often than not, the why was a normal fluctuation in the number. The conversation was waste, the “analysis” was waste, and the generation was waste. But those receiving the report had become so fixated on it that they couldn’t see beyond it. “What if we didn’t have this report? We’d never know what was going on!”Examine your policies regularly. Make sure that you don’t have policies to create waste. Photo by Anders V

Making Waste Explicit

Noticing waste serves no purpose. Understanding it does. Whether we seek to manage waste or attempt to eliminate it entirely, we need to know how much of it exists and what form it takes - what's its volume, its shape, its weight.  So we monitor it. We watch it. We learn from how it grows, how it spreads, and what its impacts are.On an idyllic spring day on Bainbridge Island near Seattle, in the crisp fresh air I stood rapt as people heated rice over an open fire. With huge mallets they furiously pounded the grains in a mortar, turning the hot steaming mass into a glutinous paste that is life’s most perfect confection - what the Japanese call "mochi." With apparently heat-resistant hands, they grabbed and worked the steaming paste, transforming it into the fluffiest mochi balls imaginable.This scenario took place at the 2008 Mochi Festival at IslandWood. IslandWood is an educational facility situated in the heart of a forest in the middle of an island in Puget Sound.  In their carbon-neutral environment, IslandWood's stunning 255 acre campus embodies an ideal. In this setting, students of all ages can spend a few days or even an entire university term studying sustainability and culture.Me? I was there simply for the mochi.While waiting in line, however, I passed IslandWood's own low-tech waste monitoring system.It's name is "Wade."Wade measures IslandWood's food waste. Diners place their meal remains into one of three buckets for weighing: Non-compostable food (like meat), compostable vegetable, and liquid waste. Wade's goal is simple: leave diners cognizant of the amount of food waste they create, even if it is going to be composted.The added benefit of Wade is the visual control of waste. At all times, the amount of waste from previous meals is visible. This keeps diners mindful of the goal and conscious that their actions impact it.This message translates well for setting up a personal kanban. Whether it is for one person, a family, or an entire group at work, keep in mind that once a type of waste is identified, over time it will continue to need managing and we will continue to need reminding.