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pped a painting company with his brother, Patrick, in Columbus, Ohio. Shira Sons Painting specializes in l
arge-scale painting projects—they’ve painted universities, military bases, mega-churches, and multimillion
-dollar homes. Starting from scratch, they’re now the preferred painting company for several major genera
l contractors in the Columbus area. How did two young guys break into a competitive market against contr


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actors who have been in business longer than they’ve been alive? Simple: when you hire Aaron and Pat, 
you can be absolutely certain the job will be done right and on time. Contractors are notoriously unpredict
able: they often show up late, take too long, do sloppy work, and have bad attitudes. The secret of Aaron 
and Pat’s success is Predictability—they do great work every single time, deliver on schedule, and they’re


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always pleasant to work with. As a result, they’re booked solid—an impressive achievement, particularly i
n a soft construction market. When purchasing something of value, customers want to know exactly what 
they can expect—they want their experience to be Predictable. Unexpected surprises can provide a custo
mer with a great experience, but if you’re not able to deliver what the customer expects in a Predictable m


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anner, it doesn’t matter how many bonuses you offer. People love pleasant surprises, but they hate to be 
caught off guard. There are three primary factors that influence the Predictability of an offer: uniformity, co
nsistency, and reliability. Uniformity means delivering the same characteristics every time. CocaCola was 
one of the first large companies to combine solid marketing with large-scale product uniformity. Product u


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niformity in the beverage industry is an astounding feat: creating, bottling, and distributing soda is an incre
dibly complex logistical process. A little too much sugar or flavoring, slightly more air, or an introduction of 
bacteria can drastically alter the final product. No one wants their favorite soda to taste different every tim
e they drink it. When you open a can of Coke, you expect exactly the same product as you had the last ti


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me, no matter where you are in the world. If even 0.1 percent of the cans of Coca-Cola sold were flat or s
our, people would quickly stop buying. Consistency means delivering the same value over time. One of th
e reasons “New Coke” failed in the mid-1980s was that customers expected Coke to taste a certain way, 
and the company delivered something completely new under the same name. Violating consistency led to


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a swift decline in sales, followed by a swift increase when the Coca-Cola Company restored the original f
ormula. Violating the expectations of loyal customers is not the way to success—if you’re offering somethi
ng completely different, present it as something new. Reliability means being able to count on delivery of t
he value without error or delay. Ask Microsoft Windows users what they hate most about their computers,


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and they’ll always tell you, “System crashes.” Unreliability is a huge frustration for a user, particularly whe
n Predictability is at a premium. How would you feel if you were building a house and a contractor didn’t s
how up on time? Improving Predictability has major Reputation and value perception benefits. The more P
redictable your standard offering is, the more you’ll be able to increase the perceived quality of the Produc


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ts and the Services that you offer. SHARE THIS CONCEPT: http://book.personalmba.com/predictability/ T
hroughput However beautiful the strategy, you should occasionally look at the results. —WINSTON CHU
RCHILL, PRIME MINISTER OF GREAT BRITAIN DURING WORLD WAR II Throughput is the rate at whi
ch a system achieves its desired goal. By understanding and improving the process you use to actually cr


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eate and deliver the value you’ve promised to your customers, you can improve quality and customer sati
sfaction. Throughput is a measure of the effectiveness of your Value Stream. Throughput is measured in t
he formula [rate/time]. The more results you create per unit of time, the higher the Throughput. In order to 
measure Throughput, you need a clearly defined objective: Dollar Throughput is a measure of how quickly


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your overall business system creates a dollar of profit. Assume a standard time unit, like an hour/ day/we
ek/month—how many dollars does your business system produce on average during that time? The faste
r your business produces dollars of profit, the better. Unit Throughput is a measure of how much time it ta
kes to create an additional unit for sale. How long does it take to go from raw materials to a finished unit r


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olling off the production line? The faster the unit Throughput, the more units you’ll have available to sell, a
nd the faster you’ll be able to respond to new demand for those products. Satisfaction Throughput is a me
asure of how much time it takes to create a happy, satisfied customer. It takes restaurants like Chipotle M
exican Grill approximately three minutes from the time the customer enters the restaurant to the time they


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receive their order. The less time that it takes to create a happy customer, the more customers you can se
rve in an hour and the more happy customers you can create every day. The longer customers have to w
ait, the fewer customers you can serve in an hour, and the less satisfied they will be with the experience.


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The best way to begin increasing Throughput is to start measuring it. How long does it take for your busin
ess system to produce a dollar of profit? How long does it take to produce another unit to sell, or a new ha
ppy customer? If you don’t know your Throughput, make it a priority to find out— measuring Throughput is
 the first step toward improving it. SHARE THIS CONCEPT: http://book.personalmba.com/throughput/ Du


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plication The problems of this world are only truly solved in two ways: by extinction or duplication. —SUS
AN SONTAG, AUTHOR AND POLITICAL ACTIVIST Duplication is the ability to reliably reproduce someth
ing of value. Factory production is the quintessential example of Duplication: one design, many copies. In
stead of “reinventing the wheel” over and over again, Duplication allows you to design the wheel once, the


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n make as many of them as you wish. The better your ability to Duplicate your offer, the more value you c
an provide. The more time and effort it costs to make something, the less available it tends to be. Duplicat
ion allows you to make copies of your offer quickly and inexpensively, making it more widely available in a
 costeffective way. Consider this book. In the olden days, books used to be copied and bound by hand. It


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would take a scribe months (sometimes years2 ) of full-time work to copy a single book. As a result, book
s were extremely expensive and difficult to obtain. How times have changed. This book was written only o
nce, but via the wonder of large-scale printing equipment, it can be reproduced quickly, reliably, and inexp
ensively. As a result, tens of millions of copies can be made and distributed all over the world and can be


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purchased for a few dollars. That’s the magic of Duplication. The Internet has made Duplication of some f
orms of value even easier. As Kevin Kelly remarked in his essay “Better Than Free,”3 the Internet is esse
ntially an enormous, inexpensive copy machine. When I write a post for my Web site, it can be Duplicated
 by my Web server for next to nothing, and delivered to a reader on the other side of the world almost inst


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antly. Duplication of information—text, images, music, video—is essentially free. The value of this informa
tion, however, can be quite significant. If you want to create something that you can sell without your direc
t involvement, the ability to Duplicate your offer is essential. If you have to be personally involved with eve
ry customer, there’s an upper limit on the number of customers you can serve in a given amount of time.


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Combining Duplication with Automation allows you to deliver value to more people— and close more sale
s as a result. SHARE THIS CONCEPT: http://book.personalmba.com/duplication/ Multiplication All growth
 depends upon activity. There is no development physically or intellectually without effort, and effort mean
s work. —CALVIN COOLIDGE, THIRTIETH PRESIDENT OF THE UNITED STATES McDonald’s knows


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how to Duplicate Big Macs. Starbucks knows how to Duplicate triple soy vanilla lattes. Here’s what McDo
nald’s and Starbucks have in common: both businesses can Duplicate entire stores, which is why there ar
e thousands of each all over the world. Multiplication is Duplication for an entire process or System. McDo
nald’s began as a single restaurant in California; Starbucks began as a single coffee shop in Seattle. By le


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arning to Duplicate the entire business system that is a McDonald’s or Starbucks store, each company op
ened new possibilities for growth. Walmart did the same thing. Starting with a single store in Fayetteville, 
Arkansas, Walmart multiplied at an astounding rate, spreading rapidly across the Midwest, then nationally
, then globally. Walmart’s success lies in Multiplying two interconnected systems: stores and distribution c


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enters. Distribution centers Multiply the ability to receive inventory from suppliers and deliver it to stores. S
tores replicate a proven system of receiving, displaying, and selling that inventory to paying customers. M
ultiplication is what separates small businesses from huge businesses. There’s an upper limit on what any
 single business system can produce. By creating more identical business systems based on a proven mo


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del, Multiplication can expand a business’s ability to deliver value to more customers. That’s the major be
nefit of franchising: instead of reinventing a business model, opening a franchise helps Multiply a model th
at already works. The easier it is to Multiply your business system, the more value you can ultimately deliv
er. SHARE THIS CONCEPT: http://book.personalmba.com/multiplication/ Scale Ut sementem feceris, ita


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metes. (You reap what you sow.) —MARCUS TULLIUS CICERO, ANCIENT ROMAN STATESMAN AND 
ORATOR Think of a skilled quilter who specializes in creating quilts by hand. Assuming each quilt takes a
 week to produce, having one active customer a week is great: creating and delivering a single quilt to a si
ngle customer is no problem at all. Having two customers at once is challenging: Customer #2 has to wait


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until Customer #1 is served. If the quilt maker receives a thousand orders in a single day, that’s a huge iss
ue—there’s no way to keep up with the demand without keeping customers waiting, which creates an und
esirable level of Scarcity. Scale is the ability to reliably Duplicate or Multiply a process as volume increase
s. Scalability determines your maximum potential volume. The easier it is to Duplicate or Multiply the valu


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e provided, the more scalable the business. Contrast the handmade quilt business with a Scalable busine
ss like Starbucks. Assume the average Starbucks has the capacity to serve a hundred beverages an hour
—any demand above that, and the store starts getting overcrowded. The solution? Build another Starbuck


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s—even if it’s right across the street, not an uncommon sight in cities like New York. Scalability is typically
 limited by the amount of required human involvement in a process. Starbucks is able to enhance their abi
lity to Duplicate lattes via Automation. Starbucks employees are involved in making drinks, but the proces
s is semiautomated: a machine actually makes the espresso, many of the ingredients are prepared ahead


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of time, and so on. The overall level of human attention or intervention that’s required to make a good dri
nk is actually quite small, which is why Starbucks can crank out so many drinks every hour. If your goal is 
to create a business that doesn’t require your direct daily involvement, Scalability should be a major consi
deration. Products are typically the easiest to Duplicate, while Shared Resources (like gyms, etc.) are easi


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est to Multiply. Humans don’t Scale. Individual people only have so much time and energy each day, whic
h is a Constraint that doesn’t change with the volume of work to be done. On the contrary—as we’ll discus
s later in Performance Load, a person’s effectiveness usually goes down as the demands on them increas
e. As a result, Services are typically difficult to Scale, since they tend to rely heavily on the direct involvem


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ent of people to deliver value. As a general rule, the less human involvement required to create and delive
r value, the more Scalable the business. SHARE THIS CONCEPT: http://book.personalmba.com/scale/ A
ccumulation Sometimes when I consider what tremendous consequences come from little things, I am te
mpted to think: there are no little things. —BRUCE BARTON, ADVERTISING EXECUTIVE BEST KNOW
N FOR CREATING THE BETTY CROCKER BRAND At this very moment, a Toyota engineer somewhere


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in the world is making a very small change to the Toyota Production System, one of the most efficient ma
nufacturing Systems in the world. Alone, the change may not look like much—a small tweak, a slight restr
ucture, a bit of material or effort saved. Taken together, however, the effects are huge—Toyota employee
s implement over 1 million improvements to the Toyota Production System every year. It’s little wonder th


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at Toyota is now the world’s largest and most valuable automotive manufacturer. 4 Small helpful or harmf
ul behaviors and inputs tend to Accumulate over time, producing huge results. According to Lean Thinking
 by James P. Womack and Daniel T. Jones, Toyota’s approach is based on the Japanese concept of kaiz
en, which emphasizes the continual improvement of a system by eliminating muda (waste) via a lot of ver


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y small changes. Many small improvements, consistently implemented, inevitably produce huge results. A
ccumulation isn’t always positive. Think of what would happen to your body if you consumed nothing but f
ast food, candy bars, and soda for a decade. Eating a single candy bar isn’t a big deal, but eating hundred
s of candy bars is. Fortunately, the opposite is true as well: small improvements in your diet, a little more e


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xercise, and a little more sleep can have major effects on your health over time. Incremental Augmentatio
n is an example of the power of Accumulation. If your offer improves with every Iteration Cycle, it won’t be
 long before your offer is many times more valuable to your customers than it was before. Small changes t
o your Value Delivery process can save you a ton of time and effort in the long run. The more small impro


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vements you make over time, the better your results. SHARE THIS CONCEPT: http://book.personalmba.c
om/accumulation/ Amplification In nature, there are neither rewards nor punishment—there are conseque
nces. —ROBERT G. INGERSOLL, POLITICAL LEADER AND ORATOR Think of a typical can of soda. W
hen cans were first used to sell beverages, they were cylindrical, flattopped, and made of steel. Over time,


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steel was phased out in favor of aluminum, pull tabs were introduced to make opening easier, and the ca
n was “necked”—tapered slightly at the top. “Necking” a can has two major effects—first, it makes it easie
r to drink from, which users like. Second, it reduces the amount of metal necessary to produce a structural
ly sound can: the walls of a typical beverage can are now around ninety micrometers thick (instead of abo


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ut two millimeters), saving an enormous amount of raw materials. According to the Can Manufacturers Ins
titute, approximately 131 billion cans are manufactured every year in the United States. When you multipl
y the cost savings of modern can designs across billions of cans and several decades, a few very small c
hanges have saved the beverage industry hundreds of billions of dollars. That’s Amplification: making a s


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mall change to a scalable System produces a huge result. The effect of any improvement or system optim
ization is Amplified by the size of the system. The larger the system, the larger the result. When McDonal
d’s comes up with a new sandwich, they’re not limited to just selling it in one of their stores—they can star
t selling it in all of their stores around the world. When Starbucks comes up with a new drink, it can be ma


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de available to customers in every Starbucks location extremely quickly. The best way to identify Amplific
ation opportunities is to look for things that are constantly Duplicated or Multiplied. If Starbucks found a w
ay to produce a shot of espresso using fewer coffee beans, it would make a huge difference in the amoun
t of coffee they’d need to buy. If they discovered a way to make that espresso shot more quickly, it would r


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educe the time it takes to serve a customer and increase the number of customers a single store could se
rve in an hour. Scalable systems amplify the results of small changes. Small changes to Scalable systems


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produce massive results. SHARE THIS CONCEPT: http://book.personalmba.com/amplification/ Barrier to
 Competition Don’t compete with rivals—make them irrelevant. —W. CHAN KIM, BLUE OCEAN STRATE
GY How much attention are you paying to what your competitors are doing? The more time and energy y
ou spend following your competition, the less time and energy you have to actually build your business. T


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hink of a company like Apple—there’s no other company in the technology world that focuses less on kee
ping up with what other companies are providing. Instead, they focus on building something completely ne
w and Remarkable, then perfecting it as much as possible. Apple’s competitors, on the other hand, seem t
o be locked in a never-ending scramble to keep up. After Apple launched the iPhone in 2007, BlackBerry


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scrambled to create the Storm, which replicated many of the same features. By the time the Storm launch
ed, the iPhone had already gone through several Iteration Cycles, making it very difficult for BlackBerry to 
compete. To date, Apple has sold over 50 million iPhones worldwide. In the same vein, instead of trying to
 compete directly with commodity laptop manufacturers like Asus, HP, and Dell in the netbook category (s


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mall, low-powered computers designed for portability), Apple conspicuously avoided the market for years. 
That changed when the iPad was launched in 2010—an offer that redefined the market instead of competi
ng directly with preexisting netbooks on features. In the first two months of its existence, the company sol
d over 2 million units. By choosing to innovate instead of compete, Apple successfully captured a leaders


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hip share of a very competitive market. Every improvement you make to your Value Stream make it harde
r for potential competitors to keep up. By increasing your ability to create and deliver value efficiently and 
effectively, you’re simultaneously making it more difficult for competitors to compete with you by doing wh
at you’re doing. Every benefit you deliver and every customer you serve make it harder for competitors to


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replicate you. Don’t focus on competing—focus on delivering even more value. Your competition will take 
care of itself. SHARE THIS CONCEPT: http://book.personalmba.com/barrier-tocompetition/ Force Multipli
er Man is a tool-using animal. Without tools he is nothing, with tools he is all. —THOMAS CARLYLE, ESS
AYIST AND HISTORIAN One of the things that make humans unique is our ability to create and use tools


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. Tools are important because they Multiply the effect of physical force, thought, or attention. The more a t
ool Amplifies or concentrates your effort, the more effective the tool. If you try pounding on a nail with your
 bare hands, you’ll certainly be able to exert some force, but it won’t be enough to drive the nail into somet
hing solid. (Besides, you’ll probably hurt your hand.) Using a hammer Multiplies the magnitude of the forc


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e you’re exerting and concentrates that force into a small area, making it easy to drive a nail in a single str
oke. Saws, screwdrivers, and other tools work the same way—they Amplify and concentrate the force you
 generate to produce more output. The most effective tools Amplify force in the greatest magnitude. A po
wer saw is far more effective at Multiplying force than a handsaw is. A dump truck can carry more than a


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wheelbarrow. A rocket can launch a pay-load farther than a slingshot. Investing in Force Multipliers makes
 sense because you can get more done with the same amount of effort. If you need to dig the foundation t
o build a new house, a $10 shovel from your local hardware store will certainly work, but a backhoe will ge
t the job done faster and easier. If building homes is your business, buying or leasing a backhoe is worth t


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he cost. Force Multipliers can be expensive—the more effective they are, the more expensive they tend to
 be. Factory production and distribution systems are examples of large-scale Force Multipliers—they mak
e it possible to deliver value to thousands (or millions) of paying customers in a very short time. They may
 cost thousands (or millions) of dollars, but they can give you capabilities that would otherwise be out of re


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ach. As a general rule, the only good use of debt or outside capital in setting up a system is to give you ac
cess to Force Multipliers you would not be able to access any other way. If your business requires tooling 
up a factory, you probably don’t have $10 million sitting in your bank account. Taking a Loan from a bank 
or accepting Capital from an outside investor may be your best option, provided you use those funds to pu


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rchase and maintain Force Multipliers, not to pay yourself or maintain rent on a fancy office. Always choos
e the best tools that you can obtain and afford. Quality tools give you maximum output with a minimum of i
nput. By investing in Force Multipliers, you free up your time, energy, and attention to focus on building yo
ur business instead of simply operating it. SHARE THIS CONCEPT: http://book.personalmba.com/force-


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multiplier/ Systemization If you can’t describe what you are doing as a process, you don’t know what you’r
e doing. —W. EDWARDS DEMING, PRODUCTION MANAGEMENT EXPERT AND PIONEER OF STATI
STICAL PROCESS CONTROL Even if you make everything up as you go along, there is still a process in
volved, assuming that multiple steps are needed to get from point A to point B. Instead of constantly “wing


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ing it,” clarifying your process can provide a few major benefits. A System is a process made explicit and r
epeatable—a series of steps that has been formalized in some way. Systems can be written or diagramm
ed, but they are always Externalized (discussed later) in some way. The primary benefit of creating a syst


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em is that you can examine the process and make improvements. By making each step in the process ex
plicit, you can understand how the core processes work, how they’re structured, how they affect other pro
cesses and systems, and how you can improve the system over time. Google is a great example of the po
wer of systems. Every time you use the Google search engine, thousands of computers automatically spri


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ng into action to deliver your results. Google’s search algorithm (a fancy programming word for system) d
efines how these computers work together, and Google employees are constantly refining the details of h
ow the system works. Each year, Google engineers make over 550 improvements to the primary search e
ngine algorithm,5 making it better able to point you to what you’re looking for. As a result, the Google algo


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rithm has become so efficient that your search results are returned in approximately 0.2 seconds with zer
o human intervention—an astounding achievement. If Google hadn’t spent most of their early time and en
ergy defining and systemizing the search process, the company simply wouldn’t exist. Systems also help t
eams of people stay on the same page. As we’ll discuss in chapter 9, communication is necessary for peo


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ple to work well together, and the more people you’re working with, the more communication you need. D
eveloping systems and clear processes for certain events and tasks can help everyone do what must be d
one with a minimum of misunderstanding and fuss. If you can’t systematize your process, you can’t Auto
mate it. Imagine what it would be like if Google relied on a team of human librarians to generate search re


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sults. It’d be a nightmare—you’d wait days (or weeks, or months) to get your results. The key to Google’s 
quality and speed is Automation (discussed later): by explicitly defining the rules of how the system operat
es, the search engine programmers are able to automate the day-to-day operation of the system. As a res
ult, Google developers are free to focus their efforts on continually improving the system instead of on ope


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rating the system. Most people resist creating business systems because it feels like extra work. We’re all
 busy, and it’s easy to feel like you don’t have time to create and improve systems because there’s alread
y too much work to do. Actually, useful systems make your work easier—if you’re feeling overloaded, the 
best thing you can do to solve the issue is spend time creating good systems. Systemization and Automat


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ion have a few major drawbacks, which we’ll explore in detail in chapters 11 and 12. For now, recognize t
hat effective systems are the lifeblood of a business—they allow you to create, market, sell, and ultimately
 deliver what you have to offer. The better your systems, the better your business. SHARE THIS CONCE
PT: http://book.personalmba.com/systemization/ 6 FINANCE He had heard people speak contemptuously


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of money: he wondered if they had ever tried to do without it. —W. SOMERSET MAUGHAM, AUTHOR O
F OF HUMAN BONDAGE In my experience, people enjoy learning about Value Creation, Marketing, Sale
s, and Value Delivery—they’re easy to understand and visualize. When it comes to Finance, however, ey
es glaze over. Finance conjures up associations of “bean counting,” mathematical formulas, and spreadsh


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eets overflowing with numbers. It doesn’t have to be that way—finance is quite easy to understand if you f
ocus on what’s most important. Finance is the art and science of watching the money flowing into and out 
of a business, then deciding how to allocate it and determining whether or not what you’re doing is produc
ing the results you want. It’s really not any more complicated than that. Yes, there can be fancy models an


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d jargon, but ultimately you’re simply using numbers to decide whether or not your business is operating t
he way you intended, and whether or not the results are enough. Every successful business must bring in 
a certain amount of money to keep going. If you’re creating value, marketing, selling, and delivering value,
 there’s money flowing into and out of the business every day. In order to continue to exist, every busines


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s must bring in Sufficient revenue (discussed later) to justify all of the time and effort that goes into runnin
g the operation. Everyone has bills to pay and groceries to buy, so the people involved in the business ne
ed to consistently make enough money to justify the time and energy they’re investing, or they’ll quit and d
o something else. Accordingly, every business must capture some amount of the value it creates as reven


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ue, which is used to pay expenses and compensate the people who make the business run. The very bes
t businesses create a virtuous cycle: they create huge amounts of value while keeping their expenses con
sistently low, so they make more than enough money to keep going without capturing too much value. As 
a result, they’re able to simultaneously pad their pocketbooks and improve the lives of their customers, sin


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ce the continued existence of the business makes everyone involved better off. Finance helps you watch 
your dollars in a way that makes sense. SHARE THIS CONCEPT: http://book.personalmba.com/finance/ 
Profit Margin Remind people that profit is the difference between revenue and expense. This makes you l
ook smart. —SCOTT ADAMS, CARTOONIST AND CREATOR OF “DILBERT” It doesn’t matter if your bu
siness brings in $100,000,000 a year in revenue if you spend $100,000,001. Business is not about what y


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ou make—it’s about what you keep. Profit is a very simple concept: it’s bringing in more money than you s
pend. In order for a business to continue to exist, the revenue it brings in must exceed expenses at some


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point in the foreseeable future. If it doesn’t, it’ll cease to be a business—it’ll run out of resources and close
, or it’ll become a project subsidized by the profits of another business. Nothing can operate at a loss fore
ver. Profit Margin is the difference between how much revenue you capture and how much you spend to c
apture it, expressed in percentage terms—if you spend $1 to get $2, that’s a 100 percent Profit Margin. If


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you’re able to create a Product for $100 and sell it for $150, that’s a Profit of $50 and a Profit Margin of 50
 percent. If you’re able to sell the same product for $300, that’s a margin of 200 percent. The higher the pr
ice and the lower the cost, the higher the Profit Margin. Profit is important because it’s what allows busine
sses to continue to stay in operation. Without generating Profits, a business can’t compensate its owners,


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who may be investing considerable time, money, and energy into the operation. If the owners don’t find th
eir investment worthwhile, they’ll simply close the business. Profits also provide a “cushion” that allow the 
business to weather unexpected events. If a business is barely generating enough revenue to cover its ex
penses and those expenses suddenly rise, the business is in a great deal of trouble. The more profitable t


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he business, the more options it has to respond to the unforeseeable. Profit is critically important, but it’s n
ot the be-all and end-all of business. Some people believe that the purpose of a business is to maximize t
he amount of Profit generated, but that’s not the only reason businesses are created. For some people (lik
e me), business is more of a creative endeavor —a way to explore what’s possible, help others, and supp


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ort yourself at the same time. The concepts you’ll learn in this chapter will help you ensure that your busin
ess creates enough Profit to keep going. SHARE THIS CONCEPT: http://book.personalmba.com/profit-m
argin/ Value Capture You can get anything you want in this life if you help enough other people get what t
hey want. —ZIG ZIGLAR, SALES GURU Every business must capture some percentage of the value it cr


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eates in the form of revenue as Profit. If it doesn’t, the business will have a difficult time generating enoug
h resources over time to continue operation. Value Capture is the process of retaining some percentage o
f the value provided in every Transaction. If you’re able to offer another business something that will allow
 them to bring in $1 million of additional revenue and you charge $100,000, you’re capturing 10 percent of


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the value created by the Transaction. Value Capture is tricky. In order to be successful, you need to capt
ure enough value to make your investment of time and energy worthwhile, but not so much that there’s no
 reason for your customers to do business with you. People buy because they believe they’re getting mor
e value in the Transaction than they’re spending. The more value you capture, the less attractive your offe


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r becomes. Capture too much, and your prospects won’t bother purchasing from you. Movies are great, b
ut would you pay $5,000 for two hours of entertainment? There are two dominant philosophies behind Val
ue Capture: maximization and minimization. Maximization (the approach taught in most business schools)
 means that a business should attempt to capture as much value as possible. Accordingly, the business s


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hould attempt to capture as much revenue in each Transaction as possible—capturing less than the maxi
mum amount of value possible is unacceptable. In the short run, it’s easy to see the appeal of maximizatio
n—more Profit is a good thing for the owners of a company. Unfortunately, the maximization approach ten
ds to erode the reason customers purchase from a business in the first place. Would you spend $999,999


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in order to make a million? It may be rational (after all, you’d be $1 ahead), but most people won’t bother.
 Customers purchase from you because they’re receiving more value than they’re giving up in the purchas
e. The less they receive, the less they’ll want to buy from you. The minimization approach means that busi
nesses should capture as little value as possible, as long as the business remains Sufficient (discussed la


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ter). While this approach may not bring in as much short-term revenue as maximization, it preserves the v
alue customers see in doing business with the company, which is necessary for the business’s long-term 
success. When something is a “good deal,” customers tend to continue to patronize the business and spr
ead the word to other potential customers. When a business tries to maximize revenue by “nickel-and-dim


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ing” their customers or trying to capture too much value, customers flee. As long as you’re bringing in eno
ugh to keep doing what you’re doing, there’s no need to fight for every last penny. Create as much value 
as you possibly can, then capture enough of that value to make it worthwhile to keep operating. SHARE T
HIS CONCEPT: http://book.personalmba.com/value-capture/ Sufficiency Know contentment and you will s


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uffer no disgrace; know when to stop and you will meet with no danger. You can then endure. —LAO TZU
, ANCIENT CHINESE PHILOSOPHER Once, a powerful executive went on vacation—his first in fifteen ye
ars. As he was exploring a pier in a small coastal fishing village, a tuna fisherman docked his boat. As the 
Fisherman lashed his boat to the pier, the Executive complimented him on the size and quality of his fish.


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“How long did it take you to catch these fish?” the Executive asked. “Only a little while,” the Fisherman rep
lied. “Why don’t you stay out longer and catch more?” the Executive asked. “I have enough to support my 
family’s needs,” said the Fisherman. “But,” asked the Executive, “what do you do with the rest of your time


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?” The Fisherman replied, “I sleep late, fish a little, play with my children, take a siesta with my wife, and s
troll into the village each evening, where I sip wine and play guitar with my friends. I have a full and busy li
fe.” The Executive was flabbergasted. “I’m a Harvard MBA, and I can help you. You should spend more ti
me fishing. With the proceeds, you could buy a bigger boat. A bigger boat would help you catch more fish,


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which you could sell to buy several boats. Eventually, you’d own an entire fleet. “Instead of selling your c
atch to a middleman you could sell directly to the consumers, which would improve your margins. Eventua
lly, you could open your own factory, so you’d control the product, the processing, and the distribution. Of 
course, you’d have to leave this village and move to the city so you could run your expanding enterprise.”


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The Fisherman was quiet for a moment, then asked, “How long would this take?” “Fifteen, twenty years. T
wenty-five, tops.” “Then what?” The Executive laughed. “That’s the best part. When the time is right, you’d
 take your company public and sell all of your stock. You’d make millions.” “Millions? What would I do then
?” The Executive paused for a moment. “You could retire, sleep late, fish a little, play with your children, ta


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ke a siesta with your wife, and stroll into the village each evening to sip wine and play the guitar with your 
friends.” Shaking his head, the Executive bade the Fisherman farewell. Immediately after returning from v
acation, the Executive resigned from his position. I’m not sure where this parable originated, but the mess
age is useful: business is not necessarily about maximizing Profits. profits are important, but they’re a me


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ans to an end: creating value, paying expenses, compensating the people who run the business, and sup
porting yourself and your loved ones. Dollars aren’t an end in themselves: money is a tool, and the useful
ness of that tool depends on what you intend to do with it. Your business does not have to bring in million
s or billions of dollars to be successful. If you have enough profit to do the things you need to do to keep t


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he business running and make it worth your time, you’re successful, no matter how much revenue your bu
siness brings in. Sufficiency is the point where a business is bringing in enough profit that the people who 
are running the business find it worthwhile to keep going for the foreseeable future. Paul Graham, venture
 capitalist and founder of Y Combinator (an early-stage venture capital firm), calls the point of sufficiency “


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ramen profitable”—being profitable enough to pay your rent, keep the utilities running, and buy inexpensiv
e food like ramen noodles. You may not be raking in millions of dollars, but you have enough revenue to k
eep building your venture without going under. You can’t create value if you can’t pay the bills. If you’re no
t bringing in sufficient revenue to cover the operating expenses, that’s a major issue. In order to keep goin


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g, you must be able to pay the employees and the owners for the time, effort, and attention they’re giving t
o the venture. If these people don’t find their investment sufficiently worthwhile, they’ll stop doing what the
y’re doing and start doing something else. You can track financial sufficiency using a number called “targe
t monthly revenue” (TMR). Since employees, contractors, and vendors are typically paid on a monthly bas


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is, it’s relatively simple to calculate how much money you’ll need to pay out each month. Your target mont
hly revenue helps you determine whether or not you’ve reached the point of Sufficiency: as long as you br
ing in more than your TMR, you’re Sufficient. If not, you have work to do. Sufficiency is subjective—how m
uch is enough to continue what you’re doing is a personal decision. If your financial needs are meager, yo


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u don’t need that much revenue to keep going. If you’re spending millions of dollars on payroll, office spac
e, and expensive systems, you’ll need much more revenue to maintain Sufficiency. The more quickly you 
can reach the point of Sufficiency, the better the chance your business will survive and thrive. The more r
evenue you generate and the less money you spend, the quicker you will reach the point of Sufficiency. O


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nce you reach the point of Sufficiency, you’re successful—no matter how much (or how little) money you 
make. SHARE THIS CONCEPT: http://book.personalmba.com/sufficiency/ Four Methods to Increase Rev
enue Money is plentiful for those who understand the simple laws which govern its acquisition. —GEORG
E CLAYSON, AUTHOR OF THE RICHEST MAN IN BABYLON Believe it or not, there are only four ways t


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o increase your business’s revenue: � Increase the number of customers you serve. � Increase the average 
size of each Transaction by selling more. � Increase the frequency of transactions per customer. � Raise yo
ur prices. Imagine you’re operating a restaurant, and you want to increase the amount of revenue that you
r restaurant brings in. Here’s how to apply these strategies: Increasing the number of customers means y


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ou’re trying to bring more people in the door. This strategy is relatively straightforward: more visitors to yo
ur restaurant will equal more tabs, which (assuming the average transaction size stays the same) will brin
g in more money. Increasing average transaction size means you’re trying to get each customer to purcha
se more. This is typically done through a process called upselling. When a customer purchases an entrée


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, you offer them appetizers, drinks, and dessert. The more of these items the customer purchases, the mo
re they spend, and the more revenue you collect. Increasing the frequency of transactions per customer 
means encouraging people to purchase from you more often. If your average customer comes in once a


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month, convincing them to patronize your business once a week will increase your revenue. The more fre
quently they visit your establishment, the more revenue your restaurant will bring in, assuming the averag
e transaction size stays the same. Raising your prices means you’ll collect more revenue from every purc
hase a customer makes. Assuming your volume, average transaction size, and frequency stay the same,


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raising your prices will bring in more revenue for the same amount of effort. Remember the lesson of Qual
ification: not every customer is a good customer. Some customers will sap your time, energy, and resourc
es without providing the results that you’re looking for. If you’re spending a lot of energy serving customer
s who don’t come in often, have a low average transaction size, don’t spread the word, and complain abo


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ut the price, it doesn’t make sense to attract more of those customers. Always focus the majority of your e
fforts on serving your ideal customers. Your ideal customers buy early, buy often, spend the most, spread 
the word, and are willing to pay a premium for the value you provide. The more ideal customers you can a
ttract, the better your business. SHARE THIS CONCEPT: http://book.personalmba.com/4-methods-toincr


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ease-revenue/ Pricing Power The moment you make a mistake in pricing, you’re eating into your reputatio
n or your profits. —KATHARINE PAINE, FOUNDER OF THE DELAHAYE GROUP Imagine doubling your
 current prices. If you’d lose less than half of your customers, it’s probably a good move. Pricing Power is 
your ability to raise the prices you’re charging over time. The less value you’re capturing, the greater your


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pricing power. Serving customers takes time, energy, and resources—the more you earn per customer se
rved, the better your business. Changing your prices can help you maximize your results while minimizing
 your effort and investment. Pricing Power is related to a concept economists call “price elasticity.” If custo
mers are very sensitive to the price of your offer, you’ll lose many customers with even a slight increase in


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price, meaning demand is “elastic.” Established semicommodity markets like toothpaste are good exampl
es: unless you’re able to create something new and unique that customers badly want, dramatically increa
sing your prices is a good way to ensure that everyone stops buying your product and starts buying from y
our competitor. If your customers aren’t price sensitive, you could quadruple the price with little change in


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sales. Take luxury goods, for example—customers purchase them because they’re expensive Social Sign
als (discussed later) that are exclusive because they’re costly. Increasing the price of designer handbags, 
clothing, and watches is likely to make those items more desirable, not less. Economists like to spend tim
e graphing and calculating price elasticity, but it’s not necessary—unless you already have accurate Norm


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s, you can’t really know how much Pricing Power you have until you actually change your prices and watc
h what happens. Fortunately, unless you’re an established player in a large and active market (in which c
ase you’ll have Norms to work with), changing your prices very rarely has permanent effects unless your p
rices are broadly publicized and scrutinized; you can Experiment to find what works. Pricing Power is imp


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ortant because raising your prices allows you to overcome the adverse effects of inflation and increased c
osts. Historically, currency issued by any government tends to decrease in value over time— there are ma
ny strong incentives for officials to increase the supply of currency, which debases that currency’s purcha
sing power. As a result, it takes more currency to purchase the same products and services necessary to


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stay in business, increasing your business’s Sufficiency needs. Without adequate Pricing Power, your bus
iness may not be able to remain Sufficient in the face of higher expenses. The higher the prices you can c
ommand, the more reliably you’ll be able to maintain profit Sufficiency. If you have a choice, choose a mar
ket in which you’ll have Pricing Power—it’ll be much easier to maintain Sufficiency over time. Lifetime Val


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ue The purpose of a customer isn’t to get a sale. The purpose of a sale is to get a customer. —BILL GLAZ
ER, ADVERTISING EXPERT Imagine operating a lemonade stand on the sidewalk of a popular tourist de
stination. Each cup of lemonade costs $1. You may be busy serving customers, but each customer you s
erve is just passing by—you’ll probably never see them again. Contrast that with the insurance business.


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Assume the average customer pays a premium of $200 per month for car insurance—that’s $2,400 in pre
miums per year. If the average customer remains with the same insurance agency for ten years, each clie
nt is worth $24,000 in premium payments over the lifetime of their relationship with the company. That’s a 
big difference. Lifetime Value is the total value of a customer’s business over the lifetime of their relations


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hip with your company. The more a customer purchases from you and the longer they stay with you, the 
more valuable that customer is to your business. One of the reasons Subscriptions are so profitable is tha
t they naturally maximize Lifetime Value. Instead of making a single sale to a customer, Subscription busi
nesses focus on providing value—and collecting revenue —for as long as possible. The longer a custome


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r remains Subscribed and the higher the price they pay, the higher the Lifetime Value of that customer. Th
e higher your average customer’s Lifetime Value, the better your business. By understanding how much y
our average customer purchases and how long they tend to buy from you, you can place a tangible value


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on each new customer, which helps you make good decisions. Losing a single lemonade stand customer 
isn’t a huge deal—losing an insurance client is. All told, it’s much better to operate in markets where custo
mers have a high Lifetime Value. The higher the Lifetime Value of your customer, the more you can do to 
keep them happy, and the more you can focus on serving customers well. Maintain a long-term relationshi


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p with profitable customers, and you win. SHARE THIS CONCEPT: http://book.personalmba.com/lifetime-
value/ Allowable Acquisition Cost (AAC) Any business can buy incremental unit sales at a negative profit 
margin, but it’s simpler to stand on the corner handing out $20 bills until you go broke. —MORRIS ROSE
NTHAL, AUTHOR OF PRINT-ON-DEMAND BOOK PUBLISHING AND BLOGGER AT FONERBOOKS.C
OM Think back to the lemonade stand: how much could you spend to attract a single paying customer? N


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ot much—you’re only earning $1 per cup of lemonade, so you can’t afford to spend much on marketing to 
individuals. Contrast that with the insurance agency: if the Lifetime Value of a customer is $24,000, how m
uch could you spend to attract a new customer? Much more. Getting people’s attention and acquiring new
 prospects typically costs time and resources. Once you understand the Lifetime Value of a prospect, you


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can calculate the maximum amount of time and resources you’re willing to spend to acquire a new prospe
ct. Allowable Acquisition Cost (AAC) is the marketing component of Lifetime Value. The higher the averag
e customer’s Lifetime Value, the more you can spend to attract a new customer, making it possible to spr
ead the word about your offer in new ways. Having a high Lifetime Value even allows you to lose money o


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n the first sale. Guthy-Renker sells a topical acne treatment called Proactiv using long-form television info
mercials, which are expensive—they hire celebrity endorsers like Jessica Simpson and spend millions to 
produce and air those commercials. At first glance, it doesn’t make any sense: the first sale is for the “low,
 low price” of $20. How on earth are they not losing money hand over fist? The answer is Subscription. W


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hen a customer purchases Proactiv, they aren’t just buying a single bottle of face goo—they’re signing up 
to receive a bottle every month in exchange for a recurring payment. The Lifetime Value of each new Pro
activ customer is so high that it doesn’t matter that Guthy-Renker “goes negative” on the initial sale—the c
ompany makes a ton of money, even if it loses money on a few customers who don’t continue with the pro


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gram. The first sale is sometimes called a “loss leader”—an enticing offer intended to establish a relations
hip with a new customer. Many Subscription businesses use loss leaders to build their subscriber base. M
agazines like Sports Illustrated offer gimmicks like football phones and spend a fortune on their annual Sw
imsuit Edition in an effort to attract new subscribers. These enticements may absorb up to a year’s worth


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of Subscription revenue, but the company comes out ahead when you consider the Lifetime Value of each
 customer. Each new subscriber allows Sports Illustrated to charge their advertisers higher prices, which p
rovides the bulk of the company’s revenue. To calculate your market’s Allowable Acquisition Cost, start wi
th your average customer’s Lifetime Value, then subtract your Value Stream costs— what it takes to creat


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e and deliver the value promised to that customer over your entire relationship with them. Then subtract y
our Overhead (discussed later) divided by your total customer base, which represents the Fixed Costs (di
scussed later) you’ll need to pay to stay in business over that period of time. Multiply the result by 1 minus
 your desired Profit Margin (if you’re shooting for a 60 percent margin, you’d use 1.00 - 0.60 = 0.40), and t


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hat’s your Allowable Acquisition Cost. Here’s an example: if your average Lifetime Value is $2,000 over a 
fiveyear period, and the cost of Value Creation and delivery is $500, that leaves you with $1,500 in revenu
e per customer served. Assuming your Overhead expenses are $500,000 over the same five-year period 
and you have 500 customers, your Fixed Costs are $1,000 per customer, which leaves you with $500 in r


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evenue before marketing expenses. Assuming you’re shooting for a minimum 60 percent profit margin, yo
u can afford to spend 40 percent of that $500 on marketing, which gives you a maximum AAC of $200 per
 customer. Knowing that, you can test various forms of marketing to see if they work—if your assumptions
 are correct, any customer you can attract for $200 or less will be worth the investment. The higher the Lif


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etime Value of your customers, the higher the Allowable Acquisition Cost. The more each new customer i
s worth to your business, the more you can spend to attract a new customer and keep them happy. SHAR
E THIS CONCEPT: http://book.personalmba.com/allowableacquisition-cost/ Overhead Beware of little exp
enses; a small leak will sink a great ship. —BENJAMIN FRANKLIN, EARLY AMERICAN POLITICAL LEA
DER, SCIENTIST, AND POLYMATH The larger your rent or mortgage payment, the more money you nee


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d to make each month to pay your expenses. The same general principle applies to businesses. Overhea
d represents the minimum ongoing resources required for a business to continue operation. This includes 
all of the things you need to run your business every month, regardless of whether you sell anything: salar
ies, rent, utilities, equipment repairs, and so on. The lower your Overhead, the less revenue the business


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requires to continue operation, and the more quickly you’ll reach your point of financial Sufficiency. If you


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don’t spend much, you don’t have to make much to cover your expenses. Overhead is critically important i
f you are building your company on a fixed amount of Capital. Venture capitalists and other forms of inves
tment can provide “seed capital”—a fixed amount of money you can use to start the business. The more 
money you raise in capital and the more slowly you spend it, the more time you have to make the busines


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s work. The faster you “burn” through your capital, the more money you need to raise and the more quickl
y you need to start bringing in revenue. If you burn through all of your start-up capital and can’t raise more
, game over. That’s why investors and savvy entrepreneurs watch the business’s “burn rate” very closely
—the slower the burn, the more time you have to create a successful business. The lower your Overhead,


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the more flexibility you’ll have and the easier it will be to sustain your business operations indefinitely. SH
ARE THIS CONCEPT: http://book.personalmba.com/overhead/ Costs: Fixed and Variable Watch the cost
s and the profits will take care of themselves. —ANDREW CARNEGIE, NINETEENTH-CENTURY INDUS
TRIALIST There’s an old business adage: you have to spend money to make money. There’s some truth t


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o that statement, but not all expenses are created equal. Fixed Costs are incurred no matter how much va
lue you create. Your Overhead is a Fixed Cost: no matter what you do in any given month, you still have t
o pay your salaried employees and the lease on your office space. Variable Costs are directly related to h
ow much value you create. If you’re in the business of creating cotton T-shirts, the more T-shirts you prod


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uce, the more cotton fabric you’ll need. Raw materials, usage-based utilities, and hourly workers are all V
ariable Costs. Reductions in Fixed Costs Accumulate; reductions in Variable Costs are Amplified by volu
me. If you can save $50 per month on your phone bill, that savings Accumulates to $600 per year. If you c
an save $0.50 on each Tshirt you produce, you’ll save $500 on every 1,000 T-shirts you make. The better


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you understand your costs, the more likely you are to find ways of producing as much value as possible 
without spending everything you make. SHARE THIS CONCEPT: http://book.personalmba.com/costs-fixe
dvariable/ Incremental Degradation Quality, quality, quality: never waver from it, even when you don’t see 
how you can afford to keep it up. When you compromise, you become a commodity and then you die. —
GARY HIRSHBERG, FOUNDER OF STONYFIELD FARM Believe it or not, many of the chocolate produc


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ts found in the candy aisles of grocery stores are no longer “milk chocolate”—they’re “chocolateflavored c
andies.” What gives? To make high-quality chocolate, you have to buy high-quality cocoa beans, which ar
e ground up to make cocoa butter. Cocoa butter is then combined with sugar, water, and emulsifiers, whic
h help the oils in the cocoa butter “stick” to the water-saturated sugar. The liquid chocolate is then heated,


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poured into molds, and cooled to produce solid chocolate. Over the years, mass-market chocolate manuf
acturers decided to use cheaper ingredients to keep costs down and increase profitability. Instead of buyi
ng high-quality cocoa beans, they bought less expensive beans from mediocre sources—who would notic
e? Then they replaced cocoa butter with vegetable oils—so much that food regulatory bodies wouldn’t allo


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w them to call it “milk chocolate” anymore. They added more emulsifiers, preservatives, and other chemic
al additives to keep the zombified chocolate together and to make it last forever on the shelf. Sounds app
etizing, right? Saving money doesn’t help you if you degrade the quality of your offer. At the time, these “c
ost saving” measures didn’t appear to have a huge impact on the chocolate’s quality—they seemed to be


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a Trade-off worth making. Over time, however, the Accumulated effects undermined the taste and quality 
of the product. People noticed, and so did the manufacturers: you can now buy “premium” versions that c
ontain the original high-quality ingredients. Finance and accounting executives get their “bean counting” r
eputations from focusing primarily on cutting costs—reducing expenses in an effort to make an offer or bu


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siness more profitable. Cutting costs can help you increase your Profit Margin, but it often comes at a stee
p price. If your goal is to increase your profitability, cutting costs can only take you so far. Creating and del
ivering value will always cost at least some amount of money, so there is a lower limit to how much you ca
n cut costs before the cuts begin to diminish the value you provide. Cutting costs that are wasteful or unne


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cessary is certainly a good idea, but Diminishing Returns (discussed later) always kick in—be careful not t
o throw the baby out with the bath water. Creating and delivering more value is a much better way to enha
nce your bottom line. You can never spend less than nothing, but there’s no upper limit on the amount of 
value you can provide or revenue you can collect. Control your costs, but don’t undermine the reason cust


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omers buy from you in the first place. SHARE THIS CONCEPT: http://book.personalmba.com/incremental
degradation/ Breakeven It is unusual, and indeed abnormal, for a concern to make money during the first 
several years of its existence. The initial product and initial organization are never right. —HARVEY S. FI
RESTONE, FOUNDER OF THE FIRESTONE TIRE AND RUBBER COMPANY Assume your business is 
bringing in $100,000 per month, and you’re spending $50,000 each month in operating expenses. Are yo


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u making money? It depends. When you create a new business, it typically takes a while before you’re abl


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e to bring in more than you spend. Systems need to be created, employees hired and trained, and marketi
ng efforts launched before revenue starts coming in. During your ramp-up period, those expenses add up.
 Let’s assume our hypothetical business took a year’s worth of $50,000-permonth expenses to launch—th
at’s $600,000. Now that the business is bringing in $50,000 per month more than it needs to cover operati


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ng expenses, it can start to recoup that initial investment. Breakeven is the point where your business’s to
tal revenue exceeds its total expenses—it’s the point where your business starts creating wealth instead o
f consuming it. Assuming the business keeps bringing in $100,000 each month and expenses stay the sa
me, it’ll take twelve months to pay down the initial investment. After that, the business will really be makin


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g money— before that, it just looks like the business is profitable. Your Breakeven point will change const
antly. Revenue naturally fluctuates, as do expenses. Keeping a running tally of how much you spend and 
how much revenue you collect from the start of your business’s operations is the only way to figure out wh
ether or not you’ve actually made money. The more revenue you bring in and the less you spend on an o


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ngoing basis, the more quickly you’ll reach Breakeven, making your business truly selfsustaining. SHARE 
THIS CONCEPT: http://book.personalmba.com/breakeven/ Amortization Before every action, ask yourself
: Will this bring more monkeys on my back? Will the result of my action be a blessing or a heavy burden? 
—ALFRED A. MONTAPERT, AUTHOR OF THE SUPREME PHILOSOPHY OF MAN: THE LAWS OF LIF
E You’ve created the toy of the century: a stuffed animal that looks and acts exactly like a real dog but do


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esn’t need to be fed, watered, or let out in the middle of the night. Kids go absolutely crazy for your Protot
ype, and parents are already throwing their credit cards at you to make sure they get one the minute it’s a
vailable. It’s a foregone conclusion that you’ll sell millions. There’s only one problem: in order to make the
se faux dogs affordable, you’ll have to tool up a major factory, which will cost at least $100 million. Your b


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ank account has nowhere near $100 million in it—that’s a heck of a lot of money. How can a business affo
rd something as expensive as a factory and still make money? Amortization is the process of spreading th
e cost of a resource investment over the estimated useful life of that investment. In the case of the faux do
g factory, let’s assume the factory is capable of producing 10 million units during its useful life. On a per-u


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nit basis, that brings the cost per unit of the factory down to $10. If you sell every unit you produce for $10
0, that’s a very healthy Profit Margin. Amortization can help you determine whether or not a big expense i
s a good idea. As long as you have a reliable estimate of how much it will cost and how much you can pro
duce, Amortization helps you figure out whether or not investing large amounts of Capital makes sense. F


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or example, a book designer may choose to purchase a copy of Adobe InDesign, the software commonly 
used by professionals to typeset books. Compared to most software packages, InDesign is pricey: a singl
e-user license costs $700. Is it worth it? The answer depends on how many books the designer uses the 
software to typeset. If they never complete a project, they’ve wasted their money. If they use it to typeset t


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en books for $1,000 each, they’ve earned $10,000 by making a $700 investment—not bad at all. Amortize
d across ten projects, the cost of the software is only $70 a project, or 7 percent of the revenue each proje
ct brings in. The designer’s credit card may hurt when the purchase is made, but the tool offers the ability 
to earn more money than would be possible otherwise. Amortization depends on an accurate assessment


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of useful life, which is a prediction. Amortization doesn’t work well if you don’t sell what you produce or if 
your equipment wears out more quickly than expected. Predictions are a tricky business—if you’re wrong i
n your estimate, your investment may cost a lot more on a per-unit basis than you originally assumed. Cro
cs makes funny-looking rubber shoes. After becoming an unexpected hit, the company ramped up for hug


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e volumes: they opened a factory in China and started producing millions of shoes in the expectation that 
they’d continue to sell each unit produced. As it turned out, Crocs were a fad— sales plummeted, and the 
company was stuck with a lot of expensive manufacturing capacity and huge amounts of inventory it could
n’t sell. Amortization couldn’t save the company from careening toward bankruptcy. Using Amortization to


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figure out whether or not a big investment is worth it is smart—just remember you’re making a prediction, 
and proceed accordingly. SHARE THIS CONCEPT: http://book.personalmba.com/amortization/ Purchasin
g Power The job of the entrepreneur is to make sure the company doesn’t run out of cash. —BILL SAHLM
AN, PROFESSOR AT HARVARD BUSINESS SCHOOL Here’s an old business adage you may have hea


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rd: “Cash is king.” It’s true. You can have millions of dollars in orders on the books, but without cash in the
 bank, it doesn’t matter. IOUs don’t pay the bills—if you can’t pay your employees or keep the lights on, yo
u’re done. Purchasing Power is the sum total of all liquid assets a business has at its disposal. That includ
es your cash, credit, and any outside financing that’s available. More purchasing power is always better, a


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s long as you use that power wisely. Purchasing Power is what you use to pay your Overhead and your s
uppliers. As long as you continue to pay them, you’re in business. As soon as you run out of Purchasing P


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ower, you’re finished. Game over. Always keep track of how much Purchasing Power you have available. 
How much cash do you have in the bank? How much available credit do you have access to? The more P
urchasing Power you have, the better off you are. Keeping track of your available Purchasing Power mak
es it much easier to run a business. Instead of constantly worrying about paying the bills, Purchasing Pow


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er gives you room to breathe, secure in the knowledge that you’re not going to suddenly run out of money.
 That frees up a great deal of mental and emotional energy you can put to better use—figuring out how to 
improve your business. Always pay close attention to how much Purchasing Power you have left— it’s the
 difference between a business that stays open and a business that fails. SHARE THIS CONCEPT: http://


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book.personalmba.com/purchasing-power/ Cash Flow Cycle All truth is found in the cash account. —CHA
RLIE BAHR, MANAGEMENT CONSULTANT Money flows through a business in predictable ways. If you 
understand how revenue, expenses, receivables, and credit work, you can ensure that you continue to ha
ve enough Purchasing Power on hand to continue operation and maximize your available options. The Ca


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sh Flow Cycle describes how cash Flows (discussed later) through a business. Think of your business’s b
ank account like a bathtub. If you want the water in the bathtub to rise, you add more water and keep it fro
m leaking out via the drain. The more water that flows in and the less that flows out, the higher the level of
 water in the tub. Revenues and expenses work the same way. Receivables are promises of payment you


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’ve accepted from others. Receivables are attractive, because they feel like a sale—someone has promis
ed to give you money, which is great. There’s a catch, however: Receivables don’t translate into cash until
 the promise is fulfilled. IOUs are not cash—the more quickly that promise is translated into payment, the 
better your cash flow. Many businesses have closed with millions of dollars of “sales” on the books. Debt i


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s a promise you make to pay someone at a later date. Debt is attractive because you can benefit from a p
urchase now while holding on to your cash until later. The later you pay, the more cash you have at your d
isposal. Debt can be useful, but there’s also a catch: Debts typically cost additional money in the form of i
nterest. Very often, you’ll also have to pay back a portion of your Debt over time, which is called “debt ser


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vice,” which you can treat as another type of expense. If you can’t cover your debt service, you’re in troubl
e. Maximizing your cash tackles the issue directly: bring in more revenue and cut costs. Increasing your pr
oduct margins, making more sales, and spending less of what you bring in will always improve your cash f
low. Deferring or negotiating a longer repayment period with your creditors can also help alleviate a cash


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crunch. If you have a supplier, vendor, or partner who is willing to let you pay later in exchange for receivi
ng materials or capabilities now, that allows you to keep more cash in your bank account now. You must 
watch this carefully: Debts can easily get out of hand if you don’t keep track of how much you owe and wh
en it’s due. When done properly, however, paying creditors later can be quite useful, particularly for marke


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ting expenses. Borrowing $1 to make $10 is a good trade; it’s even better if you’re able to do that for mont
hs before the first bill comes due. To bring cash in more quickly, it’s best to speed up collections and redu
ce the extension of credit. The faster you get paid, the better your cash flow situation. Ideally, try to get pai
d immediately, even before buying raw materials and delivering value. It’s common in many industries to e


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xtend credit to customers, but that doesn’t mean you have to as well. Always remember that you’re a busi
ness, not a bank (unless your business involves Loans)—collect any outstanding payments as quickly as 
possible. If necessary, you can increase your Purchasing Power by taking on additional Debt or opening li
nes of credit. It’s best to avoid using Debt or lines of credit if you don’t absolutely need to, but increasing a


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vailable credit certainly increases your Purchasing Power. Think of these accounts as backup funding sou
rces—for emergency use only. The more Purchasing Power you have, the more Resilient (discussed later
) your business is and the better your ability to handle the unexpected. SHARE THIS CONCEPT: http://bo
ok.personalmba.com/cash-flow-cycle/ Opportunity Cost Business, more than any other occupation, is a co


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ntinual dealing with the future; it is a continual calculation, an instinctive exercise in foresight. —HENRY R
. LUCE, PUBLISHER AND FOUNDER OF TIME INC. Let’s say you decide to quit your $50,000-a-year jo
b and start a business. Starting the business will certainly have costs of its own, but it will also cost you th
e $50,000 you would have made had you stayed at your job. Opportunity Cost is the value you’re giving u


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p by making a Decision.We can’t do everything at once—we can’t be in more than one place at a time or 
spend the same dollar on two different things simultaneously. Whenever you invest time, energy, or resou
rces, you’re implicitly choosing not to invest that time, energy, or resources in any other way. The value th
at would have been created by your next best alternative is the Opportunity Cost of that decision. Opportu


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nity Cost is important because there are always other options. If you’re working for a company that’s payin
g you $30,000 a year and you have the option to move to a company that’s paying $200,000 a year for th
e same work, why would you stay? If you’re paying your employees or contractors less than they could m


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ake elsewhere for the same work, why would they work for you? If your customers can spend $20 to get s
omething you’re charging $200 for, why would they buy from you? Opportunity Cost is important because 
it’s hidden. As we’ll discuss later in Absence Blindness, humans have a hard time paying attention to what
’s not present. Paying attention to what you’re giving up by making a Decision helps you consider all of yo


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ur options accurately before making a decision. Obsessing over Opportunity Cost too much can make you
 needlessly crazy, however. If you’re a natural maximizer (like I am), it’s tempting to overanalyze every De
cision to make sure you’ve chosen the very best option available, which can easily go well past the point o
f Diminishing Returns (discussed later). Don’t get bogged down with all of the options available—consider


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only what appear to be the best alternatives at the time of your decision. If you pay attention to the Opport
unity Costs of your decisions, you’ll make much better use of the resources at your disposal. SHARE THI
S CONCEPT: http://book.personalmba.com/opportunity-cost/ Time Value of Money They always say time 
changes things, but you actually have to change them yourself. —ANDY WARHOL, ARTIST Would you r


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ather have a million dollars today or a million dollars five years from now? The answer is obvious: why wai
t? Having the money now means you can spend it now, or invest it now. A million dollars, invested at a Co
mpounding (discussed next) interest rate of 5 percent, will be $1,276,281.56 five years from now. Why giv
e up the extra quarter of a million dollars if you don’t need to? A dollar today is worth more than a dollar to


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morrow. How much more depends on what you choose to do with that dollar. The more profitable options 
you have to invest that dollar, the more valuable it is. Calculating the Time Value of Money is a way of ma
king Decisions in the face of Opportunity Costs. Assuming you have various options of investing funds wit
h various returns, the Time Value of Money can help you determine which options to choose and how mu


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ch you should spend, given the alternatives. Let’s go back to the million dollars example: Assume someon
e offers you an investment that will deliver $1 million risk free in one year’s time. What’s the maximum am
ount you should be willing to pay for it today? Assuming your Next Best Alternative is another risk-free inv
estment with a 5 percent interest rate, you shouldn’t pay anything more than $952,380. Why? Because if


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you took that amount and invested it in your next best alternative, you’d have a million dollars: $1,000,000
 divided by 1.05 (the 5 percent interest/discount rate) equals $952,380. If you can buy the first investment 
for less than that amount, you’ll be ahead. The Time Value of Money is a very old idea—it was first explai
ned in the early sixteenth century by the Spanish theologian Martín de Azpilcueta. The central insight that


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a dollar today is worth more than a dollar tomorrow can be extended to apply to many common financial si
tuations. For example, the Time Value of Money can help you figure out the maximum you should be willi
ng to pay for a business that earns $200,000 in profit each year. Assuming an interest rate of 5 percent, n
o growth, and a foreseeable future of ten years, the “present value” of that series of future cash flows is $


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1,544,347. If you pay less than that amount, you’ll come out ahead as long as your assumptions are corre
ct. (Note: this is the “discounted cash flow method” we discussed in the Four Pricing Methods.) The Time 
Value of Money is an extremely versatile concept, and a full exploration is beyond the scope of this book. 
For a more in-depth examination, I recommend picking up The McGraw-Hill 36-Hour Course in Finance fo


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r Nonfinancial Managers by Robert A. Cooke. Compounding Improve by 1% a day, and in just 70 days, yo
u’re twice as good. —ALAN WEISS, MANAGEMENT CONSULTANT AND AUTHOR OF GETTING STAR
TED IN CONSULTING AND MILLION DOLLAR CONSULTING Here’s a surefire way to become a million
aire: save $10 a day for forty years in a way that earns 8 percent interest. Saving $10 a day isn’t difficult 
—you can save $300 a month by eliminating unnecessary expenses and earn 8 percent by investing that


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money simply and conservatively. (I recommend Fail-Safe Investing by Harry Browne and I Will Teach Yo
u to Be Rich by Ramit Sethi if you’re interested in tactical, low-risk investment strategies.) Here’s what’s e
ven more amazing: you’ll only contribute $146,110 over that forty-year span. How, then, do you end up wit
h over a million dollars? Compounding is the Accumulation of gains over time. Whenever you’re able to re


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invest gains, your investment will build upon itself exponentially —a positive Feedback Loop (discussed la
ter). A simple example of Compounding is a savings account. Let’s say your bank account earns 5 percen
t interest. After a year, $1 in your bank account is going to be worth $1.05. In year two, you don’t start with
 $1—you start with $1.05. In year three, you’ll have $1.10. In year four, you’ll have $1.15. Fourteen years


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after you make the initial deposit, you’ll have $2. That doesn’t sound like much until you consider that this 
relationship Scales. If you start with $1 million, you’ll have $2 million after fourteen years. Not bad at all. C
ompounding is important because it creates the possibility of huge gains in surprisingly short periods of ti
me. If you reinvest the revenue your business generates and your business is growing rapidly, you can m


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ultiply your original investment many times over. Compounding is the secret that explains how small comp
anies that reinvest their profits become large companies in a few short years. Accumulating gains inevitab


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ly produces huge results over time. The trick is to be patient enough to wait for the reward. SHARE THIS 
CONCEPT: http://book.personalmba.com/compounding/ Leverage We’ve been criticized for not understa
nding what the word leverage means . . . We do know what leverage means, and having a few million doll
ars cash in the bank is much nicer than being heavily leveraged. —KENNETH H. OLSEN, FOUNDER OF 
THE DIGITAL EQUIPMENT CORPORATION (DEC), WHICH WAS ACQUIRED BY COMPAQ IN 1998 Us


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ing “other people’s money” sounds like a great way to make a fortune. Borrow some money, make a fortu
ne, pay back your lender, and keep the rest. What could be better? Making money by borrowing from othe
rs can be savvy, provided you’re aware of the risks. Leverage is the practice of using borrowed money to 
magnify potential gains. Here’s an example: let’s assume you have $20,000 you’d like to invest in real est


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ate. You could use that money as a 20 percent down payment on a $100,000 property, borrowing $80,00
0, but that ties up all of your money in a single investment. Instead of using the $20,000 for a single down 
payment, you could take the same pool of money and invest in four $100,000 properties, each with a dow
n payment of $5,000. That strategy requires borrowing $95,000 four times—a total of $380,000 in loans.


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Here’s where the magic happens. Let’s assume all of the properties double in value, and you sell them. In
 the first scenario, you’d make $100,000 on a $20,000 investment—a 5x return on your $20,000 down pay
ment. In the second scenario, you’d make $400,000 on the very same $20,000 down payment—a 20x ret
urn on investment. Leverage seems like a no-brainer, right? Not so fast—what will happen if the value of


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each property drops dramatically, and you sell them all to get back as much money as possible? Assumin
g the property value drops by 50 percent, in the first scenario you’d lose $50,000. In the second scenario, 
the use of Leverage will magnify your losses to $200,000—four times as much. Leverage is a form of fina
ncial Amplification—it magnifies the potential for both gains and losses. When your investment pays off, L


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everage helps it pay off more. When your investment tanks, you lose more money than you would otherwi
se. One of the major contributing factors of the recession of 2008-9 was the use of enormous amounts of 
Leverage by investment banks. It wasn’t uncommon for banks to Leverage their investments by a factor of
 thirty or forty. Millions (or billions) of dollars were made or lost when the value of a particular stock went u


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p or down by a single percentage point. When the market crashed, a bank’s losses were magnified by the
 amount of Leverage they had taken on, which was more than enough to threaten the entire firm’s existen
ce. Using Leverage is playing with fire—it can be a useful tool if used properly, but it can also burn you se
verely. Never use Leverage unless you’re fully aware of the consequences and are prepared to accept th


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em. Otherwise, you’re putting your business and personal financial situation at risk. Hierarchy of Funding 
Money often costs too much. —RALPH WALDO EMERSON, ESSAYIST AND POET Imagine you’ve inve
nted an antigravity device that can levitate solid objects without requiring much power. Your invention will 
revolutionize the transportation and manufacturing industries, making many new products possible. Dema


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nd for your invention is a given—all you need to do is create enough devices to fill the demand. There’s a 
problem, however—estimates indicate that tooling up a production line with the equipment you need to bu
ild these devices will cost $1 billion. Unfortunately, you don’t have $1 billion to spare. Your device obviousl
y solves a huge problem, but the next step is out of reach. What do you do? Funding can help you do thin


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gs that would otherwise be impossible with your current budget. If your business requires expensive equip
ment or many workers to create and deliver value, you’ll probably need outside Funding. Few of us have 
enormous sums of money in our bank accounts waiting to be used, but it’s surprisingly easy to reach out t
o those that do. Funding is the business equivalent of rocket fuel. If your business needs additional capaci


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ty and is already pointed in the right direction, judicious use of financing can help you accelerate the oper
ation’s growth. If the business has structural issues, it will explode, and not in a good way. In order to obta
in access to Funding, it’s often necessary to give up a certain amount of control over the business’s opera
tions. Businesspeople won’t give you money for nothing—they always ask for something in return. Reme


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mber, providing Capital is a form of value for many businesses. In exchange for resources, your lenders o
r investors are looking for value in return—interest, lease payments, or a share of your company’s profits. 
They’re also looking for a way to decrease their risk of losing everything if the business goes under. To all
eviate this risk, they ask for control: the ability to influence the operations of the business. The more mone


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y you ask for, the more control they’ll want. I think it’s useful to imagine a Hierarchy of Funding: a ladder o
f available options. Every businessperson starts on the bottom and climbs as far up the ladder as necessa
ry. The higher you climb, the more Funding you get, and the more control you give up in exchange. Let’s 
examine the Hierarchy of Funding, starting at the bottom: Personal Cash is by far the best form of financin


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g. Investing cash you already own is quick, easy, and requires no approval or paperwork. Most entrepren
eurs begin by financing themselves out of cash as much as possible. Personal Credit is another low-cost


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method of financing. As long as your needs don’t exceed a few thousand dollars, it’s easy to finance expe
nses via Personal Credit. Approval is generally quick if you have good credit, and payment over time help
s increase your cash flow. You risk ruining your personal credit rating (a form of Reputation) if you can’t m
ake your payments, but for many entrepreneurs, that’s a risk worth taking. I financed my entire business o


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ut of cash and personal credit. If your needs are modest, using personal credit to finance your start-up cos
ts is a good option as long as you watch your budget. Personal Loans are typically made by friends and fa
mily. If you need more money than you can cover via Personal Cash and Personal Credit, loans from frien
ds and family are not uncommon. Just be wary: the risk that you won’t be able to pay them back is very re


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al and can have a devastating effect on important personal relationships. For that reason, I’d advise avoidi
ng asking your parents or grandparents to gamble their life savings on your idea—there are better ways. 
Unsecured Loans are typically made by banks and credit unions. You fill out an application, ask for a cert
ain amount of money, and the bank will evaluate your ability to pay the loan back with interest over a certa


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in time period. The loan can be either a lump sum or a line of credit that can be used at any time. The ban
k doesn’t ask for collateral for smaller amounts (a few thousand dollars), so the interest rate will probably 
be a bit higher than a credit card or secured loan. Secured Loans require collateral. Mortgages and autom
otive loans are good examples of secured loans: if you don’t make the payments, the lender can legally s


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eize the property promised as collateral. Because the lender can then sell that property to recoup their fun
ds, Secured Loans are much larger than Unsecured Loans: tens or hundreds of thousands of dollars. Bon
ds are debt sold to individual lenders. Instead of asking a bank for a loan directly, the business asks indivi
duals or other companies to loan them money directly. Bond purchasers give money directly to the busine


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ss, which is paid back at an agreed-upon rate for a certain amount of time. When the time expires (i.e., th
e Bond “matures”), the company must give back the original loan amount in addition to the payments alre
ady made. The legal and regulatory process that surrounds the Bond market can be extremely complicate
d, so Bond issues are typically conducted through an investment bank. Receivables Financing is a special


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type of secured lending unique to businesses. Receivables Financing can make millions of dollars in cred
it available, but at a cost: the collateral for the loan is control over the business’s receivables. Since the ba
nk controls the receivables, they can ensure their loan is paid before anything else, including employee sa
laries and vendor commitments. Large amounts of funding are available, but you’re giving up a great deal


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of control to the lender. Angel Capital is where we shift from Loans to Capital. An “angel” is an individual p
rivate investor—someone who has excess wealth they’d like to invest in a private business, typically $10,
000 to $1 million. In exchange, they’ll own 1 to 10 percent of the business. Taking on an angel investor is 
a bit like taking on a silent partner—they give you Capital, and in exchange you give them partial legal ow


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nership of the business. Some angels offer advice and are available for consulting, but they generally don’
t have the power to make business decisions. Venture Capital takes over where angels leave off. Venture 
Capitalists (VCs) are extremely wealthy investors (or groups of investors who pool their funds) with very la
rge sums of Capital available: tens (or hundreds) of millions of dollars in a single investment. Funding via


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Venture Capital happens in “rounds” that start small, then grow as more Capital is needed. Later rounds c
an dilute the ownership percentage of current shareholders, so there’s typically a great deal of negotiation
 involved. VCs also require large amounts of control in exchange for large amounts of Capital, which usua
lly means seats on the company’s board of directors. A Public Stock Offering involves selling partial owne


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rship of the company to investors on the open market. This is typically done via investment banks: compa
nies that will provide a business with enormous amounts of Capital in exchange for the shares of that com
pany to sell on the public stock market. The investment banks make money by selling the shares they’ve 
purchased at a premium to individual investors on the open market. An initial public offering (IPO) is simpl


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y the first Public Stock Offering a company offers on the open market. Any investor who purchases shares
 is legally a partial owner of the company, which includes the right to participate in management decisions
 via electing the board of directors. Whoever owns the most shares in the company controls it, so “going p
ublic” creates the risk of a hostile takeover: the mass purchasing of shares in an effort to control the comp


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any. Public Stock Offerings are typically used by angel and Venture Capital investors to exchange owners
hip for money. Investors can collect their returns in one of two ways: reaping dividends that distribute the 
Profits of the company or selling their shares to another investor. Public Stock Offerings enable investors t
o sell their shares in exchange for money, so it’s common for angels and VCs to push successful compani


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es to “go public” or be acquired by another company as quickly as possible in order to “cash out” of the in
vestment. The more control you must give up for each dollar of Funding obtained, the less attractive the s
ource of Funding. The more people you’re required to consult with before making decisions, the slower yo


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ur company will operate. Investors increase Communication Overhead (discussed later), which can adver
sely affect your ability to get things done quickly. It’s also not uncommon for investors to remove executiv
es of a company that’s not performing well, even if those executives are the founders of the company. Ev
en high-flying executives aren’t immune: when Apple was performing poorly in the 1990s, the board of dir


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ectors fired Steve Jobs from the company he cofounded. A word to the wise: before you take on large am
ounts of Capital, be aware of how much Power (discussed later) the business’s board of directors will hav
e over the operation of the company. Funding can be useful, but be wary of giving up control over your bu
siness’s operations—don’t do it lightly or blindly. SHARE THIS CONCEPT: http://book.personalmba.com/


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hierarchy-offunding/ Bootstrapping Felix qui nihil debet. (Happy is he who owes nothing.) —ROMAN PRO
VERB How much financing you need depends largely on what you’re trying to do. If you’re grasping for th
e brass ring—becoming obscenely wealthy by building a massive public company—you’ll probably need fi
nancing. If your intent is to be self-sufficient and free to make your own decisions, it’s much better to avoid


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financing in favor of retaining control. Bootstrapping is the art of building and operating a business withou
t Funding. Don’t assume that the only way to create a successful business is by raising millions of dollars 
of Venture Capital—it’s simply not true. By limiting yourself to the use of Personal Cash, Personal Credit, t
he business’s revenue, and a little ingenuity, you can build extremely successful businesses without seeki


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ng Funding at all. My business operates via a checking account, a savings account, and a business credit
 card, and I like it that way. Bootstrapping allows you to grow your business while maintaining 100 percent
 control over the business’s operations. You don’t have to get anyone else’s approval to make the decisio
ns you think are best. The drawback is that growing the business can take much longer—prudently used,


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Funding can help make things happen much more quickly than they’d happen otherwise. If you accept Fu
nding, make sure that you use it to do things that you couldn’t do any other way. Force Multipliers are usef
ul but expensive— taking on Funding in order to get access to critical capabilities can be smart. Otherwise
, try to operate from cash and operating revenue as much as possible. For best results, Bootstrap as far a


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s you can go, then move up the Hierarchy of Funding only as needed. Having 100 percent ownership and 
control of a profitable, self-sustaining business is a beautiful thing. SHARE THIS CONCEPT: http://book.p
ersonalmba.com/bootstrapping/ Return on Investment (ROI) Wise are those who learn that the bottom lin
e doesn’t always have to be the top priority. —WILLIAM A. WARD, APHORIST When you invest in somet


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hing, you expect it to provide more value than you paid for it. Knowing how to estimate how much you’ll re
ceive versus how much you’d invest is a very useful skill. Return on Investment (ROI) is the value created
 from an investment of time or resources. Most people think of ROI in terms of currency: if you invest $1,0
00 and you collect $100 in profit, that’s a 10 percent return on your investment : ($1,000 + $100) / $1,000


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= 1.10, or 10 percent. If your ROI is 100 percent, you’ve doubled your initial investment. Return on Invest
ment can help you decide between competing alternatives. If you deposit money in a savings account, the
 return on your investment will be equal to the interest rate that the bank gives you to hold your money. W
hy put your money in an account that pays 1 percent interest if you can deposit that money in an account t


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hat pays 2 percent, with no difference in fees? The usefulness of Return on Investment extends far beyon
d money: you can use it for other Universal Currencies as well. “Return on Invested Time”is an extremely 
useful way to analyze the benefits of your effort. If you were forced to work twenty-four hours a day nonst
op for a year in exchange for $1 million, would you do it? When you look at the return versus the cost to y


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our time and sanity, it’s not worth it. The return on every investment is always directly related to how much
 the investment costs. The more you spend (in terms of both money and time), the lower your return. Eve
n “sure bets” like buying a house or getting a college degree aren’t wise if you pay too much for them. Eve
ry estimate of return is speculative—you never know how it’ll actually turn out. Calculating returns is an ex


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ercise in predicting the future, which is fundamentally impossible. Every future ROI estimate is a semiedu
cated guess. You can only know your ROI for certain after the investment is made and the returns collecte
d. Nothing in this world is a sure bet—always take into account the risk of something going wrong before 
making an investment, no matter how high the potential ROI appears to be. SHARE THIS CONCEPT: htt


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p://book.personalmba.com/return-oninvestment/ Sunk Cost If at first you don’t succeed, try, try again. The
n quit. There’s no point in being a damn fool about it. —W. C. FIELDS, COMEDIAN After returning from 
World War II, my grandfather started the Kaufman Construction Company, building storefronts, homes, un
ion halls, and apartment buildings in Akron, Ohio. In 1965, after twenty-five years in the business, he kick


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ed off his most ambitious project: a five-story, twenty-sixunit apartment building on Portage Path. The “Bar
anel” was to be built on the lots of two older homes, which had been purchased and demolished for the jo
b. Steel rebar and bricks were ordered, and excavation was proceeding as planned. The expected cost of


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the project was $300,000, roughly $2.4 million in 2010 dollars. The project proceeded smoothly until the e
xcavators found huge hidden deposits of blue clay, which could make the foundation extremely unstable. 
To continue the project, thousands of cubic feet of clay and dirt would have to be excavated to reach bedr
ock, and additional concrete and rebar would be required to fill the massive hole. Completing the building


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would cost far more than originally expected, but it was difficult to determine exactly how much. Instead of
 walking away, Grandpa decided to finish the project—he’d already spent so much money on the land and
 excavation that it felt wrong to “waste it” without having something to show for the effort and investment. 
He found a few investors, put up another apartment building and the family home as collateral, and the pr


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oject continued. By the time the building was complete, they’d spent over three times as much money as 
originally planned: approximately $1 million, roughly $8 million in today’s dollars when adjusted for inflatio
n. It was more than the building was worth. Grandpa spent the rest of his career handling angry investors 
and lawyers. It’s a sad story, but one worth learning from. Sunk Costs are investments of time, energy, an


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d money that can’t be recovered once they’ve been made. No matter what you do, you can’t get those res
ources back. Continuing to invest in a project to recoup lost resources doesn’t make sense—all that matte
rs is how much more investment is required versus the reward you expect to obtain. Sunk Cost is easy to 
understand conceptually but much harder to put into practice. When you sink years of work into a career y


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ou realize you don’t want, or millions of dollars into a project that unexpectedly requires millions more, it’s 
difficult to walk away. You’ve invested so much that it feels wrong to “give it up for nothing.” In reality, ther
e’s nothing you can do about your past investment—it’s gone. All you can do is act based upon the inform
ation you have now. Making mistakes is inevitable: no one is perfect. You will make a few decisions that, i


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n retrospect, you’ll wish you hadn’t—count on it. If you could turn back time, you’d do things differently. Un
fortunately, you can’t. There will always be other projects, provided you don’t double down on a risky proje
ct to recover your losses. “Throwing good money after bad” is not a winning strategy. Don’t continue to po
ur concrete into a bottomless pit—if it’s not worth the additional investment, walk away. You never have to


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earn back money in the same way you lost it. If the reward isn’t worth the investment required to obtain it 
or the risk, don’t invest. SHARE THIS CONCEPT: http://book.personalmba.com/sunk-cost/ 7 THE HUMA
N MIND Ninety percent of this game is half mental. —YOGI BERRA, FORMER PROFESSIONAL BASEB
ALL PLAYER AND MALAPROPIST Now that we’ve covered the essentials of how businesses work, we’r
e going to shift gears into understanding how people work. Businesses are built by people for people. As


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we discussed in Value Creation and Value Delivery, if people didn’t have needs and wants, businesses w
ouldn’t exist. Likewise, if no one was able or willing to fulfill those needs and wants, businesses couldn’t o
perate. Understanding how we take in information, how we make decisions, and how we decide what to d
o or what not to do is critically important if you want to create and sustain a successful business venture.


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Once you have a clear picture of how the human mind works, it’s easy to find better ways to get things do
ne and work more effectively with others. SHARE THIS CONCEPT: http://book.personalmba.com/human-
mind/ Caveman Syndrome Every man is a quotation from all his ancestors. —RALPH WALDO EMERSO
N Imagine for a moment what it would be like to have lived 100,000 years ago. Your senses are on full ale


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rt as you walk along the banks of a river, scanning for food: fish swimming in the stream, edible plants, or 
animals to catch. The sun is nearing its apex, and you’ve already walked six miles today—your callused f
eet will take you six miles more before the day is done. In a few hours, you’ll stop for some water and find 
shade: the midafternoon sun is blazingly hot, and rest will help you Conserve Energy (discussed later). As


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you walk, your eyes settle on a small bush about twenty feet away. Your heart leaps—you recognize the 
pattern of the leaves, and you know that both the leaves and roots are good to eat. You start to dig at the 
earth around the base of the plant to expose the roots, intending to place the entire shrub into the simple 
woven basket you have strapped to your back. Suddenly, you notice a movement out of the corner of your


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eye. Four feet away, a massive cobra has drawn itself up to strike, displaying its distinctive patterned hoo
d and sharp fangs. There’s no time to think— adrenaline surges, your pulse races, and you quickly jump o
ut of the way and run away as fast as you’re able, leaving the food behind. You run until it’s clear that the t
hreat is gone, and then you spend a few minutes recovering, trembling from the exertion and the stress as


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the adrenaline wears off. You’re disappointed about losing the food, but it wasn’t worth risking your life. O
nce you recover, you resume your search for food and shelter from the midday sun. Tonight, you’ll return t
o your tribe to share what food you’ve found. You know everyone well, since there are only forty or so peo
ple in the tightknit group. You’ve banded together primarily for protection from wild animals and other tribe


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s, who periodically attempt to seize your tribe’s resources via raids. Together, you make spears and nets t
o catch fish, turn flint into knives and axes for hunting and defense, and create baskets and clay pots to st


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ore food. On the fire, an antelope is roasting—a group of hunters in your tribe literally chased it to death, a
 technique called persistence hunting. In the evening, you’ll sit around the fire the group has built to cook f
ood and keep predators away, and you’ll discuss the day and tell stories until you drift off to sleep. Tomorr
ow, you’ll do it all over again. Human biology is optimized for conditions that existed 100,000 years ago, n


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ot for the world in which we actually live today. Food is everywhere; predators are not. You no longer hav
e to be in constant motion; instead, you probably spend most of your time occupied by sedentary activities
, like sitting behind a desk at a computer. As a result, we face many new threats to our brains and bodies, 
like obesity, heart disease, diabetes, Alzheimer’s disease, and chronically low energy. Your brain and bod


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y simply aren’t optimized for the modern world. Part of the challenge of working in the modern world is tha
t our brains and bodies are tuned for physical and social survival, not sixteen-hour work-days. Business h
asn’t been around long enough for our biology to adapt to the new demands we’re placing upon ourselves
. Don’t be too hard on yourself—you simply weren’t built for the type of work you’re currently responsible f


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or. No one is—we’re all running, demanding new software on ancient hardware. SHARE THIS CONCEPT
: http://book.personalmba.com/cavemansyndrome/ The Gas Tank Now no joy but lacks salt, / That is not 
dashed with pain /And weariness and fault —ROBERT FROST, POET Pounding Red Bull and pulling all-
nighters can only take you so far. If you want to do good work, taking care of yourself isn’t optional. If you


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don’t give your body what it needs to run, you’ll run out of gas long before you reach your goals. Your min
d is first and foremost a physical system. Oftentimes, what we experience as mental fatigue or emotional 
distress is simply a signal from our body that we’re not getting enough of something we physically need: n
utrients, exercise, or rest. If you want to get things done, you can’t constantly be running on “empty”—you


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have a Gas Tank, just like a car does. When you have a lot of work to do, it’s common to think that taking 
care of yourself is a secondary concern. It’s not—taking care of yourself should be your primary concern if
 you want to get important things done without burning out. Nutrition, exercise, and rest are the inputs you
r body converts into productive energy. Poor (or too little) input inevitably reduces the quantity and quality


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of your output. Here are a few basic guidelines to help you get the most out of each day: Eat high-quality f
ood. Garbage In, Garbage Out (discussed later)—pay attention to what you put into your body. If you eat 
meat, eggs, or dairy, avoid sources that contain antibiotics or hormones. Also avoid refined sugar and pro
cessed foods as much as possible—if your great-grandparents wouldn’t immediately recognize it as food,


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don’t eat it. Eating a small snack or meal every 2.5 hours or so helps keep your blood sugar stable, so yo
u don’t crash during the day. I’m the kind of guy who sometimes forgets to eat, so I try to keep things simp
le—a handful of almonds or a piece of fruit works best for me. Use caffeine in moderation— herbal tea is 
a good substitute for soda, and carrying a water bottle makes it much easier to stay hydrated. Exercise re


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gularly. According to Brain Rules by John Medina, even lowintensity physical activity increases energy, im
proves mental performance, and enhances your ability to focus. Going for a walk or run, jumping rope, or 
doing a bit of yoga can help clear the cobwebs in your mind and give you more energy for the rest of the d
ay. I often swing around a fourteen-pound sledgehammer to get my blood pumping—it’s a cheap and effe


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ctive weightlifting tool that doesn’t take up much space. (Just don’t hit anything.)1 Get at least seven to ei
ght hours of sleep each night. Sleep helps consolidate the results of Pattern Matching and Mental Simulati
on, as well as reverse the effects of Willpower Depletion (all discussed later)—so don’t skimp on rest. I fin
d it useful to set an alarm to remind me to go to bed, giving me enough time to wind down before retiring f


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or the night. Going to bed early helps you get up early, which is very useful if you do creative work—I find 
it’s best to write or do other creative tasks before the day begins, so you don’t get distracted and run out o
f time. Get enough sun, but not too much. Vitamin D is an important part of many chemical reactions in yo
ur body, and your body can only synthesize it if your skin is exposed to direct, nonfiltered sunlight. (Light t


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hrough windows doesn’t count.) Just don’t get too much—sunburns and skin cancer aren’t fun. Light help
s set your circadian rhythm, which affects your sleeping patterns. I regularly use a light therapy device2 to
 ensure that I’m getting enough light, particularly in the winter months. Getting as little as ten minutes of s
unlight in the morning is a very easy way to improve both your sleep and your mood. Feed your brain the r


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aw materials it needs to run. If you’ve ever felt angry, sad, apathetic, or lethargic for no reason, your body 
may not be getting enough of the raw materials necessary to build the neurotransmitters responsible for m
aking you feel good. In The Mood Cure, Julia Ross explains that your brain needs certain compounds to p
roduce critical moodaltering neurotransmitters like dopamine and serotonin. Without the materials necess


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ary to build these mood-altering chemicals, you’ll feel off, even if everything in your world is going just fine
. Changes in our modern diet make it necessary to get some of these substances in supplement form. A g
ood multivitamin supplement, fish oil, magnesium, and essential amino acids can go a long way to ensure


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your brain has what it needs to function effectively. Just make sure whatever you buy is highly bioavailabl
e—supplements won’t help you if they pass through your body undigested.3 I constantly Experiment with 
new ways to improve my energy, productivity, and mood—I recommend you do the same. Guiding Structu
re can help make these lifestyle changes much easier—changing the structure of my environment has hel


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ped me make many changes almost effortlessly, including three years on a vegan diet (no animal product
s). Don’t be afraid to try something new to see if you notice an improvement—just be safe. When in doubt,
 consider how your ancient ancestors lived, and act accordingly. SHARE THIS CONCEPT: http://book.per
sonalmba.com/gas-tank/ The Onion Brain The views expressed here do not necessarily represent the una


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nimous view of all parts of my mind. —MALCOLM MCMAHON, BISHOP OF NOTTINGHAM Most of us id
entify with the voice inside our head that’s constantly commenting about the world around us. That voice i
s sometimes electric with excitement, but more often it’s uncertain, concerned, or scared. Fortunately, “yo
u” are not that voice. “You” are only a small part of your brain. The voice in your head is just a radio annou


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ncer, commenting on what your brain is doing automatically. It is not you—your consciousness is actually 
what your brain uses to solve problems it can’t handle on autopilot. Since human behavior has its roots in 
the brain, it’s very useful to understand how your brain is actually constructed. Here’s a brief (and massive
ly oversimplified) look at how your brain works. Think of the Brain as an Onion—it has several layers, whic


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h sit on top of one another. At the core is a structure called the hindbrain, which is essentially responsible 
for keeping you alive. The hindbrain is responsible for all of the physiological functions necessary for survi
val: heart rate, sleeping, waking, reflexes, muscle movements, and biological urges. Located at the base 
of the brain, the hindbrain is sometimes called the “lizard brain” because this basic neurological structure


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appears in all of our biological precursors, including reptiles and amphibians. The hindbrain is primarily re
sponsible for generating signals that are passed down through your spinal cord and nerves to every part o
f your body, resulting in your physical actions. Above your hindbrain is the midbrain, which is responsible f
or processing sensory data, emotion, memory, and Pattern Matching (discussed later). Our midbrains are


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constantly (and automatically) predicting what will happen next, then sending that information to the hindb
rain, which readies our body for immediate action. The midbrain is the radio announcer, and the hindbrain
 is the radio. Sitting just above the midbrain is a thin, folded layer of tissue—the forebrain. This small shee
t of neural matter is responsible for the cognitive capabilities that make us distinctly human: self-awarenes


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s, logic, deliberation, Inhibition, and Decision. Developmentally speaking, the forebrain is very new, and lik
ely evolved to help us handle ambiguity. Most of the time, our midbrain and hindbrain run the show—we’r
e operating on instinct and autopilot. That changes, however, when we face something unexpected or unf
amiliar, which confounds the midbrain’s ability to predict what will happen next. That’s when the forebrain


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kicks into gear, gathering data and considering options. After some deliberation and analysis, the forebrai
n decides what to do based on what appears to be best at the time. Once a Decision is made, the midbrai
n and hindbrain assume normal operation and carry out the decision. Neuroscientists are probably ready t
o shoot me at this point, but this very basic model of the brain is accurate enough to be useful.4 P. J. Eby,


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my “mind hacking” friend and mentor, uses a great analogy to explain the relationship between the differe
nt parts of your mind: your brain is a horse, and “you” are the rider. Your “horse” is intelligent—it moves o
n its own, can identify challenges, and will balk at things that appear dangerous or scary. “You,” the rider, 
are there to set a direction and reassure the “horse” that it’s safe to proceed. One of the best things you c


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an do to get more done is to dissociate yourself from the voice in your head. The radio announcer has the
 attention span of a two-year-old after drinking a triple espresso. Its job is to highlight things in your enviro
nment you may be interested in paying attention to—things that may fulfill one of your Core Human Drives
 or present some danger. That doesn’t mean the voice is always right, or that you must take everything it


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says as gospel truth. Meditation is a simple practice that can help you separate “you” from the voice in yo
ur head. There’s nothing mystical or magical about meditation— you simply breathe and watch what your 
“monkey mind” does without associating yourself with it. After a while, the voice becomes quieter, improvi
ng your ability to keep yourself on the course you choose. A few moments of quiet meditation every day c


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an be the difference between feeling scared and overwhelmed and feeling in control of your destiny. If you
’re interested in learning to meditate, I recommend Mindfulness in Plain English by Bhante Henepola Gun
aratana and Wherever You Go, There You Are by Jon Kabat-Zinn. SHARE THIS CONCEPT: http://book.p
ersonalmba.com/onion-brain/ Perceptual Control The behavior of an organism is the output of control syst


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ems, and is performed with the purpose of controlling perceptions at desired reference values. Behavior is
 the control of perception. —WILLIAM T. POWERS, CONTROL SYSTEMS THEORIST AND AUTHOR O
F MAKING SENSE OF BEHAVIOR: THE MEANING OF CONTROL In the hallowed halls of businesses (a


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nd business schools) around the world, B. F. Skinner is the hidden king. Skinner was one of the major inte
llectual forces behind the behaviorist movement in psychology—the idea that biological systems always re
spond a certain way to certain stimuli. Control the stimuli, and you can control the behavior. “Condition” th
e organism with rewards and punishments, and the organism will learn exactly how to behave. Over the d


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ecades, behaviorism has fallen out of vogue in psychology— research has made it clear that there’s far m
ore to behavior than the carrot and the stick. Unfortunately, that hasn’t extended to business practice—in 
corporations and business school classrooms around the world, the search continues for the magic incent
ive that will make people do exactly what businesses want. In reality, human behavior is much more like a


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thermostat. A thermostat is a very simple system: all it consists of is a sensor, a set point, and a switch. T
he sensor measures the temperature of the surrounding environment. When the temperature is within a gi
ven range, the thermostat does nothing. When the temperature is below the set point, the switch turns the
 heater on. Once the temperature is above the set point, the switch turns the heater off. This relationship i


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s called Perceptual Control—the thermostat controls the temperature of the room by comparing the percei
ved temperature against the set point, then taking an action if and only if that perception is “out of control.”
 Once the action brings the perception under control, the system stops acting until the set point is violated 
once again. Living organisms—including human beings—are essentially very complex Perceptual Control


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systems: we act in ways to keep our perceptions of the world within acceptable boundaries. We don’t put 
on a coat because cold weather forces us to—we put on a coat because we feel cold and we don’t want t
o feel cold. If the light entering our eyes is too bright, we find shade, pull down the blinds on the windows, 
or put on sunglasses—the action controls the perception, and the action we ultimately take depends on th


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e Environment (discussed later) we find ourselves in at the time. In Making Sense of Behavior: The Meani
ng of Control, William T. Powers uses the following example to explain how control systems account for th
e wide range of behaviors human beings exhibit: imagine a ship in the middle of an ocean during a wild st
orm. The ship is rising and falling randomly, pitching back and forth as it’s buffeted by the waves. A rock o


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n the deck of the ship is not a control system. The rock doesn’t want anything, so it has nothing to control
—it just tumbles wherever the forces of physics take it. A human being on the deck of the ship, however, 
wants to stay upright, and will therefore take many different actions to continue to stay standing: changing
 balance, moving, holding on to handrails, etc. If the human stumbles and falls, they’ll take whatever actio


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ns they can to get back on their feet once more. The Environment dictates which actions are possible to b
ring the perception under control. Control is not planning—it’s adjusting to changes in the Environment as 
they actually happen. The human in the storm doesn’t have the capability to predetermine what actions th
ey’ll take to stay on their feet —as the Environment changes, their actions will change in response, depen


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ding on the resources and options available at the moment. Perceptual Control explains why the same sti
mulus often produces different responses. A good example of why the stimulus/response model doesn’t p
aint the whole picture is the classic incentive of many employers: paid overtime. If you want your hourly e
mployees to work more, you should pay more overtime, right? Not necessarily. Workers who are controllin


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g for income (i.e., they don’t have enough and want more) will probably work more overtime, but what abo
ut workers who already feel they’re making enough money or have priorities that are more important than 
work? A few of those workers will work exactly the same amount of time, and some will actually work less
— they’re controlling for a certain amount of income, then spending their time doing other things that are i


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mportant to them, like being with their family or pursuing a side project. Raising overtime pay will allow the
m to reach that point more quickly, so they’ll spend less time at work. The overtime incentive produces thr
ee different results, two of which are complete opposites—working more and working less. So much for b
ehaviorism. Perceptual Control represents a fundamental shift in understanding why people do the things


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they do. Once you understand that people act to control their perceptions, you’ll be better equipped to infl
uence how they act. SHARE THIS CONCEPT: http://book.personalmba.com/perceptualcontrol/ Referenc
e Level Action comes about if and only if we find a discrepancy between what we are experiencing and w
hat we want to experience. —PHILIP J. RUNKEL, PROFESSOR OF PSYCHOLOGY AND EDUCATION, 
UNIVERSITY OF OREGON At the heart of every Perceptual Control system is a Reference Level—a ran


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ge of perceptions that indicate the system is “under control.” When a perception is within the system’s Ref
erence Level, nothing happens. When the perception violates the Reference Level by being too high or to
o low, the system will act to bring the perception back under control. There are three kinds of Reference L
evels: set points, ranges, and errors. A set point is a minimum or maximum value. The thermostat is an ex


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ample of a set point—whenever the temperature falls below a certain value, the heater kicks on. Your bod
y’s production of melatonin is another set point— once it reaches a particular threshold, you’ll start falling


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asleep. Business financial controls are managed as set points: as long as your revenue is above a certain
 set point and your expenses are below a certain set point, you’re okay. If you suddenly spend three times
 what you normally spend or your revenue falls below your point of Sufficiency, that triggers action—you w
ant to find out why you overspent and how to bring your expenses back under control. A range is a spread


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of acceptable values. The difference between a range and a set point is the existence of an upper and lo
wer limit to the perception being controlled. With a set point, the perception must be above or below a cert
ain level to be under control; with a range, the perception must be between two set points to be under con
trol. For example, your body has a system for regulating the level of glucose in your blood, which it uses f


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or energy. Too much or too little blood glucose can be life threatening, so your body works to keep the lev
el within an acceptable range by releasing insulin, which causes extra glucose to move into (or out of) the 
cells in your body. As long as your blood glucose is within the acceptable range, nothing happens. When t
he reference range is violated, your body starts working to bring the situation back under control. An error


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is a set point defined as zero—any perception that’s not zero is out of control. Think of the pain receptors i
n your skin. Most of the time, they do nothing, which means everything is under control. If you cut or burn 
yourself, however, the receptors send a signal that something is wrong, and you’ll act to remedy the situat
ion. Customer service complaints are a business example—if you don’t receive any, everything is under c


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ontrol. If your in-box is filling with complaints, you know something needs to be fixed. If you want to chang
e a behavior, you must either change the system’s Reference Level or change the Environment in which t
he system is operating. Think back to the thermostat—if you want to turn the heater off, you can change t
he set point to a lower temperature. If you’re aware that your expenses will be three times what they were


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last month because you’re launching a huge marketing campaign, your finances are no longer out of contr
ol. If you’re in the process of getting a tattoo, pain receptors firing is an acceptable situation. The percepti
ons themselves haven’t changed, but you’ll no longer act to bring the perception under control because it 
already is under control. Changing the Reference Level changes the behavior of the system. Consciously


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defining and redefining Reference Levels can help you change your behavior. If you’re worried that your s
pending is out of control, you can create a budget that will give you information on what your Target Mont
hly Revenue needs to be in order to stay Sufficient. If you’re worried that your weight is too high or low, a 
visit to your doctor can help you calibrate your expectations and self-perception against medical data. If y


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ou’re consistently working twelve-hour days and you decide that no more than eight is acceptable, your w
ork habits will change. Change the Reference Level, and your behavior will change automatically. SHARE
 THIS CONCEPT: http://book.personalmba.com/reference-level/ Conservation of Energy Whenever an in
dividual or a business decides that success has been attained, progress stops. —THOMAS J. WATSON,


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FORMER PRESIDENT OF IBM Here’s a universal truth of human nature: people are generally lazy. The 
critical insight is that being lazy is a feature, not a bug. Think what would happen if one of your ancient an
cestors ran around all day for no good reason until they collapsed from exhaustion? If a predator or enem
y appeared, they’d have no reserves left to respond to the threat—a very bad situation. As a result, we’ve


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evolved to avoid expending energy unless absolutely necessary, which I call Conservation of Energy. Ove
r the past several decades, researchers have studied marathoners and ultramarathoners (people who reg
ularly run fifty to one hundred miles at a stretch) to learn more about how the body responds to pain. Here
’s what they’ve found: when you’re so tired that it feels like you’re about to kick the bucket any second, ph


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ysiologically, you’re not even remotely close to actually dying. The signals your brain is sending to your bo
dy are a ruse that serves as a warning, prompting you to keep some energy in reserve, just in case energ
y is needed later. Unless a Reference Level is violated, people generally will Conserve Energy by not acti
ng. Think of two roommates who share different standards of household cleanliness. To one, the presenc


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e of dirty dishes in the sink is a problem—in his mind, any dishes at all is “out of control,” which prompts a
ction to fix the situation. To the other roommate, the situation may not be out of control until the sink is ove
rflowing, at which point he’ll expend some energy washing dishes. Different Reference Levels, different ac
tions. If you think your weight, health, and physique are just fine, you probably won’t change your diet or s


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tart exercising spontaneously. If you’re comfortable with your social circle and confidence, you probably w
on’t do much to improve your social skills or expand your circle of acquaintances. If you think you’re maki
ng enough money, you probably won’t do much to earn more. Conservation of Energy explains why some
 people stay in dead-end jobs for decades, even though they know the position isn’t great. If the work is o


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kay, the bills get paid, and the job never becomes stressful or frustrating enough to violate expectations, p
eople generally won’t go out of their way to get a promotion, find another job, or start a new business. Peo
ple only start to expend effort if their Reference Levels are violated in some way, so if their expectations a


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ren’t violated, they simply don’t act. Sources of information that change your Reference Levels are valuabl
e in prompting action. One of the things that prompted me to build courses and offer consulting was the k
nowledge that some business authors and coaches were able to spend all day learning and helping other
s, and be paid very well for their expertise. That was enough to violate my Reference Levels about work a


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t the time—if they could get paid for doing what I loved to do, why should I have to spend all day in a day j
ob that was just “okay”? The more I learned about what people did to make this possible, the more I want
ed to do to make it a reality for myself. Before Roger Bannister’s record-breaking performance in 1954, ru
nning a mile in under four minutes was considered beyond the physical limitations of the human body. Aft


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er Bannister proved it was possible, the psychological barrier was broken: by the end of 1957, sixteen run
ners had accomplished the feat. The only thing that changed was the Reference Level: these athletes kne
w it was possible and wanted to do it, so they did. Good books, magazines, blogs, documentaries, and ev
en competitors are valuable if they violate your expectations about what’s possible. When you discover th


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at other people are actually doing something you previously considered unrealistic or impossible, it chang
es your Reference Levels in a very useful way. All you need to know is that something you want is possibl
e, and you’ll find a way to get it. SHARE THIS CONCEPT: http://book.personalmba.com/conservation-ofe
nergy/ Guiding Structure Your environment will eat your goals and plans for breakfast. —STEVE PAVLIN
A, AUTHOR OF PERSONAL DEVELOPMENT FOR SMART PEOPLE AND BLOGGER AT STEVEPAVLI


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NA.COM For three years, Kelsey and I experimented with a vegan diet—no animal products whatsoever. 
No meat, no eggs, no cheese, no milk. Most of our friends and family had two responses: “Are you crazy?
” and “That must be very difficult—I could never do that.” It was such a drastic lifestyle change that people
 marveled at our willpower. I’d like to make a confession: it wasn’t difficult at all. There was very little effort


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or willpower involved. Here’s the secret: instead of relying on willpower to resist the urge to cook a steak 
or order a pepperoni pizza, we changed the structure of our Environment to support our choices. We thre
w out all of the food we didn’t want to eat and replaced it with healthier options that still tasted good. We c
hanged where we shopped— instead of going to the supermarket, we went to a small natural food store.


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We stopped going to steakhouses and started going to restaurants that specialized in serving vegetarian/
vegan food. As a result, we didn’t have to use much willpower to act consistently with our choice. When I 
got hungry, I ate an apple or carrots and hummus— that’s what was in the refrigerator. Ordering a pizza o
r buying and cooking a steak took more effort, so I didn’t do it. By changing the structure of our Environme


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nt, Kelsey and I made it easier to act the way we had decided to act. Guiding Structure means the structur
e of your Environment is the largest determinant of your behavior. If you want to successfully change a be
havior, don’t try to change the behavior directly. Change the structure that influences or supports the beha
vior, and the behavior will change automatically. If you don’t want to eat ice cream, don’t buy it in the first


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place. In Homer’s Odyssey, Odysseus and his crew prepare to sail past the island of the Sirens—bird wo
men who sang so beautifully that unwitting sailors would lose all reason and shipwreck themselves. Instea
d of relying on strength of will to resist the temptation of the Sirens, Odysseus changed the structure of th
e Environment, plugging his men’s ears with beeswax and tying himself to the ship’s mast. Temptation thu


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s avoided, the ship made safe passage. Change the structure of your Environment, and your behavior will
 change automatically. Add a bit of Friction (discussed later) or eliminate certain options completely, and y
ou’ll find it much easier to focus on what you’re trying to accomplish. A great example of Guiding Structure
 is the “Sterile Cockpit Rule” that the Federal Aviation Administration (FAA) instituted in 1981. Most airline


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accidents happen below ten thousand feet, where distractions can be deadly. Above ten thousand feet, pil
ots can talk about anything they want, but below ten thousand feet, the only discussion permitted is about 
information directly related to the flight in progress. By eliminating distractions, the Sterile Cockpit Rule re
duces errors and accidents. Change the structure of your Environment, and you’ll be amazed at how drast


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ically your behavior will change in response. SHARE THIS CONCEPT: http://book.personalmba.com/guidi
ng-structure/ Reorganization Not all those who wander are lost. —J. R. R. TOLKIEN, AUTHOR OF THE L
ORD OF THE RINGS Whenever a perception violates the system’s Reference Level, action will occur to b
ring the perception back under control. Sometimes that response is well defined—as we discussed earlier


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, your body knows exactly what it needs to do to regulate blood glucose. Often, however, you don’t know 
exactly what is wrong—or how to fix it. Think of a perception as abstract as “job satisfaction”—there’s a se
t point in your mind that stands for “how happy I should be at work,” and your perception of job satisfactio
n is an average of your actual experiences at work. Pleasant experiences move the average higher, and u


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npleasant experiences move the average lower. If your perception of “job satisfaction” is lower than you th
ink it should be (your Reference Level), your brain will kick into action—“I’m not as happy as I should be .


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. . Something needs to change.” Here’s the problem: you may not know what that “something”is. Would yo
u be happier if you changed assignments, worked for a new boss, left the company, or started working for
 yourself? Who knows? That’s where Reorganization comes in. Reorganization is random action that occu
rs when a Reference Level is violated but you don’t know what to do to bring the perception back under c


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ontrol. The “quarter-life” or midlife crisis many people experience is a perfect example of Reorganization. 
You don’t quite know what to do to eliminate the angst you’re feeling, so you start doing things that aren’t 
normal for you, like quitting your job to backpack across Europe or getting a tattoo and buying a motorcycl
e. Reorganization feels like you’re lost, depressed, or crazy—that’s completely normal. Your brain starts s


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pitting out all kinds of off-the-wall things in an effort to find something to fix the situation. Sometimes, whe
n I’m really stressed out, I’ll start to think that being a janitor sounds appealing—the work’s not difficult, yo
u don’t have to think so much, and you still get paid. That doesn’t mean it’s a good idea, but this type of th
ought process is absolutely normal—my brain is just trying out random ideas to bring certain systems bac


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k under control. Reorganization is the neurological basis of learning. As we’ll discuss in Pattern Matching, 
our minds are learning machines that associate specific causes with specific effects. If your mind hasn’t al
ready learned what to do in a certain situation, the best way to solve the problem is to try new things in an
 effort to gather data. That’s what Reorganization is for—it’s the impulse to consider or try new things to s


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ee what works. One of the most important things to understand about Reorganization is that it’s best not t
o fight it. Even though it’s sometimes tempting to try to convince yourself that everything is okay, resisting 
or repressing the impulse to try something different slows down your learning. There’s nothing odd or abn
ormal about “dark nights of the soul”—they’re a signal that some perception about your life is out of contro


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l, and Reorganization is required to gather more data about how to fix it. Once you learn how to bring the 
perception back under control, Reorganization stops naturally. When you’re feeling lost, take heart—it’s ju
st your brain gathering the information it needs to make good decisions. Embracing the impulse to try som
ething new will help you exit Reorganization more quickly. SHARE THIS CONCEPT: http://book.personal


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mba.com/reorganization/ Conflict The significant problems we face cannot be solved at the same level of t
hinking we were at when we created them. —ALBERT EINSTEIN, RENOWNED PHYSICIST Let’s take a 
moment to examine everyone’s favorite character flaw: procrastination. Everyone procrastinates to a certa
in extent: with too many things to do, putting off tasks until they feel urgent is a natural response. How can


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you focus on something due in the future when there’s something that needs to be done now? What’s par
ticularly frustrating are the times we know we have time to get something done in advance, but we just do
n’t feel like doing it right now. Part of us wants to work, and part of us wants to not work. If you try to force 
yourself to work, you find that you’re so easily distracted that not much gets done. If you try to rest, part of


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you feels bad that you’re not working, which means you’re not really resting. Entire days can pass where 
you neither really work nor really rest, but you feel exhausted from the effort of getting nothing done. What
 gives? Conflicts occur when two control systems try to change the same perception. When you’re procra
stinating, one of your brain’s subsystems is trying to control “getting things done,” while another is trying t


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o control “getting enough rest.” Since both systems are trying to control the same perception—physical ac
tion—the systems fight to move the perception in the way they want it to go. The situation is akin to a heat
er and an air conditioner fighting to control the temperature in a single room. As long as their respective re
ference levels are mutually exclusive, neither system will ever be under control— they’ll continue to expen


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d effort to move the system in the direction they’re controlling for. Even if one system brings their percepti
on back under control temporarily, it won’t be long before the other system ensures it’s out of control once
 more. Procrastination is an example of an inner Conflict, but Conflicts happen between people as well. C
onflicts occur when people are controlling for different outputs that require the same input. Think of two ch


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ildren fighting over the same toy. It’s the procrastination/temperature battle all over again, only the control 
systems are people. As long as one child has the toy, the other will be upset. As a result, the toy moves b
ack and forth constantly, and both children are upset. Think about senior leaders in a large company squa
bbling over how a limited budget will be allocated, and you’ll have a good idea of where Conflicts come fro


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m. If $1 million is allocated to one VP, that means all of the other VPs can’t use it, so they protest—corpor
ate politics at its best. One of the things that make interpersonal Conflict challenging is that we can never t
ruly control the actions of another human being. We can influence, persuade, inspire, or negotiate, but we
 can never directly act upon another person’s perceptions or directly change their Reference Levels. Confl


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icts can only be resolved by changing Reference Levels—how success is defined by the parties involved. 
Attempting to resolve a Conflict by simply calling attention to unacceptable behavior is ineffective in the sa
me way that willpower can’t change behavior directly—it’s not addressing the root cause of the Conflict. E


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ach party in the Conflict has a different Reference Level, which is primarily influenced by the situation or E
nvironment.The only way to resolve the conflict is to change each party’s Reference Level, which is best d
one by changing the structure of the situation. In the case of procrastination, Conflict can be ended by sch
eduling firm times for work and rest, ensuring enough of each. In The Now Habit, Neil Fiore recommends


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creating an “unschedule” that prioritizes rest over work. When your brain is sure that you’ll be receiving all
 of the relaxation and enjoyment you need, and that you only have a certain amount of time to get things d
one, it’s easier to focus on doing productive work. In the case of the competing heater and air conditioner,
 the situation can only exist as long as you maintain the conflicting temperatures on the thermostats. Chan


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ge the Reference Levels, and you resolve the Conflict. In the case of squabbling children (or vice presiden
ts), you can change the situation by ensuring that each combatant gets roughly the same toy, gets no toy 
at all, or changes their measure of success from “getting mine” to “working together.” Change the situation
 that creates the Reference Levels each party is using to measure success, and you’ll eliminate the Confli


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ct. SHARE THIS CONCEPT: http://book.personalmba.com/conflict/ Pattern Matching Your memory is a m
onster; you forget—it doesn’t. It simply files things away. It keeps things for you, or hides things from you
— and summons them to your recall with a will of its own. You think you have a memory; but it has you! 
—JOHN IRVING, NOVELIST AND ACADEMY AWARD-WINNING SCREENWRITER Long before you kn


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ew what gravity was, you knew that a ball would move toward the ground if you released it. The first few ti
mes you let go of a ball, it would always fall to the ground. It didn’t take many such experiences for you to 
learn that any object you released would fall. Gravity is just a name for something your brain learned by it
self. One of the most interesting things about the brain is its ability to automatically learn and recognize pa


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tterns. Think of Pavlov’s famous dogs: ring a bell, and they’ll start to salivate. Pavlov taught them a patter
n: every time the bell rings, food is on the way. It didn’t take long for the dogs to learn the pattern, so they’
d respond even before the food appeared. Our brains are natural Pattern Matching machines. The brain is
 constantly busy trying to find patterns in what we perceive, then associating new patterns with other patte


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rns that are stored in memory. This Pattern Matching process happens automatically, without conscious e
ffort. Simply by paying attention to the world around you, your brain is collecting new patterns and adding 
them to memory. Humans learn patterns primarily via Experimentation. If a small child wants to be held by
 its mother, it doesn’t take long to try several different approaches and learn which response produces the


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desired result, typically “If I cry, Mom is going to pick me up and hold me.” From then on, the child will rel
y on the pattern whenever it desires the result. You can think of your memory as the database of patterns 
you’ve learned via past experience. Patterns get stored in our long-term memory, waiting to be used to de
termine responses to new or uncommon situations. Recall is optimized for speed, not accuracy—the brain


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stores information contextually, which helps you recall related patterns quickly when you need them. That
’s why the best way to find a set of lost keys is to mentally walk through all of the places you’ve been rece
ntly—the context makes it easier to recall the information. The more accurate patterns you’ve learned, the
 more options you have when solving new problems. Pattern Matching is one of the primary reasons expe


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rienced people tend to make better decisions than inexperienced people —they’ve learned more accurate
 patterns via their experience. Having a larger mental database to draw from is what gives experts their ex
pertise. Pattern Matching is one of the foundational capabilities of our mind and how it works. The more a
ccurate patterns you have stored in your memory, the more quickly and accurately you can respond to wh


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atever life throws at you. SHARE THIS CONCEPT: http://book.personalmba.com/pattern-matching/ Menta
l Simulation I saw the angel in the marble and carved until I set him free. —MICHELANGELO, SCULPTO
R AND ARTIST Quick: imagine jumping into the middle of an active volcano. Is it a good idea? Answering
 this question took you only a few fractions of a second, even though you’ve never personally jumped into


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a volcano or seen anyone who has. What you’ve done is quite extraordinary: how is it possible to immedia
tely know the answer to something you’ve never considered before? Mental Simulation is our mind’s abilit
y to imagine taking a specific action, then simulating the probable result before acting. Our minds are con
stantly trying to predict what will happen in the future, based on what’s happening around us and what acti


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ons we’re considering. Anticipating the results of our actions is a significant advantage: it dramatically enh
ances our ability to solve novel problems. Mental Simulation relies on our memory—the database of Patte
rns we’ve learned via perception and experience. When you imagined jumping into a volcano, your brain c
ouldn’t find any personal experiences, but it did find relevant Associations: lava is hot, hot things burn, bur


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ns are painful and dangerous, painful and dangerous things are bad. This set of Associations is used to si
mulate the probable result in the blink of an eye, resulting in a snap judgment: VERY BAD IDEA. Mental S
imulation is extremely powerful and versatile—it can be used to test even the most arbitrary actions witho


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ut risk. Given any goal or scenario, Mental Simulation is what your brain uses to connect point A to point 
B, where point A is where you are now and point B is what you’re imagining. The only limitation on what y
ou can simulate is your imagination. For example, how would you go about visiting Antarctica? It’s a rand
om question, but by holding the End Result in mind for a few seconds, your brain automatically starts con


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necting the dots, based on the Patterns you’ve learned. “I could call a travel agent . . . Cruises go to Antar
ctica all the time . . . I’d have to fly to Argentina . . . I’d have to buy a really warm coat,” etc. All of this think
ing just happens, without much effort on your part—it’s what your brain is designed to do. Mental Simulati
on only works if you supply a “point B,” even if the action or goal is completely arbitrary—you can simulate


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the path to even the most unrealistic and absurd destination you can imagine. Think of using a service lik
e Google Maps or a vehicle GPS system—the system can give you accurate directions, but it won’t work 
unless you enter a destination. That destination can be your best friend’s house or someplace random, lik
e Albuquerque, New Mexico. Either way, without supplying a Goal (discussed later), the system can’t oper


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ate. The same rule applies to Mental Simulation—no destination, no simulation. Mental Simulation is parti
cularly powerful if you learn how to harness it consciously, which we’ll explore in detail in Counterfactual S
imulation. SHARE THIS CONCEPT: http://book.personalmba.com/mentalsimulation/ Interpretation and R
einterpretation We don’t see things as they are. We see things as we are. —ANAÏS NIN, AUTHOR AND


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DIARIST Have you ever received an e-mail from someone that made you very angry, only to find out later
 that you misunderstood the tone or intent of the message? Your mind reached a conclusion that wasn’t tr
ue based on what you thought you perceived, only to discover there was a different way of interpreting the
 message that also made sense. Our minds are always simulating different courses of action, but sometim


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es there’s not enough information to ensure that a Pattern is completely accurate. Since you’re not omnis
cient, your mind never has complete data, so it automatically fills in missing pieces by interpreting what yo
u sense via the Patterns you have stored in memory. In the absence of any other information to the contra
ry, you’ll “jump to conclusions” by relying on the interpretation your mind creates. This capacity to fill in the


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blanks even happens on the physiological level. In our field of vision we have two complete blind spots—t
he points where our optic nerves connect to our eyes. We literally cannot see in those spots, but our brain
s automatically take in all of the surrounding information and seamlessly fill in the blanks. As a result, we 
appear to have a solid field of vision, even though it’s an illusion created by our brain’s ability to interpret i


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nformation. The human brain constantly relies on prior Patterns and information to make Interpretations in
 the absence of information. Think of the spam folder in your e-mail account—it uses a collection of previo
us spam messages (called “priors”) to estimate the probability that any new incoming message is also spa
m, using a process called Bayesian inference. The messages don’t self-identify as spam, but the compute


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r’s Bayesian spam filter can spot them anyway. Your brain does roughly the same thing every time you de
cide you like someone right after meeting them—your brain is relying on Patterns you’ve learned via past 
experiences with other people to make a snap judgment. These snap Interpretations can also be altered
—a process called Reinterpretation . Think of meeting an attractive person who consistently becomes qui


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et and aloof whenever you’re around. At first glance, their behavior may signal that they’re shy or don’t lik
e you very much. If one of your friends tells you that they’re romantically interested in you, however, your I
nterpretation of that person’s past behavior can change in an instant. Reinterpretation is possible because
 your memory is fundamentally impermanent. Our memories aren’t like computer disks—every time we re


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call a memory, it doesn’t simply resave to the same location in the same state. Every time we recall somet
hing, the memory is saved in a different location, with a twist: the new memory will include any alterations 
we’ve made to it. It’s possible to change your beliefs and Mental Simulations consciously by recalling and 
actively Reinterpreting past events. Mental Simulation and Interpretation rely on Patterns stored in memor


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y, so if you want to change the results of your brain’s simulations, the best way to go about doing that is to
 alter the mental database of information those simulations are based on. Reinterpretation is how you cha
nge the database. In Re-Create Your Life, Morty Lefkoe teaches a process that can be used to Reinterpre
t past events in a simple and useful way: 1. Identify the undesirable pattern. 2. Name the underlying belief


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. 3. Identify the source of the belief in memory, including as much sensory detail as possible. 4. Describe 
possible alternate interpretations of the memory. 5. Realize that your original belief is an interpretation, no
t reality. 6. Consciously choose to reject the original belief as “false.” 7. Consciously choose to accept you
r reinterpretation as “true.” Here’s an example of how I personally used Lefkoe’s process: one possible wa


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y of Interpreting my brand management career at P&G is that I was a miserable failure—I was on the man
agement fast track, and I couldn’t “cut it,” so I “washed out.” For a while, I believed that was true, but that 
belief didn’t serve me very well. When I tried to explore alternate paths, my mind naturally simulated that


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my “failure” would extend to my new projects as well. As long as my mind relied on this Interpretation to si
mulate the future, I was stuck in a self-defeating cycle. There’s another way of Interpreting my previous ca
reer at P&G: my experience taught me a lot about how large corporations work, and I learned more about 
what I’m good at, what I don’t particularly enjoy doing, and how I want to invest my time. Working at P&G


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helped me discover a path that didn’t work for me, so I stopped following that path and tried other things t
hat better fit my strengths and desires until I found one I loved—a major victory and a huge life improvem
ent. Which Interpretation is “true”? Both are valid Interpretations. My mind wasn’t malfunctioning when it c
reated the first Interpretation, but that Interpretation didn’t serve me very well. Reinterpreting the situation


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and accepting the second version as “true” was much more useful—without it, you probably wouldn’t be r
eading this book. Reinterpret your past, and you’ll enhance your ability to make great things happen in the
 present. SHARE THIS CONCEPT: http://book.personalmba.com/interpretation/ Motivation BUT I DON’T 
WANNA!!! —TWO-YEAR-OLD CHILDREN EVERYWHERE Motivation is something that you probably thi


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nk about all the time, using phrases like “I’m feeling really motivated to get this done” or “I’m not feeling ve
ry motivated to do this right now.” Since so many of us rely on the term to explain our daily experience, it’s
 worthwhile to understand what we’re actually talking about. Motivation is an emotional state that links the 
parts of our brain that feel with the parts that are responsible for action. Using the Onion Brain as a basic


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model, Motivation is the link between the midbrain (which perceives the world) and the hindbrain (which s
ends the signals to our body to take action). In most cases, Motivation is automatic—our mind perceives a
 difference between the way things are and the way we want them to be, and the body automatically acts t
o eliminate the difference. You can break down the experience of Motivation into two basic desires: movin


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g toward things that are desirable and moving away from things that aren’t. Things that fulfill our Core Hu
man Drives appear desirable, so we experience an impulse to move toward them. Things that appear dan
gerous, scary, or threatening are undesirable, so we naturally experience an impulse to move away from t
hem. In general, “moving away” takes priority over “moving toward.” The reason comes back to Caveman


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Syndrome—running away from a lion automatically takes priority over cooking lunch. Let’s say you have a
n exciting opportunity to start a new business. A feeling of excitement may cause you to move toward that
 opportunity. At the same time, if the opportunity requires you to leave a high-paying job, which feels risky,
 you may be compelled to move away from the very same opportunity, resulting in Conflict. As long as the


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risk outweighs the excitement, you’ll hesitate, even if there’s very little chance you’ll ever be in danger if y
ou take the leap. This safety mechanism in our minds developed for very good reasons, but today, most o
f the decisions we make don’t have life-and-death consequences. Motivation is an emotion—NOT a logica
l, rational activity. Just because your forebrain thinks you should be motivated to do something does not


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mean you’ll automatically become motivated to do that thing. (If only it were that easy, right?) Very often, 
Mental Simulations, Patterns, Conflicts, and Interpretations hidden in the midbrain can get in the way of m
aking progress toward what we want to accomplish. As long as there are “move away from” signals being 
sent, you’ll have a hard time feeling motivated to move toward what you want. In the same vein, you can’t


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“motivate” other people by yelling at them to work faster—all the drill-sergeant approach accomplishes is 
making them want to move away from you. They may comply with you temporarily if they perceive some t
hreat to themselves if they don’t, but you can bet that they’ll move away from working with you at the first 
available opportunity. Eliminate the inner conflicts that compel you to move away from potential threats, a


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nd you’ll find yourself experiencing a feeling of Motivation to move toward what you really want. SHARE T
HIS CONCEPT: http://book.personalmba.com/motivation/ Inhibition Inhibition is the ability to stop: to delay
 our response until we are adequately prepared to make it. —MICHAEL GELB, AUTHOR OF BODY LEA
RNING: AN INTRODUCTION TO THE ALEXANDER TECHNIQUE AND HOW TO THINK LIKE LEONAR
DO DA VINCI Believe it or not, most of your daily actions require very little conscious thought. Most of the


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time, our bodies and minds are on autopilot—our minds sense the world around us, compare our Environ
ment and actions against internal Reference Levels, and act accordingly. Think about driving a car: with p
ractice, your body does everything necessary to keep the car on the road, without requiring much conscio
us thought. Every once in a while, however, it pays to ignore the autopilot and do something different. If y


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ou stumble across a bear in the woods, the last thing you want to do is run, even though that’s what your i
nstincts may be telling you to do. If you run, the bear is likely to decide you look like lunch and chase you 
down. Instead of running, it’s actually more effective to stand your ground and make yourself appear as bi
g and loud and threatening as you can. Appearing to be a threat requires you to consciously inhibit your n


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atural response, but it’ll cause the bear to see you as a threat and decide to leave you alone. Inhibition is t
he ability to temporarily override our natural inclinations. If you’ve ever put up with one of your siblings (or


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colleagues) acting immature, obnoxious, or annoying, Inhibition prevented you from doing something you 
would have regretted later. Willpower is the fuel of inhibition. As we discussed in the section on the Onion 
Brain, the forebrain’s job is ambiguity resolution, decision making, and Inhibition. Whenever we inhibit our 
natural responses to our Environment, Willpower is at work. Our midbrain and hindbrain are the autopilot,


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and the forebrain is the override. In that sense, “free will” is a bit misleading—“free won’t” is a more accur
ate description. Inhibiting certain decisions or responses can be beneficial, but our ability to inhibit has limi
tations, which we’ll discuss next. SHARE THIS CONCEPT: http://book.personalmba.com/inhibition/ Willpo
wer Depletion If you don’t want to slip, don’t go where it’s slippery. —ALCOHOLICS ANONYMOUS MAXI


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M In the 1960s, Dr. Walter Mischel, a researcher at Columbia University, systematically tortured small chil
dren. Here’s how he did it: Dr. Mischel placed the child in a small room with a table and a chair. In the mid
dle of the table, Dr. Mischel would place a big, fluffy marshmallow, then tell the child, “If you wait until I co
me back, you can have two.” Then he’d leave. Here’s what happened: some kids would gobble up the ma


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rshmallow seconds after the researcher left. Others made heroic efforts to distract themselves from tempt
ation, forcing themselves to pay attention to something other than the marshmallow in an agonizing attem
pt to hold out long enough to get the bigger reward. Dr. Mischel found a correlation between Willpower an
d success: kids with a greater ability to “defer gratification” were more successful in school, as well as late


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r on in life. Overriding our instincts can often make it possible to collect larger rewards later—spending is 
easy, but saving is not, even if the latter is more beneficial over time. Willpower can be thought of as instin
ctual override—it’s a way to interrupt our automatic processing in order to do something else. Whenever 
we experience a situation in which it’s useful to inhibit our natural inclinations, Willpower is required to kee


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p us from responding. As such, Willpower is a useful tool, but it has certain inherent limitations. Our reserv
es of Willpower are very limited and become Depleted with use. Dr. Roy Baumeister, a researcher at Flori
da State University, found that our ability to successfully use Willpower for self-control tasks is dependent 
on a physiological fuel: blood glucose. Acts of Willpower Deplete relatively large amounts of glucose, and


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when those stores run low, we have a hard time using Willpower to inhibit behavior. That’s why it’s difficult
 to resist dishing up a bowl of ice cream at 8:30 p.m. when you’re on a diet—by then, your stores of Willpo
wer are long gone. The best way to use your limited reserves of Willpower is to use Guiding Structure to c
hange the structure of your Environment instead of your behavior. For example, if you decide you want to


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quit eating ice cream, it doesn’t make sense to keep a tub in your freezer, then rely on your Willpower to r
esist the temptation to eat it. That situation is a recipe for disappointment, and when your Willpower inevit
ably fails, it’s easy to misinterpret the lapse as a fundamental character flaw, an example of the Attribution
 Error (discussed later). Instead, it’s much more effective to use a little Willpower to remove the ice cream


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from your freezer entirely, by either giving it to someone else or throwing it away. By removing the ice cre
am from your Environment, no Willpower is required—you’d actually have to go somewhere to get it, whic
h takes more effort. The path of least resistance changes accordingly, so if you’re hungry, you’ll eat somet
hing else—an apple, perhaps. The Internet is a massive temptation to me—I love learning new things, an


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d the Web contains enough interesting information to keep me endlessly occupied. It’s easier for me to sp
end time reading rather than writing, but I write on a computer, which is the equivalent of keeping ice crea
m in my freezer—it’s always there, tempting me away from writing. Instead of constantly relying on my Wil
lpower to get this book done, I used a small amount of Willpower to alter my Environment by installing an


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application called Freedom5 on my Mac. The program temporarily disables Internet connectivity on my la
ptop, making it impossible for me to connect to the Internet for a few hours. (Windows users can accompli
sh the same result using a program called LeechBlock.6 ) Temptation thus obliterated, I write. It’s safe to 
say that, without Freedom, you wouldn’t be reading this right now. Save your Willpower: focus on using it t


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o change your Environment, and you’ll have more available to use whenever Inhibition is necessary. SHA
RE THIS CONCEPT: http://book.personalmba.com/willpowerdepletion/ Loss Aversion Our doubts are trait
ors, and make us lose the good we oft might win, by fearing to attempt. —WILLIAM SHAKESPEARE, ME
ASURE FOR MEASURE Recently, my wife, Kelsey, decided to withdraw some funds from an investment 
account. When the brokerage deposited the money into her bank account, they deposited an additional $


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10,000 by mistake. Rationally, it shouldn’t have been a big deal—it was a simple mistake that was easily c
orrected. Emotionally, however, Kelsey felt like she was “losing” the extra money, even though it wasn’t re
ally hers at all. Loss Aversion is the idea that people hate to lose things more than they like to gain them. 
There are very few relationships that psychology is able to quantify, but this is one of them: people respon


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d twice as strongly to potential loss as they do to the opportunity of an equivalent gain. If you look at your i
nvestment portfolio and notice that it’s increased by 100 percent, you’ll feel pretty good. If you notice that


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your portfolio went down 100 percent, you’ll feel horrible. Loss Aversion explains why threats typically tak
e precedence over opportunities when it comes to Motivation. The threat of loss used to require immediat
e attention, because losses were extremely costly—even life threatening. Dying or losing a loved one to a 
predator, sickness, exposure, or starvation is universally a horrible experience, so we’re built to do everyt


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hing in our power to prevent that from happening. The potential losses we typically face now are rarely as 
serious, but our minds still give them automatic priority. Loss Aversion also explains why uncertainty appe
ars risky. Depending on the study you look at, anywhere between 80 and 90 percent of adults think it woul
d be great to own their own business and work for themselves. If that’s true, why don’t more people start b


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usinesses? Loss Aversion keeps them from acting: the threat of losing a steady (and somewhat predictabl
e) job commands more Attention than the opportunity to create a new selfsustaining business. Starting a 
business involves the specter of potential loss, which prevents people from getting started in the first plac
e. Loss Aversion is particularly pronounced in recessions and depressions. Losing a job, a home, or a sig


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nificant percentage of your retirement fund isn’t life threatening, but it feels horrible all the same. As a resu
lt, people tend to become more conservative, avoiding risks that could make things worse. Unfortunately, 
some of those risks—like starting a new business— may actually present a major opportunity to make thin
gs better. The best way to overcome Loss Aversion is to Reinterpret the risk of loss as “no big deal.” Casi


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nos are in the business of overcoming Loss Aversion every single day—in a sense, the ostentatious buildi
ngs on the Las Vegas Strip are enormous monuments to human stupidity. If Loss Aversion is such a big d
eal, how do casinos encourage people to play games in which they’re mathematically certain to lose mon
ey? Casinos win by abstracting the loss. Instead of having players gamble with currency, which is perceiv


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ed as valuable, the casino converts currency into chips or debit cards, which don’t feel as valuable. As the
 player loses this “fake” money over time, the casino will provide “rewards” like free drinks, T-shirts, room 
upgrades, or other benefits to alleviate any remaining sense of loss. As a result, losing becomes “no big d
eal,” so players continue to play—and continue to lose money night after night. Loss Aversion is why Risk


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Reversal is so important if you’re presenting an offer to a potential customer. People hate to lose, which m
akes them feel stupid and taken advantage of. As a result, they’ll go to great lengths to ensure that they d
on’t lose, and the best way to ensure that they don’t make a stupid decision is to not buy your offer in the f
irst place. If you’re in the business of making sales, that’s a big problem. Eliminate this perception of risk b


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y offering a money-back guarantee or similar Risk Reversal offer, and people will feel the decision is less r
isky, resulting in more sales. SHARE THIS CONCEPT: http://book.personalmba.com/loss-aversion/ Threa
t Lockdown How little can be done under the spirit of fear. —FLORENCE NIGHTINGALE, PIONEER OF 
PROFESSIONAL NURSING You’re. fast asleep when something goes bump in the night. Almost immedia


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tely, you’re alert—your heart rate increases, your pupils dilate to take in more light and detail, and stress h
ormones like adrenaline and cortisol flood your bloodstream. Your mind automatically identifies the likely s
ource of the noise, escape routes, and potential defensive weapons. In the blink of an eye, you’re ready to
 defend yourself against the threat, whatever it might be. When your mind perceives a potential threat—re


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al or imaginary—your body immediately prepares to respond. This automatic physiological response is de
signed to help you do one of three things to eliminate the threat: fight, flee, or freeze. As long as you’re in 
“protection mode,” it’s difficult to do anything other than fixate on the threat. Until you search the house, th
ere’s no way you’ll be able to go back to sleep—your body will only come out of protective mode after you’


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re sure there’s no threat to face. The subconscious choice to fight, flee, or freeze is largely dependent on 
your brain’s automatic Mental Simulation of the situation. If your brain predicts you can win if you fight, yo
u’ll fight. If your brain predicts you can “win” by getting away, you’ll flee. If your brain predicts you can’t get
 away, you’ll freeze in the hope that the threat will pass you by. Freezing makes your brain go into Threat


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Lockdown—protection mode—which makes it difficult to do anything other than fixate on the threat. Threa
t Lockdown is a constructive response designed to help you defend yourself, but like many ancient instinct
s, it often malfunctions in our modern environment. The threats you face are far less acute today, but they
 are often chronic. In the olden days, when the threat was a predator or an angry tribal chief, the lockdown


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response was constructive, since it focused our energy on staying alive and/or part of the tribe. Even tho
ugh the thoughts that run through our heads on a daily basis have little in common with those of our ancie
nt ancestors, the hardware those thoughts are running on—our brains —is still largely the same and is co
nstantly on the lookout for very old threats in a very new environment. As a result, we eat too much and e


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xercise too little, and the instinctive behaviors of fighting like hell, freezing, or running away aren’t very co
nstructive when dealing with an angry boss or an overdue mortgage payment. The recent turmoil in the st
ock market is an excellent example of Threat Lockdown in action. The stock market crash in late 2008 sp


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arked a flurry of panic and hand-wringing, even among people who were in no danger of losing their home
s or jobs. The mere possibility of bad things happening grinds businesses to a halt at the very time increa
sed productivity is needed to keep the firm in good shape. Instead of focusing on doing good work, emplo
yees spend most of their time and energy worrying about what the future holds and gossiping about who’s


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next on the chopping block, decreasing the overall amount of value created and increasing the likelihood 
that the firm’s future will get worse. Threat Lockdown can easily become a vicious cycle. If you’re ever in t
he unfortunate situation of having to lay off workers, it’s best to do it quickly, cleanly, and all at once. It’s b
est to make cuts swiftly, then reassure remaining employees that no more cuts will be made. Rumors of la


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yoffs or workers constantly wondering “if I’ll be next” is a recipe for Threat Lockdown. If you’re experiencin
g Threat Lockdown, don’t try to repress the threat signal. Many studies have shown that active repression 
doesn’t make a perception go away—instead, it makes the signals progressively stronger. Think of what a
 small child does when they want to get your attention, but you ignore them—they’ll continuously increase


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the commotion they make until they’re sure you’ve noticed them. Your brain does the same thing— repres
sion only makes the threat signals stronger. Consciously sending a mental “message received, safe to pro
ceed” signal to your brain is a simple and surprisingly effective way to make yourself stop fixating on the is
sue so you can consider appropriate responses. The key to dealing with Threat Lockdown is to convince y


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our mind that the threat no longer exists. You can do that in one of two ways: (1) you can convince your m
ind there was never actually any threat, or (2) you can convince your mind the threat has passed. Convinc
ing your mind there was never a threat is the equivalent of searching your house in the dark at midnight—
the search proves that no threats exist, so it’s safe to leave protective mode. Convincing your mind that th


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e threat has passed does the same thing—the threat is gone and can no longer harm you, so it’s safe to c
arry on. Sometimes it’s difficult to defuse Threat Lockdown, particularly if you’ve been in it for a long time. 
Because protective mode is physiological, it’s often best to use physiological means to calm yourself dow
n. Exercise, sleep, and meditation can help calm your mind by metabolizing or counteracting the stress ho


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rmones that have been flooding your body. When you’re feeling overwhelmed, going for a quick run or lifti
ng weights can do wonders for your state of mind. Notice the threat signal, then do what you can to prove 
to your mind the threat no longer exists, and you’ll break yourself out of Threat Lockdown. SHARE THIS 
CONCEPT: http://book.personalmba.com/threat-lockdown/ Cognitive Scope Limitation One death is a trag


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edy. A million deaths is a statistic. —KURT TUCHOLSKY, GERMAN SATIRIST If you ever have a chance
 to walk through the middle of Times Square in New York City during tourist season, you’ll quickly realize t
hat, to most of the people moving toward you, you are not a person. Instead of being a human being, you 
are an object—an obstacle standing between where they are and where they want to go. As a result, they’


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ll run you over with impunity. No matter how intelligent a person is, there’s an upper bound on the amount 
of information a single mind can process, store, and respond to. Above that limit, information may be store
d in abstract terms, but it’s processed differently from information related to that individual’s personal expe
rience or concerns. “Dunbar’s number” is a theoretical cognitive limit on the number of stable social relatio


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nships humans can maintain at one time. According to Robin Dunbar, a British anthropologist, humans ha
ve the cognitive capacity to keep track of somewhere around 150 close personal connections. Beyond thi
s limited circle, we start treating people less like individuals and more like objects, and groups of people b
eyond this limit are likely to splinter off into subgroups over time. If you’ve ever wondered why you don’t w


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rite letters to your elementary school classmates, Dunbar’s number is a decent hypothesis—you’re too bu
sy maintaining your ties to people who are in your immediate social circle. There’s some controversy rega
rding the actual quantity of connections where Cognitive Scope Limitation kicks in (the Bernard-Killworth 
median, a competing estimate, is 231), but there’s little doubt that such a limit exists. When a disaster stri


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kes somewhere around the world that affects millions of people, we may feel bad, but we don’t feel a milli
on times what we would feel if that disaster directly affected a close friend or family member. The more re
mote the connection, the less such an impact affects us individually. The tourists in Times Square aren’t e
vil—they’re just overwhelmed. Over 364,000 people pass through Times Square every day, 7 and our min


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ds simply aren’t capable of handling that much information at once. Abstractly, these people still realize th
at you’re a human being, but there’s so much going on in the area that it’s difficult to treat you like one. Th
e mind gets overwhelmed, so it starts simplifying reality to compensate. The same thing happens to execu
tives of large companies. Rationally, they may be aware that they’re responsible for hundreds of thousand


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s of employees and millions of shareholders, but no matter how intelligent they are, their brains simply are
n’t capable of processing the magnitude of that reality. As a result, executives can hurt a lot of people with
out even realizing it. The CEO of a large company may not particularly care if thousands of frontline worke


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rs are laid off—after all, they may not know any frontline workers personally. Whenever you see an execut
ive making a boneheaded decision like dumping toxic waste into a river millions of people drink from, or d
ownsizing thousands of jobs while handing out millions of dollars in bonuses, it’s probably not because th
ey’re rotten to the core. As scary as it sounds, it’s probably because they simply haven’t thought too much


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about it —the scope and scale of what they’re managing is too complex to handle, so their mind processe
s the decision abstractly instead of viscerally. Personalizing an issue is a way to hack this universal limitati
on. In the absence of brain upgrades, it’s not possible to directly expand the scope of information our min
ds are capable of processing. In order to get around this limitation, it’s useful to personalize decisions and


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issues by imagining they affect someone close to us. In the case of the boneheaded executive, they’d fee
l very different about their decision if their mother’s water was polluted, or their child’s job was downsized. 
Instead of abstractly considering the issue, personalizing it makes it easier to feel the effects of the decisi
on viscerally, which makes it easier to make better decisions. In Green to Gold, Daniel Esty and Andrew


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Winston describe several ways of making it easier to internalize the results of large decisions. The “newsp
aper rule” and “grandchild rule” are effective ways of personalizing the results of your decisions. The “new
spaper rule” is a simulation of the following: assume your decision was publicized on the front page of tom
orrow’s New York Times, and your parents and/or significant other read it. What would they think? Imagini


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ng the personal consequences of your decisions in this way is a much more accurate way to evaluate the 
impact of short-term decisions. The “grandchild rule” is a way of evaluating decisions with long-term cons
equences. Imagine that, thirty or forty years from now, your grandchild gives you feedback on the results 
of your decision. Will they laud you for your wisdom or reprimand you for your stupidity? Personalize the r


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esults of your decisions and actions, and you’ll be far less likely to run afoul of Cognitive Scope Limitation.
 SHARE THIS CONCEPT: http://book.personalmba.com/cognitive-scopelimitation/ Association In general,
 we are least aware of what our minds do best. —MARVIN MINSKY, COGNITIVE SCIENTIST AND ARTI
FICIAL INTELLIGENCE RESEARCHER AT MIT Who cares which golf clubs Tiger Woods uses? Who car
es which shoes Michael Jordan wears? Who cares which purse Paris Hilton is carrying? Your mind cares.


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Remember, your brain is taking in information all the time and is using it to create Patterns that describe 
how the world works. Rationally, these things may not matter—you probably know that using the same gol
f clubs Tiger Woods uses won’t magically correct your atrocious slice. When it comes time to buy golf club
s, however, your mind will be drawn to the clubs that make you feel good, and more likely than not, you’ll f


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ind the clubs Tiger uses quite appealing. The human mind stores information contextually, including cues l
ike Environment and correlation. Because the brain is a Pattern Matching machine, it’s constantly trying to
 figure out what’s associated with what. As a result, your mind effortlessly forms Associations—even betw
een things that aren’t logically connected. For decades, the Coca-Cola Company has been associating C


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oke with a single emotion: happiness. Do a quick search for Coke commercials on You Tube: you won’t fi
nd any images of layoffs or funerals. What you will find is a litany of happy moments: Adrien Brody cruisin
g in his car, parades of whimsical creatures celebrating as a bottle of Coke exits a vending machine, and 
Charlie Brown winning the race for a runaway Coke bottle balloon in the Macy’s Thanksgiving parade. Ev


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en holidays aren’t immune: the company largely invented the modern image of Santa Claus, who just so h
appened to be holding a bottle of Coke. It’s possible to influence behavior by using associative cues, even
 Associations that make no logical sense. Coca-Cola’s advertisements don’t convince soda consumers th
at Coke is better in some functional respect (“Now with 37 percent more sugar!”), but they do make peopl


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e feel good whenever they think about Coke. When a customer is standing in the supermarket deciding w
hich soft drink to buy, those feelings make a big difference in each customer’s final choice. Consider beer 
commercials, which usually feature attractive women and confident men. Your rational mind knows that dr
inking a certain type of beer won’t make you more attractive or confident, but Correlation is powerful—you


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r brain will make the Association anyway. As a result, beer ads influence behavior, even though no one ta
kes the images they contain seriously. Presenting your prospects with positive Associations can influence 
how they think about what you offer. Celebrity endorsements work because they tie into strong Associatio
ns people already have with the endorsers, associations that rub off on the product or service being endor


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sed. Everyone knows James Bond is a fictional character, but when Daniel Craig is featured wearing a tux
edo in a watch advertisement, the “sophisticated international spy” Association is automatically transferre
d to the timepiece. Cultivate the right Associations, and potential customers will want what you have even 
more. SHARE THIS CONCEPT: http://book.personalmba.com/association/ Absence Blindness Facts do n


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ot cease to exist because they are ignored. —ALDOUS HUXLEY, ESSAYIST AND AUTHOR OF BRAVE 
NEW WORLD Here’s a curious fact about human beings: we have a really hard time realizing that someth


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ing isn’t there. When I worked in P&G’s Home Care division, one of my first projects was testing the viabili
ty of a Product that prevented things from getting dirty. You still had to clean, but it took more time for thin
gs to get dirty again, so the Product saved the user significant time and effort. Once the Product went into 
testing, however, it was apparent that the idea wasn’t feasible. The Product genuinely worked, but users d


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idn’t realize it— they had a hard time believing the Product worked, since they couldn’t see anything happ
ening. After the test phase was complete, the project was canceled. Absence Blindness is a cognitive bias
 that prevents us from identifying what we can’t observe. Our perceptual faculties evolved to detect object
s that are present in the Environment. It’s far more difficult for people to notice or identify what’s missing.


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Examples of Absence Blindness are everywhere. Here’s a common example: great management is borin
g—and often unrewarding. The hallmark of an effective manager is anticipating likely issues and resolving
 them in advance, before they become an issue. Some of the best managers in the world look like they’re 
not doing much, but everything gets done on time and under budget. The problem is, no one sees all of th


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e bad things that the great manager prevents. Less skilled managers are actually more likely to be reward
ed, since everyone can see them “making things happen” and “moving heaven and earth” to resolve issue
s—issues they may have created themselves via poor management. Make a note to remind yourself to ha
ndsomely reward the low-drama manager who quietly and effectively gets things done. It may not seem li


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ke their job is particularly difficult, but you’ll miss them when they’re gone. Absence Blindness makes prev
ention grossly underappreciated. In the case of the Product I was working on, people had a hard time beli
eving that something they couldn’t see working was actually effective. If you’re trying to sell the absence o
r prevention of something, you’re fighting an uphill battle, even if your Product is great. Always state benef


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its in positive, immediate, concrete, and specific terms by focusing on things the user can directly experie
nce. Absence Blindness also makes it uncomfortable for people to “do nothing” when something bad happ
ens, even if doing nothing is the best course of action. Often, the best course of action is to choose not to 
act, but that’s often difficult for humans to accept emotionally. The economic “boom and bust” cycle most


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markets experience is partially a consequence of Absence Blindness. According to Ludwig von Mises in H
uman Action, economic “bubbles” are created when a government tries to encourage an economy to grow
 by artificially reducing interest rates, making it easier to borrow money. By making access to Capital abno
rmally easy, 8 this policy leads investors to speculate by paying abnormally high prices for assets they’d o


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therwise avoid, like tulips,9 dot-com companies with no revenue, 10 and risky mortgage-backed securities
.11 Eventually, the bubble “pops” when investors realize that the assets they’ve been speculating on aren’
t worth what they paid, leading to a sudden crash in the price of the overvalued asset. Because of Loss A
version, people start freaking out and start clamoring for an immediate solution to the collapsing market.


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More often than not, the “solution” is to reduce interest rates even more to encourage the economy to star
t growing again—a self-reinforcing Feedback Loop (discussed later) that ultimately does nothing but exac
erbate the issue by creating the conditions necessary for an even larger bubble to form down the road. To
 fix the issue, the best course of action is to stop artificially manipulating interest rates, which caused the i


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ssue in the first place. Unfortunately, Absence Blindness makes doing nothing psychologically uncomforta
ble— after all, “we can’t sit here and do nothing while the world burns!” As a result, people typically prefer 
the government to act, even if the action the government takes ultimately makes things worse. Experience
 makes it easier to avoid Absence Blindness. Experience is valuable primarily because the expert has a la


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rger mental database of related Patterns, and thus a higher chance of noticing an absence. By noticing vi
olations of expected Patterns, experienced people are more likely to get an “odd feeling” that things “aren’
t quite right,” which is often enough warning to find an issue before it becomes serious. In Sources of Pow
er: How People Make Decisions, researcher Gary Klein tells the story of a team of firefighters putting out


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a fire on the first floor of a house. When water was sprayed at the base of the fire, the fire didn’t respond a
s expected—it didn’t diminish at all. The chief noticed and ordered everyone out—something just didn’t fe
el right. A few minutes later, the house collapsed—the fire had started in the basement, destroying the fou
ndation. If the team had stayed inside, they would have died. That’s the power and benefit of experience.


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The only reliable way I’ve found to overcome Absence Blindness is Checklisting (discussed later). By thin
king in advance what you want something to look like and translating that into visible reminders you can r
efer to while making decisions, checklists can help you remember to look for the absence of qualities in th
e moment. (We’ll discuss creating Checklists in great detail in chapter 12.) SHARE THIS CONCEPT: http:


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//book.personalmba.com/absenceblindness/ Contrast The world is full of obvious things which nobody by 
any chance ever observes. —SIR ARTHUR CONAN DOYLE, AUTHOR OF THE SHERLOCK HOLMES B
OOKS If you walk into a department store to buy a business suit, you’re likely to notice a few options that


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appear to be abnormally expensive. The store will very rarely sell these suits—that’s not their purpose. Co
mpared to a $3,000 suit, a $400 suit doesn’t sound like a lot of money—even if the same suit could be pur
chased at another store for $200. The same principle applies to the order in which products are presented
 by the salesperson. After choosing a suit, you’ll be directed to shirts, shoes, and accessories. Compared


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to a $400 suit, what’s another $100 on shoes? $80 for a belt? $60 for a few shirts? $50 for a few ties? $40
 for a set of cuff links? Compared to the suit, the accessories seem inexpensive, so why not? Here’s what 
Jordan Smart, one of my clients, reported: I went shopping last year on Black Friday, looking to get some 
slightly more formal clothes . . . I went out with the intent of buying a set of shirts and two blazers. I though


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t for a while on buying ties to go with it, and decided that the one or two I had in my closet already would s
uffice. I went shopping at two stores. In the first, I picked out a set of shirts, and as I was leaving, the sale
sman asked if I needed ties to go with them. I politely told him no, and privately congratulated myself on st
icking to my resolution. At the second store, I tried on a few blazers and decided to purchase them. Again,


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the salesman asked if I needed ties to go with my blazers. At that point, I very clearly remember thinking 
about the price of the blazers and thinking to myself, “Well, I’m spending this much money anyway,” and p
roceeded to buy a set of ties. I didn’t think anything of it until I learned about Contrast. Looking back at the
 receipt, I realized I’d spent more on the ties than I had spent on the blazers. Our perceptions are influenc


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ed by information gathered from the surrounding environment. Is $10,000 a lot of money? It depends on y
our circumstances. If you have $10 in your bank account, $10,000 is an enormous sum. If you have $100,
000,000, it’s a rounding error. Our perceptual faculties are optimized to notice Contrast, not to compare w
hat we perceive with things that aren’t there, which is the root of Absence Blindness. Everything we notice


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and every decision we make is based on information gathered from the surrounding Environment.That’s 
why camouflage works—it reduces the contrast between an object and its surrounding Environment, whic
h makes it harder to notice. Contrast is often used to influence buying decisions. In the business world, co
ntrast is often used as pricing camouflage. In the case of the $60 shirt, it may be possible to buy the exact


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same shirt at another retailer for $40, but the less expensive shirt isn’t present in the store where the com
parison is taking place. What is present is the $400 suit, which makes the $60 shirt look like a bargain. Co
mpared with a $2,000 computer, a $300 extended warranty appears inexpensive, even though it increase
s the total purchase price by 15 percent. Compared with a $30,000 vehicle, spending $1,000 for leather s


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eats feels like a bargain. Compared with buying a $400,000 house, spending $20,000 to remodel the kitch
en feels like no big deal. Framing is a way to control the perception of Contrast. For example, I often use t
he phrase “$149,000 less than a top-tier business program” when marketing my online Business Crash C
ourse. Compared with buying a book, my course looks expensive; compared with the cost of an MBA pro


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gram, it’s a bargain. Take advantage of Contrast when presenting your offer, and you’ll increase the odds 
that your potential customers will view your offer favorably. SHARE THIS CONCEPT: http://book.personal
mba.com/contrast/ Scarcity The way to love anything is to realize it might be lost. —G. K. CHESTERTON,
 ENGLISH WRITER AND CHRISTIAN APOLOGIST Because of Conservation of Energy, people have a n


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atural tendency to decide to “do things later” unless there’s a compelling reason to act immediately. As a 
businessperson, “later” is a big issue, because “later” turns into “never” if the customer forgets about you. 
How can you encourage your customers to act immediately? Scarcity encourages people to make decisio
ns quickly. Scarcity is one of the things that naturally overcomes our tendency to conserve—if you want s


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omething that’s scarce, you can’t afford to wait without the risk of losing what you want. Loss Aversion en
sures that this possibility feels bad enough to prompt us to take action now. As a result, adding a Scarcity 
element to your offer is a great way to encourage people to take action. Scarcity makes people understan
d that they’ll lose something valuable if they wait, making it more likely they’ll choose to act immediately if


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they desire what is being offered. The more scarce the value, the more intense the desire. In 1996, Tickle 
Me Elmo was the hot toy of the Christmas season. Elmo was already a popular character, but limited qua
ntities of the toy drove parents into a buying frenzy. Normally rational people started spending hundreds o
f dollars on eBay for the toy and mobbing retailers when new stock became available. Here are a few way


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s you can add an element of Scarcity to your offer: 1. Limited Quantities—inform prospects that you’re off
ering a limited number of units for sale. 2. Price Increases—inform prospects that the price will go up in th
e near future. 3. Price Decreases—inform prospects that a current discount will end in the near future. 4. 
Deadlines—inform prospects that the offer is only good for a limited period of time. Scarcity that appears


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blatantly artificial can backfire. For example, putting an artificial limit on sales of e-books, downloadable so
ftware, or electronic music files makes no sense—everyone knows electronic files can be Duplicated infini
tely at essentially no cost, so the scarcity feels manipulative, which makes people want to buy from you le


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ss. Price increases with deadlines, on the other hand, tend to work well—raising the price after a certain n
umber of orders or a certain amount of time is a reasonable policy and is less likely to come across to the 
customer as unreasonable or manipulative. Add an element of Scarcity to your offer, and you’ll encourage
 people to buy now instead of “later.” SHARE THIS CONCEPT: http://book.personalmba.com/scarcity/ No


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velty Why is it that when I ask for a pair of hands, a brain comes attached? —HENRY FORD At the height
 of World War II, Norman Mackworth took Royal Air Force radar operators away from their jobs for a speci
al mission: staring at a clock for two hours at a time. Mackworth was a psychologist who specialized in stu
dies of vigilance—the ability to maintain high levels of Attention on a single object for long periods of time.


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Radar operators were natural test subjects—their job mostly consisted of looking at blips on a radar scre
en in a dark room for hours on end. Most of the time, very little on the radar screen changed. When somet
hing abnormal appeared on the screen, however, it could be critically important: inbound enemy airplanes
 on a bombing mission. The radar operator’s job was to be alert enough to notice anomalies immediately,


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but the task was extremely difficult—boredom often led to mistakes that cost lives. To simulate this challe
nging environment, Mackworth created the “Mackworth Clock,” a device designed to test how well people 
pay attention over time. The “clock” featured a second hand that worked like a normal clock, with a twist—
it would randomly skip a second, ticking two notches instead of one. The test subject’s job was to press a


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button every time they noticed the skip. Here’s what Mackworth found: after ten minutes of staring at the c
lock, the quality of the subject’s attention went down dramatically. The maximum period of sustained atten
tion even highly motivated operators (who were given substantial bonuses for performance) were able to 
sustain was thirty minutes—any longer, and they’d inevitably zone out. Novelty—the presence of new sen


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sory data—is critical if you want to attract and maintain attention over a long period of time. One of the rea
sons people can focus on playing games or surfing the Internet for hours at a time is novelty—every new 
viral video, blog post, Facebook update, Twitter post, and news report reengages our ability to pay attenti
on. In Brain Rules, John Medina shares how he’s able to keep the attention of his students effectively in cl


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asses that last more than an hour: he plans his class in modules that last no more than ten minutes. Each
 module starts with a Hook—an interesting story or anecdote, followed by a brief explanation of the key co
ncept. Following this format ensures that his audience retains more information and doesn’t zone out. (Th
at’s the primary reason this book is organized in short sections that take less than ten minutes to read.) E


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ven the most Remarkable object of attention gets boring over time. Human attention requires novelty to su
stain itself. Continue to offer something new, and people will pay attention to what you have to offer. SHA
RE THIS CONCEPT: http://book.personalmba.com/novelty/ 8 WORKING WITH YOURSELF To think is e
asy. To act is difficult. To act as one thinks is the most difficult. —JOHANN WOLFGANG VON GOETHE,


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POET, DRAMATIST, AND POLYMATH Your body and mind are the tools you use to get things done. Lea
rning how to work effectively with yourself makes accomplishing what you set out to achieve easier and m
ore enjoyable. In today’s busy business environment, it’s easy to get stressed about everything that needs
 to be done. Learning how to work effectively and efficiently can be the difference between a fulfilling care


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er and a draining one. In this chapter, we’ll discuss how to decide what to do, set and achieve goals, track
 your daily tasks, overcome resistance, and consistently get more productive work done without burning o
ut. SHARE THIS CONCEPT: http://book.personalmba.com/working-withyourself/ Monoidealism Just do it.
 —NIKE BRAND SLOGAN Much has been written in the past few years about the subject of productivity


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—how to get more done. Books like Getting Things Done, The Power of Less, and Master Your Workday 
Now! all propose different methods of achieving work-flow nirvana. When we’re trying to “be productive,” 
what exactly are we shooting for? Ideally, you want to focus the full powers of your energy and Attention o
n a single subject at a time. Monoidealism is the state of focusing your energy and attention on only one t


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hing, without conflicts. Monoidealism is often called a “flow” state, a term coined by psychologist Mihaly C
sikszentmihalyi. This is the state of human attention at its most productive: clear, focused Attention and ef
fort directed at one (and only one) subject for an extended period of time. P. J. Eby, a former computer pr
ogrammer who specializes in helping people use their minds more productively, defines Monoidealism thi


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s way: When somebody says “just do it,” they are trying to communicate that you should not do anything e
lse. It might better be phrased as, “Do it, without thinking about anything, not even about what you’re doin
g. In fact, don’t even do it, just watch yourself doing it, but don’t actually try to do anything.” Properly, “mo
noidealism” is simply the state in which you have exactly one thing on your mind, with no conflicts. It’s a c


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ondition that results in one naturally taking action in relation to the thought, rather than a technique in and 
of itself . . . The usefulness of a particular [productivity] technique for a particular individual will largely dep
end on whether it addresses their particular stumbling blocks in achieving a monoideal state. When you’re


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“just doing it,” you’re in “flow”—a Monoideal state. There are no distractions, no interruptions, no self-judg
ments, no doubts. When your mind is in 100 percent “do” mode, you inevitably get a lot done. So how exa
ctly do you get yourself into a Monoideal state? First, eliminate potential distractions and interruptions. De
pending on the level of cognitive activity required to complete your work, it’ll take ten to thirty minutes befo


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re your mind becomes absorbed in what you’re doing. Phone calls, coworkers “dropping by to pick your br
ain,” and other unanticipated demands on your Attention will break your Monoideal state, so priority numb
er one is ensuring that you don’t get distracted. I often use earplugs or play instrumental music to eliminat
e background noise, and disconnect the phone when I don’t want to be interrupted. Turning off my Interne


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t connection (see Willpower Depletion) while I’m writing also makes it much easier for me to maintain a M
onoideal state. Otherwise, I’m way too likely to browse the Web when the going gets tough. Using similar 
Guiding Structure techniques is a good way to prevent your Attention from straying. Second, eliminate inn
er Conflicts. Sometimes it’s difficult to get started because you’re experiencing a Conflict between two con


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trol systems in your mind. Eliminating these Conflicts before you start working helps you achieve a Monoi
deal state much more quickly. If you feel resistance to getting started, it’s useful to spend some time and 
energy exploring that Conflict more deeply before you keep working. While writing this book, I experience
d several periods of frustrating resistance. Instead of trying to ignore the resistance or push through it (a s


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urefire way to experience Willpower Depletion), exploring that resistance using Mental Simulation and Rei
nterpretation helped me uncover a hidden Conflict: I wasn’t happy with how my work was turning out, and 
doing more of what wasn’t working would be a waste. Spending some time revising the structure of the bo
ok resolved that Conflict, simultaneously making the book better and eliminating the source of the resistan


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ce. Third, kick-start the Attention process by doing a “dash.” Since it can take ten to thirty minutes to get in
to the zone, setting aside ten to thirty minutes for a quick burst of focused work can make it much easier t
o get into the zone quickly. If you’re not productive by the time the dash is over, you have permission to st
op and do something else. That’s rarely the case: once you get started, it’s easy to keep going. One techn


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ique I often use is called the Pomodoro Technique,1 named by its creator, Francesco Cirillo, after those fu
nny little kitchen timers shaped like a tomato (pomodoro in Italian). Here’s how the technique works: Set a
 kitchen timer for twenty-five minutes. Your job is to focus on a single task for the entire duration—if you g
et stuck, just keep focusing until the timer goes off. After the twenty-five-minute work period is over, you c


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an take a five-minute break, bringing the total duration to half an hour—a block of time any of us can fit int
o our schedule here and there. What I love about the Pomodoro Technique is that it accomplishes two go
als at once: it makes it easy to get started, and it gives you permission to ignore distractions. Even if you’r
e not excited about what you need to do, saying to yourself “it’s only twenty-five minutes” is a great way to


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overcome the initial resistance to getting started. The Pomodoro Technique is also a good excuse to igno
re distractions: if the phone rings, reminding yourself that “a Pomodoro is indivisible” is an effective way to
 give yourself permission to ignore it, maintaining your Monoideal state. If you eliminate distractions and C
onflicts before you start your dash, you’ll naturally transition into a Monoideal state a few minutes into the


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work period. Meditation is a form of Monoidealism “resistance training.” Simple meditations like focusing o
n your breathing, then consciously (and nonjudgmentally) bringing your focus back to your breath if and w
hen your Attention strays is a way to consciously practice the skills used to maintain your Attention in the f
ace of distractions. As little as ten minutes of simple meditation every day can dramatically improve your a


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bility to focus. SHARE THIS CONCEPT: http://book.personalmba.com/monoidealism/ Cognitive Switching
 Penalty Rule your mind or it will rule you. —HORACE, FIRST-CENTURY B.C. ROMAN POET Every proj
ect and every task that you decide to work on takes a certain amount of Attention, energy, and focus to ge
t it done. The question is: how can you accomplish everything you need to do most effectively? Many peo


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ple rely on multitasking: trying to do more than one thing at the same time. While many people assume thi
s makes them more efficient, Monoidealism and multitasking are complete opposites. Neurologically, it’s i
mpossible for your brain to multitask. When you’re trying to do more than one thing at a time, you’re not re
ally parallel processing—you’re rapidly switching your Attention from one thing to another. While you’re pa


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ying Attention to Task A, you’re ignoring Task B until you switch back to it. As a result, productive multitas
king is a myth. According to several recent neurological studies,2 the more things you try to pay Attention 
to at any given time, the more your performance at all of them suffers. That’s why it’s never a good idea to
 talk on a cell phone while driving—by trying to focus on two things at once, you decrease your reaction ti


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mes to the same level as someone who’s driving while intoxicated.3 Every time you switch the focus of yo
ur Attention from one subject to another, you incur the Cognitive Switching Penalty. In order to take action
, your brain has to “load” the context of what you’re doing into working memory. If you constantly switch th


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e focus of your Attention, you’re forcing your brain to spend time and effort thrashing, loading and reloadin
g contexts over and over again. That’s why it’s possible to spend an entire day multitasking, get nothing d
one, and feel exhausted at the end—you’ve burned all of your energy context-switching instead of making
 progress. The Cognitive Switching Penalty is a Friction cost (discussed later): the less you switch, the low


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er the cost. That’s why Monoidealism is so efficient— by focusing your Attention on only one thing at a tim
e, you’re allowing your brain to load the context into working memory once, which means you can focus y
our energy on actually accomplishing the task at hand. To avoid unproductive context switching, a batchin
g strategy is best. Eliminating distractions can help prevent unnecessary interruptions, but it’s entirely pos


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sible to waste energy mentally thrashing even if you have the entire day free. The best approach to avoid 
unnecessary cognitive switching is to group similar tasks together. For example, I find it difficult to make p
rogress on creative tasks (like writing or shooting training videos) between client calls. Instead of attempti
ng to juggle both responsibilities at the same time, I batch them together. I typically focus on writing for a f


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ew uninterrupted hours in the morning, then batch my calls and meetings in the afternoon. As a result, I c
an focus on both responsibilities with my full Attention. I use a similar strategy when doing chores, updatin
g financial reports, or running errands: I’ll dedicate a few hours solely to finishing those tasks. As a result, 
I accomplish everything I need to do in very little time. Paul Graham, a venture capitalist, programmer, an


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d essayist, calls this batching strategy “Maker’s Schedule/Manager’s Schedule.”4 If you’re trying to create 
something, the worst thing you can possibly do is to try to fit creative tasks in between administrative task
s—context switching will kill your productivity. The “Maker’s Schedule” consists of large blocks of uninterr
upted time; the “Manager’s Schedule” is broken up into many small chunks for meetings. Both schedules


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serve different purposes—just don’t try to combine them if your goal is to get useful work done. Eliminate 
unproductive context switching, and you’ll get more done with less effort. SHARE THIS CONCEPT: http://
book.personalmba.com/cognitiveswitching-penalty/ Four Methods of Completion I am only one, but I am o
ne. I cannot do everything, but I can do something. And because I cannot do everything, I will not refuse t


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o do the something I can do. What I can do, I should do. And what I should do, by the grace of God, I will 
do. —EDWARD EVERETT HALE, NINETEENTH-CENTURY UNITARIAN CLERGYMAN AND WRITER T
here are really only four ways to “do” something: completion, deletion, delegation, and deferment. Comple
tion—doing the task—is the option most people think about. If you keep a to-do list, you’re probably assu


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ming that those tasks are all your responsibility to get done. That’s not quite true—completion is best for i
mportant tasks that only you can do particularly well. Everything else can be handled in another manner. 
Deletion—eliminating the task—is effective for anything that’s unimportant or unnecessary. If something o
n your task list is unimportant, don’t feel bad about eliminating it. If it’s not worth doing, it’s not worth doing


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well or quickly—don’t hesitate to get rid of it. Delegation—assigning the task to someone else—is effectiv
e for anything another person can do 80 percent as well as you can. In order to delegate, you must have s
omeone to delegate to. Employees, contractors, or outsourcers can all help you get more things done by 
completing tasks on your behalf. In preparing my online Personal MBA Business Crash Course,5 Kelsey


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and I shot the videos, but we enlisted Kelsey’s grandmother—an insanely fast typist—to help us create tra
nscripts of each of the videos. As a result, we were able to complete the entire course in record time, with
out feeling overwhelmed. If you don’t have anyone to delegate routine tasks to, working with a virtual assi
stant company can be quite useful. For less than $100 a month, you can enlist the help of a team of profe


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ssionals to help you get things done. If you have little experience with delegation, it’s an experiment worth
 trying.6 Deferment—putting the task off until later—is effective for tasks that aren’t critical or time depend
ent. Don’t feel bad about putting some things off— the best way to bog yourself down is to try to handle to
o many things at the same time. Saving noncritical tasks for later is a good way to keep your attention and


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energy focused on what’s most important. In Getting Things Done, David Allen recommends keeping a “s
omeday/ maybe” list of things you’d like to do someday but that aren’t that important right now. Creativity r
esearcher Scott Belsky recommends a similar approach in Making Ideas Happen: create a “back burner” l
ist of tasks you want to get to eventually but that aren’t a priority right now. Periodically reviewing this list


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when you’re looking for something new or exciting to do is quite useful. Use all four options when processi
ng your to-do list, and you’ll get more done than you ever thought possible. SHARE THIS CONCEPT: http
://book.personalmba.com/4-methods-ofcompletion/ Most Important Tasks (MITs) You’ve got to think about
 the big things while you’re doing small things, so that all the small things go in the right direction. —ALVI


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N TOFFLER, TECHNOLOGY RESEARCHER AND FUTURIST Not all tasks are created equal—some ar
e more important than others. You only have so much time and energy to get things done each day. Of all
 of the things that are on your to-do list right now, some of them are really important, and some of them re


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ally aren’t important. If you want to make the most of your limited time and energy, it pays to focus on com
pleting the tasks that will make the biggest difference first, before spending your time and energy on anyth
ing else. A Most Important Task (MIT) is a critical task that will create the most important results you’re loo
king to achieve. Everything on your plate is not critically important, so don’t treat everything on your task li


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st equally. By taking a few minutes to identify a few tasks as particularly important, you’ll make it easier to 
focus on achieving them first. At the beginning of every day, create a list of two or three MITs, then focus 
on getting them done as quickly as possible. Keep this list separate from your general to-do list or task tra
cking system. I typically use a 3 × 5 index card or David Seah’s “Emergent Task Planner,”7 a free downlo


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adable PDF that makes it easy to plan your day. When creating your list of MITs, it’s useful to ask a Self-E
licitation question : “What are the two or three most important things that I need to do today? What are the
 things that—if I got them done today—would make a huge difference?” Write only those tasks on your MI
T list, then try to get them done first thing in the morning. Combining this technique with Parkinson’s Law (


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discussed later) by setting an artificial deadline is extremely effective. If you set a goal to have all of your 
MITs done by 10:00 a.m., you’ll be amazed at how quickly you can complete the day’s most important tas
ks. Having a list of two or three MITs helps you maintain a Monoideal state by giving you permission to sa
y no to interruptions that aren’t as important. If you’re working on your MITs and someone calls you, it’s e


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asier to ignore the call or tell the caller, “I’m working under deadline—I’ll get back to you later.” By definitio
n, everything that’s not an MIT is not as important, so it’s easier to say no to noncritical interruptions. Achi
eve your MITs as quickly as possible, and then you’ll have the rest of the day to handle anything else that 
comes up. SHARE THIS CONCEPT: http://book.personalmba.com/most-importanttasks/ Goals Setting a


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vague goal is like walking into a restaurant and saying, “I’m hungry. I want some food.” You’ll stay hungry 
until you order something. —STEVE PAVLINA, AUTHOR OF PERSONAL DEVELOPMENT FOR SMART
 PEOPLE AND BLOGGER AT STEVEPAVLINA.COM Much has been made in business literature about t
he importance of having Goals. Well-formed Goals accomplish two things: they help you visualize what yo
u want and make you excited about achieving it. A Goal is a statement that clarifies precisely what you wa


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nt to achieve, which makes it easy for your brain to use Mental Simulation to Visualize what achieving that
 Goal looks like. If the End Result you’re looking for is vague or fuzzy, you’re making it difficult for your mi
nd’s automatic planning systems to find ways to get what you want. Well-formed Goals also play a key rol
e in Motivation—the more clearly defined your Goal, the easier it is to get excited about doing the things r


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equired to get what you want. Fuzzy Goals like: “I want to climb a mountain” aren’t very helpful, because t
hey don’t give your brain any material to work with. Which mountain? Where? When? Why? Without answ
ers to these questions, you probably won’t do anything at all. Well-formed Goals pass the “Everest Test.” 
Useful Goals look like this: “I want to climb to the summit of Mount Everest before my fortieth birthday, an


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d take a panoramic picture to frame on my wall as a trophy.” This Goal is easy for your brain to simulate—
Mount Everest is in Nepal, so you’ll have to arrange travel. You’ll also have to improve your climbing skills
, find a guide, buy equipment, purchase a suitable panoramic camera, etc. Once you make a conscious D
ecision to achieve the Goal, your mind automatically starts finding ways to get it done. Goals are most use


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ful if they’re Framed in a Positive, Immediate, Concrete, Specific (PICS) format: � Positive refers to Motivati
on—your Goal should be something you move toward, not away from. Goals like “I don’t want to be fat an
ymore” are a recipe for Threat Lockdown—you’re reinforcing the negative instead of using Reinterpretatio
n to change your mind’s prediction to get excited about improving. For best results, eliminate Conflicts firs


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t, then move toward what you want to achieve. � Immediate refers to time scale: your Goals should be thin
gs that you decide to make progress on now, not “someday” or “eventually.” If you don’t want to commit to
 working on a particular Goal now, put it on your someday/maybe list and focus on something else. � Concr
ete means you’re able to see the results in the real world. Goals are achievements—you should know wh


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en you’ve accomplished what you set out to achieve. Setting Goals like “I want to be happy” won’t work b
ecause they’re not concrete— how would you know when you’re done? When you reach the top of Mount
 Everest, you’ve achieved something concrete in the real world—that’s concrete. � Specific means you’re a
ble to define exactly what, when, and where you’re going to achieve your Goal. Climbing Mount Everest o


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n a certain date in the near future is specific, which makes it easy for your mind to plan exactly how you’ll 
go about accomplishing it. For best effect, your Goals should be under your control. Goals like “losing twe
nty pounds” are soul crushing because they’re not directly under your control—losing weight is a result, n
ot an effort. If your weight randomly moves up a few pounds on a given day, it’s easy to feel defeated, eve


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n though you had no choice in the matter. For best results, make your Goals actions that are within your L
ocus of Control (discussed later), like doing a minimum of thirty minutes of exercise every day and controll


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ing the number of calories you consume. To track your Goals, any simple notebook or reference system 
will do. Personally, I capture all of my Goals in a simple text file, which I print out and keep in my to-do not
ebook. Whenever I’m thinking about what I need to do, I have my list of Goals handy for easy reference, 
which makes it easy to determine which tasks are most important. It’s perfectly okay to change your Goal


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s. Sometimes we think we want something, only to find out later that we don’t want it so much anymore. D
on’t feel bad about that—it’s called learning. If you find yourself working toward a Goal you no longer feel 
good about, work on something else. SHARE THIS CONCEPT: http://book.personalmba.com/goals/ State
s of Being I may not have gone where I intended to go, but I think I have ended up where I intended to be.


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—DOUGLAS ADAMS, HUMORIST AND AUTHOR OF THE HITCHHIKER’S GUIDE SERIES One of the 
mistakes I constantly see people making when setting Goals is assuming everything is an achievement. T
hink of statements like “I want to be happy,” “I want to feel excited,” and “I want to be successful.” How do
 you know if you’ve achieved what you set out to do? Can you really achieve happiness, excitement, or su


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ccess if your day-to-day experience changes? A State of Being is a quality of your present experience. E
motional experiences aren’t achievements because they fluctuate over time—you can be happy right now
 and upset an hour from now. Accordingly, “being happy” is not an achievement—it’s a quality of your pre
sent experience. States of Being are decision criteria, not Goals. It’s okay to want to “be happy” or “be suc


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cessful,” but treating these desires as Goals is a recipe for frustration. Instead of treating these states as 
achievements, it’s far better to think of them as decision criteria—ways of understanding whether or not y
our actions are leading to your desired results. States of Being help you answer the question “Is what I’m 
doing right now working?” For example, if you want to feel happy, you may notice that spending time with


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close friends and family members creates the experience you want, so making time for those things is ob
viously important. If you want to feel calm, but your job is making you stressed out all the time, it’s clear th
e situation needs to change—what you’re doing isn’t working. Breaking down complex States of Being int
o smaller parts is even more useful. Instead of using complex States of Being like “success” and “happine


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ss” as decision criteria, it’s far better to decide what these states actually mean to you. For example, I defi
ne “being successful” as “working on things I enjoy with people I like,” “feeling free to choose what I work 
on,” and “having enough money to live without financial stress.” Together, these States of Being provide a
 much more useful definition of success—if that’s how I’m experiencing the world, I’m “successful.” The sa


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me goes for “happiness.” Instead of being a single State of Being, “being happy” is a combination of “havi
ng fun,” “spending time with people I enjoy,” “feeling calm,” and “feeling free.” When those States of Being
 describe my experience in the present moment, I’m “happy.” Breaking down “happiness” into its compon
ent parts helps me ensure I’m doing things that will help me experience it more fully and more often. Deci


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de what States of Being you want to experience, and you’ll have a powerful set of decision criteria you ca
n use to evaluate the results of your actions in an entirely new and useful way. SHARE THIS CONCEPT: 
http://book.personalmba.com/states-of-being/ Habits We are what we repeatedly do. Excellence, then, is 
not an act, but a habit. —WILL DURANT, HISTORIAN, PARAPHRASING ARISTOTLE, ANCIENT GREE


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K PHILOSOPHER What about things you want to do on a daily basis, like exercising? Is that a Goal or a 
State of Being? Neither, actually. Habits are regular actions that support us. Exercising, brushing your tee
th, taking vitamins, following a particular diet, or keeping in touch with friends and family are all examples 
of Habits that keep us happy and healthy. Due to the power of Accumulation, small Habits can add up to


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huge results over time. Habits typically require a certain amount of Willpower to create. Therefore it’s best
 to use the techniques we discussed in the section on Guiding Structure to make it easier to instill the Hab
its you want to adopt. If you want to go to the gym first thing in the morning, packing your gym bag and lay
ing out workout clothing the night before makes it easier to go, since you’ve structured your environment t


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o require less effort to act. Habits are easier to install if you look for triggers that signal when it’s time to ac
t. For example, if you want to take vitamins, it’s easier to remember to take them if you use another habitu
al action as a trigger for the action. Instead of relying on your mind to remember to take your vitamins in t
he middle of the day, you can use brushing your teeth in the morning or evening as a reminder. For best r


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esults, focus on installing one Habit at a time. Remember, you only have so much Willpower to use each 
day, and overriding your default mode of action depletes it quickly. If you try to install too many Habits at t
he same time, you probably won’t succeed at adopting any of them for long. Focus on installing one Habit
 until taking action feels automatic, then move on to the next. SHARE THIS CONCEPT: http://book.perso


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nalmba.com/habits/ Priming Seek, and ye shall find. —MATTHEW 7:7 Have you ever been interested in a
 particular type of car, only to start noticing them everywhere? I certainly have—it feels like someone sudd
enly unloaded hundreds of the exact make and model of the car you like all over the highway. That’s not t


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rue, of course—the universe isn’t playing tricks on you. The cars were always there; you just never notice
d them before. Before you decided you were interested in a particular type of car, your brain filtered those
 cars out of your awareness. Once you became interested, however, your brain stopped filtering out that i
nformation, and you started noticing every time that particular car drove by. In a sense, you programmed


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your brain to notice certain things about the Environment around you. All it took was becoming interested i
n something specific to remove the filter. Priming is a method of consciously programming your brain to al
ert you when particular information is present in your Environment. One of the fascinating ramifications of 
our brain’s Pattern Matching function is that we’re constantly scanning the Environment for useful informat


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ion. If you tell your mind specifically what you want to find, it will alert you whenever your senses notice it. 
Priming is a way to consciously influence your brain’s Pattern Matching capabilities. By taking a few mom
ents to consciously decide what you’re interested in and what you’re looking for, you can program your mi
nd to alert you when it notices something relevant. Some people call this intuition —Priming is how you co


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nsciously put your intuition to productive use. Here’s an example of how I use Priming: in the book 10 Day
s to Faster Reading, Abby Marks-Beale recommends a technique I refer to as purpose setting: taking a fe
w minutes before you start reading to figure out (1) why you want to read this material and (2) what kind o
f information you’re looking for. Jotting down a few notes before picking up the book reinforces exactly wh


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at you’re looking to find. After defining your purpose, you then pick up the book and flip through it quickly, 
paying particular Attention to the table of contents, section headings, and index—condensed sources of in
formation about what the book contains and how the material is structured. Jotting down terms and conce
pts that appear to be particularly important helps prime your brain to notice them when they appear later.


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This process only takes a few minutes, but the impact it has on your reading speed is profound. Once you
’ve Primed your mind to notice important concepts, you can work your way through the entire book at light
ning speed. As you read, your brain automatically filters out unimportant material and homes in on the ma
terial you’re particularly interested in learning. As a result, it’s possible to extract most of the useful conten


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t in almost any nonfiction book in less than twenty minutes. When I go to a library or bookstore, this techni
que allows me to read several books in less than an hour. Without using this method, there’s no way I cou
ld have created the Personal MBA reading list as it exists today, let alone written this book. One of the wa
ys people “get lucky” when they’re working toward a particular Goal is via Priming. One of the reasons Go


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al setting is useful is because it’s an easy way to Prime your brain to look for things that will help you get 
what you want. If your goal is to climb Mount Everest, you’re far more likely to notice when tickets to Nepa
l are 70 percent off while browsing a travel Web site. If you read the same thing before setting the Goal, y
ou’d probably filter it out—you’d have no reason to pay Attention. Take some time to consciously Prime y


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our brain to notice what’s important to you, and you’ll inevitably find it. SHARE THIS CONCEPT: http://bo
ok.personalmba.com/priming/ Decision At the moment of every day I must decide what I am going to do t
he next moment; and no one can make this decision for me, or take my place in this. —JOSÉ ORTEGA Y
 GASSET, PHILOSOPHER AND ESSAYIST A Decision is the act of committing to a specific plan of actio


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n. The word “decide” comes from the Latin decidere, which means “to cut off.” When you make a decision
, you’re cutting off the other possible avenues that you could explore, leaving only the path you’re committ
ing to. If you’re not cutting off viable options, you’re not really making a Decision. No matter how good you
r personal productivity system is, it can’t make decisions for you. No matter how sophisticated your task-tr


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acking system is, it will never be able to tell you the best thing to do at any given moment. Constructing a 
system to make decisions for you is a pipe dream—all systems can do is help provide information you can
 use to make better decisions. Making the decision will always be your responsibility. No Decision, large o
r small, is ever made with complete information. Since we can’t predict the future, we often attribute the fe


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eling of indecisiveness to a lack of information. What’s really happening is mental thrashing—your forebrai
n’s job is to resolve ambiguities and make decisions, so your midbrain will continue to send signals until y
our forebrain does its job. Once a decision is made—whatever it is—the thrashing stops. Don’t feel you ne
ed to have all of the information before you decide—the world is too complicated to make accurate predict


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ions. Retired general Colin Powell famously advocates collecting half of the information available, then ma
king a decision, even though your information is clearly incomplete. “Don’t wait until you have enough fact
s to be 100 percent sure, because by then it is almost always too late . . . Once [you’ve acquired 40 to 70 
percent of the available information], go with your gut.”8 If that’s a winning strategy for life-and-death battl


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e decisions, it’ll work for life’s daily decisions as well. Collect just enough information to make an informed
 decision, then make your Decision and move forward. Failure to make a Decision is itself a decision. Life 
doesn’t stop if you refuse to choose—the world will keep moving forward, and you may be forced to take a


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ction by default. Abdicating responsibility for your Decisions doesn’t mean you’re not making them—you’r
e just allowing yourself to be a victim of circumstance. For best results, make your Decisions clearly and c
onsciously. In my experience, many people have difficulty figuring out what to do because they hesitate to
 actually make a decision—Loss Aversion prompts them to leave all of their options open, “just in case.”


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Without a decision, however, their brain can’t use Mental Simulation to figure out how to get from where th
ey are now to where they think they want to be, so their minds thrash around unproductively. Simply sayin
g to yourself, “I am deciding to do X right now,” makes it much easier to proceed. Once a Decision is finall
y made, your brain’s Mental Simulation planning circuits will kick into gear, and you’ll start moving again. If


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you’re having difficulties making a Decision, Steve Pavlina, the author of Personal Development for Smar
t People, recommends using this question as the tiebreaker: “Out of the available options, which experien
ce do I want to have?” If you’re having a difficult time making a particular decision, it’s probably because y
our brain is having a hard time figuring out which one is best. It’s an uncomfortable situation, but what it re


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ally means is that it doesn’t really matter which one you choose. If that’s true, you can simply choose the 
experience you find more interesting. When Kelsey received an enticing job offer in New York City, we sp
ent weeks torn between staying in Cincinnati and moving to the big city. There were many uncertainties in
volved with moving: Where would we live? Could we afford it? What about my job? It was enough to give


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us both a bad case of Threat Lockdown. In the end, we realized there wasn’t a clear winner, so it didn’t re
ally matter which one we chose. Living in New York was an experience we both wanted to have, so we de
cided to move. Almost immediately, we felt a sense of clarity and relief. Instead of continuing to thrash, m
aking a Decision allowed us to move forward, even in the face of Uncertainty. SHARE THIS CONCEPT: h


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ttp://book.personalmba.com/decision/ Five-Fold Why Ask the next question, and the one that follows that, 
and the one that follows that. —THEODORE STURGEON,AUTHOR OF MORE THAN HUMAN Very ofte
n, we’re not consciously aware of why we want what we want. Conducting a “root cause analysis” is a use
ful way to discover the motivations behind our desires. The Five-Fold Why is a technique to help you disc


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over what you actually want. Instead of taking your desires at face value, examining the root cause of wha
t you want can help you define your core desires more accurately. Applying the Five-Fold Why is easy: wh
enever you set a Goal or objective, ask yourself why you want it. If you want to become a millionaire, ask 
yourself why you want to have a million dollars. Don’t try to force an answer—just ask yourself the questio


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n in a spirit of curiosity, and wait until your mind generates a response on its own. When your mind provid
es an answer, ask “why?” again. Continue to ask yourself why until you get a “because I want it” response
, which indicates you’ve reached the root cause of your original Goal. Here’s an example of how to apply t
he Five-Fold Why to the classic Goal, “I want to be a millionaire”: 1. Why do I want a million dollars? Beca


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use I don’t want to be stressed about money. 2. Why don’t you want to be stressed about money? So I do
n’t feel anxious. 3. Why don’t you want to feel anxious? So I feel secure. 4. Why do you want to feel secur
e? So I feel free. 5. Why do you want to feel free? Because I want to feel free. The root desire isn’t having
 a million dollars—it’s feeling free. Is it possible to feel free without having a million dollars? Absolutely—th


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ere are many ways to feel free that have absolutely nothing to do with money. Taking an alternate approa
ch that addresses the real desire may be more effective than your original Goal. Discover the root causes 
behind your Goals, and you’ll discover new ways to get what you actually want. SHARE THIS CONCEPT:
 http://book.personalmba.com/five-fold-why/ Five-Fold How Go as far as you can see; when you get there


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you’ll be able to see farther. —THOMAS CARLYLE, ESSAYIST AND HISTORIAN After applying the Five-
Fold Why, you’ll probably discover that what you ac tually want is quite different from what you thought yo
u wanted. Now that you’ve identified the root cause of your original Goals, it’s time to figure out how to get
 what you actually want. The Five-Fold How is a way to connect your core desires to physical actions. Let’


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s use the previous example: the core desire is to feel free. How would you go about doing that? 1. Paying 
off an outstanding debt 2. Reducing your work hours, finding another position, or becoming an entreprene
ur 3. Moving to a new city or country 4. Breaking off a restricting personal relationship Once you find a “ho
w” that looks like a good idea, ask “how” again. Let’s say that quitting your job and starting a business wo


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uld give you the greatest sense of freedom. How would you go about doing that? Fill in the details, and wh
at was at first a fuzzy idea becomes more and more clearly defined. Continue asking “how” until you’ve cl
early defined your plan in terms of Next Actions (discussed below). The purpose of the Five-Fold How is t
o create a complete chain of actions from your big idea all the way down to things that you can do right no


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w. Done properly, each action gives you an experience of what you want as you do it. If paying off a debt 
would make you feel free, connecting the dots in this way enables you to feel more and more free every ti
me you make a payment, which makes it much easier to keep going. Connect your big Goals to small acti


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ons you can take now, and you’ll inevitably achieve what you set out to accomplish. SHARE THIS CONC
EPT: http://book.personalmba.com/five-fold-how/ Next Action If we attend continually and promptly to the l
ittle that we can do, we shall ere long be surprised to find how little remains that we cannot do. —SAMUE
L BUTLER, NINETEENTH-CENTURY NOVELIST Often, what we want to achieve can’t be done in a singl


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e sitting. Projects are Goals that take more than one action to complete, and the larger the project is, the 
more difficult it is to anticipate all of the actions that must be done. Climbing Mount Everest is a project—o
ne fraught with complexity and Uncertainty. How do you work on a project so large it threatens to overwhe
lm you? Simple: focus only on the action you need to take next to move toward your Goal. The Next Actio


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n is the next specific, concrete thing you can do right away to move a project forward. You don’t have to k
now everything that must be done to make progress on a project—all you need to know is the very next th
ing you can do to move the project forward. David Allen, the author of Getting Things Done, coined the ter
m to describe one of the core steps of his “fundamental process”: 1. Write down a project or situation that


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is most on your mind at this moment. 2. Now describe in a single written sentence your intended desired o
utcome for this problem or situation. What needs to happen to mark this “done”? 3. Next, write down the v
ery next physical action step required to move the situation forward. 4. Put those answers in a system you
 trust. According to Allen, these questions help you clarify exactly what “done” and “doing” look like. If you


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define what “done” looks like, you can focus your attention and energy on “doing” the things that will get y
ou to “done.” Writing this book was a massive undertaking—it took me years to compile the research and 
a little over a year to actually write the text. “Write the book” is not an action—it’s a project. There’s no wa
y I could’ve finished the manuscript in one sitting, but it was possible to write a small section of the book in


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less than an hour. After breaking up the book into well-defined sections, it was much easier to make prog
ress, since each individual task was less overwhelming. To keep yourself from feeling overwhelmed, track
 your projects and tasks separately. Here’s what I do: I always carry around a notebook that contains a 3 
× 5 index card.9 The card contains a short list of my active projects. The notebook contains my to-do list: t


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he next actions that will move my projects forward, which I process using a system called “Autofocus,” whi
ch was created by Mark Forster. 10 The system helps me use my intuition to identify what I can do right n
ow to make progress. As long as my projects are tied to my Goals and are aligned with my preferred Stat
es of Being, it’s only a matter of time before I complete them. Focus on completing the Next Action, and y


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ou’ll inevitably complete the entire project. SHARE THIS CONCEPT: http://book.personalmba.com/next-a
ction/ Externalization Words are a lens to focus one’s mind. —AYN RAND, PHILOSOPHER AND AUTHO
R OF ATLAS SHRUGGED AND THE FOUNTAINHEAD One of the quirks about how your mind works is t
hat it handles information from outside your head better than the thoughts that are rattling around inside y
our head. If you’ve ever worked with a personal trainer or coach, you know what I mean. When exercising


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by yourself, it’s very easy to listen to the little voice inside your head that says, “This really hurts—you sh
ould stop”—even if you’ll get better results by continuing. When working with someone else, the little voice
 goes away, since there’s a person in your Environment who’s encouraging you to push yourself just a littl
e bit more. As a result, you get a better workout. Since we respond more easily to stimuli in our Environm


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ent than our own internal thoughts, there’s a simple method we can use to improve our productivity—we c
an convert our internal thoughts into an external form our minds can use more effectively. Externalization t
akes advantage of our perceptual abilities in a very intelligent way. By converting our internal thought proc
esses into an external form, Externalization essentially gives us the ability to reinput information into our o


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wn brains via a different channel, which gives us access to additional cognitive resources we can use to p
rocess the same information in a different way. There are two primary ways to Externalize your thoughts: 
writing and speaking. Writing (or drawing, if you prefer) is the best way to capture ideas, plans, and tasks. 
Not only does writing give you the ability to store information in a form you can reference later, it gives you


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r mind the opportunity to examine what you know from a different angle. Challenges and issues that seem
 insurmountable while they’re bouncing around in your frontal lobe can often be solved surprisingly quickly
 after they’re put on paper. Capturing your ideas on paper makes them easier to share with others, in addi
tion to archiving your thoughts for later reference and review. As the saying goes, “The palest ink is cleare


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r than the fondest memory.” Notebooks and journals, regularly used, are worth their weight in gold. Speaki
ng—to yourself or to another person—is another effective method of Externalization. Vocal Externalization
 explains why most of us have had the experience of solving our own problems while talking with a friend 
or colleague. By the time you’re done talking, you’re likely to have more insight into your problem—even if


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your listener didn’t say a word. The key to vocal Externalization is to find an audience who is willing to list
en patiently and avoid interrupting you as you talk through an issue. Even talking to yourself or an inanima


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te object can help: explaining your problem to a rubber duck, teddy bear, action figure, or other anthropom
orphic object sitting on your desk can work if you can get over the initial awkwardness. More often than no
t, “rubberducking” the problem makes it easier to solve. However you choose to Externalize your thoughts
, don’t keep them locked up in your head. Experiment with different approaches to find which method wor


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ks best for you. To help keep your mind clear during the day, schedule a small amount of dedicated time t
o Externalize. Early mornings or late evenings typically work best for this purpose. However you do it, the 
more you Externalize, the clearer your thoughts will become, and the faster you’ll make progress toward y
our goals. SHARE THIS CONCEPT: http://book.personalmba.com/externalization/ Self-Elicitation How do


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I know what I think until I hear what I say? —E. M. FORSTER, NOVELIST AND SOCIAL ACTIVIST Exter
nalization is most useful if you use it as a tool to examine your plans, goals, and actions. Jotting down the 
events of the day in a diary format is useful for later review, but using a journal or confidant as a problem-
solving tool is even more useful. Self-Elicitation is the practice of asking yourself questions, then answerin


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g them. By asking yourself good questions (or working with someone who asks good questions), you can 
grasp important insights or generate new ideas very quickly. The Five-Fold How and Five-Fold Why are s
pecific examples of SelfElicitation. Simply by asking yourself questions, you’re exploring options you previ
ously didn’t consider and Priming your brain to notice related information. In Self-Directed Behavior, David


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Watson and Roland Tharp explain a very useful self-questioning technique you can use to discover the re
asons behind behaviors that don’t serve you. The ABC Method (Antecedent, Behavior, Consequences) is 
a set of questions to ask yourself whenever you notice a behavior you want to change. By recording answ
ers to the following questions in a journal, logging when specific behaviors occur, and noting the frequenc


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y or duration of those behaviors, it’s possible to discover patterns in your behavior or thought processes. 
Once you know the pattern, it’s easier to change the behavior. ANTECEDENT • When did it happen? • W
hom were you with? • What were you doing? • Where were you? • What were you saying to yourself ? • W
hat thoughts were you having? • What feelings were you having? BEHAVIOR • What were you saying to y


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ourself ? • What thoughts did you have? • What feelings were you having? • What actions were you perfor
ming? CONSEQUENCES • What happened as a result? • Was it pleasant or unpleasant? Asking yourself
 good questions helps you discover good answers. Make it a Habit to consistently ask yourself good quest
ions, and you’ll be surprised how easy it is to overcome the challenges you face. SHARE THIS CONCEP


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T: http://book.personalmba.com/self-elicitation/ Counterfactual Simulation To be able to ask a question cle
arly is two-thirds of the way to getting it answered. —JOHN RUSKIN, NINETEENTH-CENTURY ART CRI
TIC AND SOCIAL THEORIST As we discussed in the section on Mental Simulation, our minds are consta
ntly trying to predict the future. Now it’s time to learn how to simulate potential courses of action intentiona


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lly. Counterfactual—“what if ”—questions allow you to directly access your brain’s simulation capabilities. 
You can think of Counterfactual Simulation as applied imagination—you’re consciously posing a “what if” 
or “what would happen if” question to your mind, then sitting back and letting your brain do what it does be
st. Based on the Patterns, Associations, and Interpretations you have stored in memory, your brain will pr


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oduce what it believes to be the most likely result. All you have to do is suspend judgment, pose the quest
ion, and wait for the answer. Counterfactual Simulation is one of our most powerful (and underused) capa
bilities. Instead of waiting for your brain to simulate a potential course of action, Counterfactual Simulation
 allows you to “force” your brain to run the simulations you want it to run. One of the reasons Counterfactu


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al Simulation is useful is because of its flexibility: you can simulate anything you want. The subject of your
 simulation can be completely arbitrary: the only limit to the things you can simulate is your imagination. If 
you want to simulate what would happen if you suddenly quit your job and moved to Tahiti, there’s nothing
 stopping you. You could even simulate what would happen if you lived ten thousand years in the future or


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set up shop on Jupiter. Counterfactual Simulation can help you discover hidden opportunities you may ha
ve previously assumed weren’t possible. While I was working at P&G, I often dreamed of working for mys
elf and developing the Personal MBA full-time, but I always assumed it was “a year or two away.” A year l
ater, it was still “a year or two away.” Working for myself was a pleasant daydream, but I simply assumed i


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t wasn’t realistic without really examining the possibilities. That changed shortly after I discovered Counter
factual Simulation. While traveling on business in September of 2008, I ran a simulation: “What would hav
e to be true if I left my job at P&G by my birthday?” (It’s in early November.) I didn’t think this question was
 realistic, but it was ambitious enough to be interesting, so I Inhibited my judgment and simulated the ques


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tion anyway. When you run a Counterfactual Simulation, you assume the event or end state you’re simula
ting is already true. By supplying your mind with an artificial destination, it will automatically start to fill in th
e blanks between point A and point B. When I ran the simulation on leaving P&G, I assumed that it was d


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efinitely going to happen, then figured out how it would be possible. As I ran the simulation, other question
s naturally presented themselves. How much revenue was coming in? How many clients would I need to 
have? What other projects would I work on, and how much money would I need to bring in to be financiall
y Sufficient? As these questions presented themselves, I answered them as best I could, scribbling my an


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swers in a notebook. By the time I was finished simulating, I had discovered it was possible for me to leav
e my job at P&G immediately, instead of “in a year or two.” When I returned to work the following Monday,
 I resigned. My last day of corporate work was four days before my twenty-eighth birthday. In my experien
ce, time spent examining counterfactuals is never wasted. Instead of simply assuming what you want isn’t


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realistic or possible, Counterfactual Simulation allows you to actually figure out what it would take to mak
e what you want real. After doing a simulation, you’ll always come away with a greater understanding of w
hat it takes to do something, or what would need to be true in order to make something work. Apply your 
mind to Counterfactual Simulation, and you’ll be absolutely astounded at how easy it is to accomplish som


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e of the things that you assumed were simply dreams. SHARE THIS CONCEPT: http://book.personalmba
.com/counterfactualsimulation/ Parkinson’s Law Work expands so as to fill the time available for its compl
etion. —CYRIL NORTHCOTE PARKINSON, NAVAL HISTORIAN AND MANAGEMENT THEORIST In 19
55, Cyril Northcote Parkinson wrote a humorous essay in the Economist based on his experience in the B
ritish civil service. In that essay, Parkinson proposed what became his eponymous law: “Work expands so


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as to fill the time available for its completion.” If something must be done in a year, it’ll be done in a year. 
If something must be done next week, it’ll be done next week. If something must be done tomorrow, it’ll be
 done tomorrow. We plan based on how much time we have, and when the deadline approaches, we start
 to make Choices and Trade-offs to do what must be done to complete the task by the deadline. Parkinso


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n’s Law should not be considered carte blanche to set unreasonable deadlines. All projects take time—yo
u certainly can’t build a skyscraper in a day or a factory in a week. The more complex the project, the mor
e time it typically takes—to a point. Parkinson’s Law is best used as a Counterfactual Simulation question.
 What would it look like if you finished the project on a very aggressive time scale? If you had to build a sk


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yscraper in a day, how would you go about doing it? Answer the question the way you would a counterfac
tual, and you’ll discover techniques or approaches you can use to get the work done in less time. Ingvar K
amprad, the founder of IKEA, once said, “If you split your day into ten-minute increments, and you try to w
aste as few of those ten-minute increments as possible, you’ll be amazed at what you can get done.” For


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small tasks, use what I call Ingvar’s Rule—assume each task will take no more than ten minutes to compl
ete, then begin. This includes meetings and phone calls: for some reason, the default time period for meet
ings is an hour —whether you need it or not. Often you can get just as much, if not more, done if you assu
me that the basic unit of time for a meeting is ten minutes. Ingvar’s Rule is a counterfactual—what would


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you do if you only had ten minutes to get something done? Act accordingly. SHARE THIS CONCEPT: htt
p://book.personalmba.com/parkinsons-law/ Doomsday Scenario What looks large from a distance, close u
p ain’t never that big. —BOB DYLAN, SONGWRITER AND MUSICIAN If you’re in Threat Lockdown, it’s h
ard to get anything done—your mind is fixated on the threat, imagining scenes that would fit right into a ba


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d horror movie. Let’s say you’re thinking of starting a business, but you lock up with anxiety whenever you
 think about striking out on your own. You imagine quitting your job, and your mind immediately pictures in
vesting a lot of money building something that doesn’t work, going bankrupt, and becoming homeless. Yo
u won’t be able to get another job, everyone will hate you, and you’ll spend the rest of your days living in a


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van down by the river. How do you encourage your brain to stop trying to protect you if it’s clearly overrea
cting? A Doomsday Scenario is a Counterfactual Simulation where you assume everything that can go wr
ong does go wrong. What if you don’t complete the project on time? What if your plan doesn’t work? What
 if you lose everything? What if they all laugh at you? Doomsday Scenarios are pessimistic for a reason—


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they help you realize that, in most circumstances, you’re going to be okay. Caveman Syndrome makes ou
r ancient brains overdramatic, so they assume every potential threat is a life-or-death situation. The reaso
n we get so stressed out is that our brains Interpret losing resources, diminishing in status, or being reject
ed as threats to our survival. That may have been true a long time ago, but it’s not anymore. Now you can


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lose money, screw up, or be rejected hundreds of times a day—and live to tell the tale. When you actuall
y examine your worst fears, you’ll discover that things won’t be as bad as you fear. Creating a Doomsday 
Scenario is the equivalent of giving a small child who is afraid of monsters under their bed a flashlight—by
 shedding some light on the subject of their fears, they realize there’s nothing to be afraid of. By intentiona


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lly Externalizing and defining your worst fears, you’re exposing them as what they really are: irrational ove
rreactions. More often than not, you’ll discover that you were scared of something that doesn’t really matt


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er. Even if something bad goes wrong, it’s not really going to be as bad you think. As soon as you realize 
you’re not going to die, you’re free to do much more than you previously dared to do. Once you’ve imagin
ed your Doomsday Scenario, you can start doing things to improve upon the worst case. If you’re starting 
a business, you can begin defining the actual risks and make plans to mitigate them. Instead of being a vi


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ctim of your fears, you can use them constructively. Construct your Doomsday Scenario, and you can ma
ke your overdramatic brain work with you, instead of against you. SHARE THIS CONCEPT: http://book.pe
rsonalmba.com/doomsdayscenario/ Excessive Self-Regard Tendency I haven’t been wrong since 1961, w
hen I thought I made a mistake. —BOB HUDSON, POLITICIAN Every few months, television viewers aro


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und the world cringe while delusional contestants on American Idol show the world how horrible they are 
at singing. The most fascinating part of this spectacle isn’t the epic display of tonedeafness—it’s the fact t
hat many of the people auditioning believe they’re talented singers. The contrast is astounding—how coul
d anyone be so horribly wrong about something so obvious? Excessive Self-Regard Tendency is the natu


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ral tendency to overestimate your own abilities, particularly if you have little experience with the matter at 
hand. Being optimistic about our capabilities has benefits—it increases the probability we’ll try something 
new. That’s how novices sometimes accomplish great things—they do them before realizing how risky or 
difficult their objective was. Steve Wozniak, who cofounded Apple Computer with Steve Jobs, built the wo


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rld’s first personal computer. Here’s what he had to say about the experience: “I never had done any of thi
s stuff before, I never built a computer, I never built a company, I had no idea what I was doing. But I was 
going to do it, and so I did it.” Woz didn’t know what he was doing, but he thought he could, so he did. Unf
ortunately, our natural confidence also comes with a cost—the potential for harmful self-delusion. The Exc


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essive Self-Regard Tendency is even more pronounced if you don’t know much about the subject at hand
. The more incompetent a person is, the less they realize they’re incompetent. The more a person actually
 knows, the better their ability to self-assess their capabilities, and the more likely they are to doubt their c
apabilities until they have enough experience to know they’ve mastered the subject. According to David D


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unning and Justin Kruger of Cornell University, Charles Darwin’s famous quip “Ignorance more frequently 
begets confidence than does knowledge” is literally true. They explain the “Dunning-Kruger effect” as follo
ws: 1. Incompetent individuals tend to overestimate their own level of skill. 2. Incompetent individuals fail t
o recognize genuine skill in others. 3. Incompetent individuals fail to recognize the extremity of their inade


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quacy. 4. If they can be trained to substantially improve their own skill level, these individuals can recogni
ze and acknowledge their own previous lack of skill. People who are “unconsciously incompetent” don’t kn
ow they’re incompetent—they know so little about the subject that they can’t fully appreciate how little the
y actually know. That’s why every barber and taxi driver you meet is an expert on the economy and intern


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ational politics. Once you learn a bit more about a new subject, you become “consciously incompetent”—y
ou know you don’t know what you’re doing. As a result, most individuals become less confident in their abi
lities shortly after learning more about a topic—more knowledge makes it easier to fully appreciate the limi
ts of their knowledge and capabilities. Developing “conscious competence”—the state of knowing what yo


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u’re doing—takes experience, knowledge, and practice. When you’re consciously competent, you regain y
our confidence: you know the limits of your knowledge and can accurately assess your abilities. A certain 
amount of humility is a valuable self-correcting quality. Overconfidence sometimes produces greatness, b
ut it’s a high-risk bet— without guidance, you’re far more likely to find yourself in a bad situation. Cultivatin


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g a healthy amount of humility can keep you from assuming you know everything there is to know about e
verything, then painfully discovering otherwise. The Excessive Self-Regard Tendency is universal (be ver
y wary if your first impulse is to think you’re immune to it), so it’s important to have trusted advisers who ar
en’t afraid to tell you if you’re making a mistake. One of the easiest ways to get yourself in trouble via the


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Excessive Self-Regard Tendency is estimating deadlines—overconfidence is a major cause of the Planni
ng Fallacy (discussed later). When I agreed to write this book, I thought it would take about six months—b
ut I’d never written a book before, so I really had no idea. Several of my more experienced friends and ad
visers counseled that it would probably take a year, and I’m very glad I listened—they were right. All of us


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are prone to overestimating our abilities. Padding your team with yes-men is deadly because people who 
always agree with you can’t help you correct for this tendency—people who always support your decision
s won’t prevent you from making huge mistakes. Cultivate relationships with people who aren’t afraid to te
ll you when you’re making questionable assumptions or going down the wrong path— they’re valuable frie


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nds indeed. SHARE THIS CONCEPT: http://book.personalmba.com/excessive-selfregard-tendency/ Confi
rmation Bias It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain
’t so. —MARK TWAIN Paradoxically, one of the best ways to figure out whether or not you’re right is to ac


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tively look for information that proves you’re wrong. Confirmation Bias is the general tendency for people t
o pay Attention to information that supports their conclusions and ignore information that doesn’t. No one 
particularly likes to learn they’ve made a bad decision, so we tend to filter the information we pay Attentio
n to. The more strongly held the opinion or belief, the more we ignore sources of information that challeng


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e that position. That’s why you won’t find many political conservatives reading politically liberal sources of 
news, and vice versa—they already know they don’t agree, so why bother? Unfortunately, this makes bot
h positions more and more extreme, since neither side seeks information that may challenge their convicti
ons. The best way to counteract Confirmation Bias is to intentionally seek out sources of information that


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challenge your current hypothesis or belief. When Kelsey and I adopted a vegan diet for a number of year
s, it was easy to also adopt the mind-set that we were clearly making the optimal choice —for our health, f
or our animal friends, and for the planet. This worldview naturally made it difficult to pay attention to any s
ource of information that argued the contrary. Ultimately, we changed our minds as a result of finding disc


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onfirming evidence. After reading The Vegetarian Myth by Lierre Keith, we discovered that vegetarianism i
sn’t as healthy or environmentally friendly as we had originally believed. Protein Power by Michael R. and 
Mary Dan Eades taught us more about how our bodies biochemically process the food we eat, and about 
how the Feedback Loops (discussed later) that exist in our metabolism actually function. As a result, we le


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arned that a few persistent health issues (low energy, slow digestion, etc.) we were experiencing were act
ually a consequence of our diet. Both books provided evidence that contradicted our original position—an
d they changed our minds. We learned a great deal from the experience— both about diet and about the i
mportance of paying Attention to disconfirming evidence. Paying Attention to disconfirming evidence is na


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turally difficult—it means intentionally looking for reasons you might be wrong, and we usually hate to be 
wrong. Seeking disconfirming evidence will either show you the error of your ways or provide additional ev
idence for why your position is actually correct—as long as you suspend judgment long enough to learn fr
om the experience. Looking for disconfirming information is uncomfortable, but it’s useful, whatever you ul


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timately decide. SHARE THIS CONCEPT: http://book.personalmba.com/confirmation-bias/ Hindsight Bias
 Finish each day and be done with it. You have done what you could. Some blunders and absurdities no d
oubt crept in; forget them as soon as you can. Tomorrow is a new day; begin it well and serenely and with
 too high a spirit to be encumbered with your old nonsense. —RALPH WALDO EMERSON, ESSAYIST A


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ND POET How do you feel when you realize that you’ve made a mistake? Hindsight Bias is the natural te
ndency to kick yourself for things you “should have known.” If you lose your job, you “should have known i
t was coming.” If the price of a particular stock you own drops 80 percent overnight, you “should have sold
 it.” If you launch a product and no one buys it, you “should have known it wouldn’t work.” Baloney. If you


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knew then what you know now, you wouldn’t have done what you did. Every decision you ever make will 
be based on incomplete information— we have to use Interpretation to fill in the blanks. Since you’re not o
mniscient, you’ll always have more information when you evaluate the results of your actions than you ha
d when you actually made the decision. As a result, it’s very easy to feel stupid if things don’t turn out the


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way you expected. It’s important to realize that these feelings are irrational—your decisions were based o
n the best information you had at the time, and there’s nothing you can do now to change them. Don’t feel
 bad about things that you “should have seen” or “should have done.” Changing the past is outside of your
 Locus of Control (discussed later), so there’s no sense in wasting energy on self-doubt, wondering what


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might have been. Hindsight Bias becomes destructive if you negatively judge yourself or others for not kn
owing the unknowable. As the saying goes, “Hindsight is 20-20.” Reinterpret your past mistakes in a const
ructive light, and focus your energy on what you can do right now to move in a positive direction. SHARE 
THIS CONCEPT: http://book.personalmba.com/hindsight-bias/ Performance Load If not controlled, work


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will flow to the competent man until he submerges. —CHARLES BOYLE, FORMER U.S. CONGRESSIO
NAL LIAISON FOR THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION (NASA) Being bu
sy is better than being bored, but it’s possible to be too busy for your own good. Performance Load is a co
ncept that explains what happens when you have too many things to do. Above a certain point, the more t
asks a person has to do, the more their performance on all of those tasks decreases. Imagine juggling bo


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wling pins. If you’re skilled, you may be able to juggle three or four without making a mistake. The more pi
ns that must be juggled at once, the more likely you are to make a mistake and drop them all. If you want t
o be productive, you must set limits. Juggling hundreds of active tasks across scores of projects is not sus
tainable: you’re risking failure, subpar work, and burnout. Remember Parkinson’s Law: if you don’t set a li


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mit on your available time, your work will expand to fill it all. If you don’t draw the line somewhere, work wil
l consume all of your energy, and you’ll inevitably burn out. Limits always have consequences—if you’re n


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ot prepared to handle the consequences, it’s not really a limit. If you’re working for a manager who expect
s you to work twenty hours a day, seven days a week, telling them no by setting limits on your working ho
urs may cost you your job. Working that pace is completely unrealistic, but if you’re not willing to accept th
e possibility of losing the job, you haven’t really set the limit. In order to handle the unexpected, you must


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have unscheduled time to respond to new inputs. The default mind-set of many modern businesses is that
 “downtime” is inefficient and wasteful—workers should be busy all the time. Unfortunately, this philosoph
y ignores the necessity of handling unexpected events, which always occur. Everyone only has so many h
ours in a day, and if your agenda is constantly booked solid, it’ll always be difficult to keep up with new an


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d unexpected demands on your time and energy. You can’t perform at 110 percent of your capacity at all t
imes—use the Four Methods of Completion to eliminate, defer, or delegate marginally valuable work that 
contributes to Performance Load. By keeping some capacity in reserve, you’ll be ready to handle the Most
 Important Tasks immediately. SHARE THIS CONCEPT: http://book.personalmba.com/performance-load/


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Energy Cycles We all have times when we think more effectively, and times when we should not be thinki
ng at all. —DANIEL COHEN, CHILDREN’S AUTHOR Here’s the problem with “time management”: time is
 not what needs to be managed. No matter what you choose to do, time will inevitably pass. The implicit a
ssumption of time management systems is that every hour is fungible—equivalent to any other. Nothing c


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ould be further from the truth: all people are created equal, but all hours are most definitely not. Througho
ut the day, your energy level naturally cycles up and down. Your body has natural rhythms during the day,
 which I call Energy Cycles. Most people are familiar with the twenty-four-hour circadian rhythm, which wa
kes you up in the morning and makes you feel tired at night. Lesser known is the ninety-minute ultradian r


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hythm, which is described in The Power of Full Engagement by Jim Loehr and Tony Schwartz. The ultradi
an rhythm influences bodily systems, controlling the flow of hormones throughout your body. When your e
nergy is on an upswing, you’re capable of focusing deeply and getting a lot accomplished. When it’s on a 
downswing, all your mind and body want to do is rest and recover. There’s nothing abnormal about these


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changes in energy during the day, but we often act as though being on a downswing is somehow a proble
m that needs to be fixed. Nowadays, it’s popular to try to “hack” this cycle to get more done by resting less
. Attempting to work eight to twelve hours without a break is not uncommon in highly competitive workplac
es. Most of us try to over-clock our brains with large doses of sugar and caffeine. Some people even resor


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t to abusing prescription or illegal drugs to work a little bit longer or faster. Like all biological organisms, hu
mans need to rest and recover for peak performance. Taking a break isn’t a sign of laziness or weakness
—it’s a recognition of a fundamental human need. Paying attention to your natural Energy Cycle will help 
you consistently perform at your best over long periods of time. Here are four simple ways to work with yo


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ur body instead of against it: 1. Learn Your Patterns—Use a notebook or calendar to track how much ener
gy you have during different parts of the day, as well as what you’re eating and drinking. If you do this for 
a few days, you’ll notice patterns in how your energy waxes and wanes, allowing you to plan your work ac
cordingly. 11 2. Maximize Your Peak Cycles—When you’re in an up cycle, you’re capable of getting a lot


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accomplished, so plan your day to take advantage of that energy. If you’re doing creative work, carve out 
a three- to four-hour block of time during an up cycle to get it done. If your work consists of attending a lot 
of meetings, plan the most important meetings during the up cycle. 3. Take a Break—When you’re in a do
wn cycle, it’s better to rest than attempt to power through it. Rest and recovery are not optional—if you do


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n’t rest now, your body will force you to rest later, by either cycling down longer than usual or by getting si
ck. During a down cycle, go for a walk, meditate, or take a twentyminute nap. Relaxing on the down cycle 
can restore your energy, allowing you to take full advantage of the next up cycle. 4. Get Enough Sleep—S
leep deprivation results in a prolonged down cycle, which gets in the way of getting things done. To ensur


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e you get enough sleep each evening, set a timer to go off an hour before you’d ideally be in bed sleeping
. When the timer goes off, turn off the computer and/or TV, go through your evening routine, make a cup o
f noncaffeinated tea, and spend some time with a book you enjoy. When your reading comprehension star
ts to go down, you’ll know it’s time for bed. Paying attention to your Energy Cycles during the day will help


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you get the most out of the time you have available. Take maximum advantage of your up cycles and rest
 on your down cycles, and you’ll be amazed at what you can accomplish in a day. SHARE THIS CONCEP
T: http://book.personalmba.com/energy-cycles/ Stress and Recovery Only those who will risk going too far
 can possibly find out how far one can go. —T. S. ELIOT, POET AND PLAYWRIGHT During my last sem


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ester of college—around the time I created the Personal MBA—I pushed myself to the breaking point. I w
as taking twenty-two credit hours of classes across three subjects: business information systems, real est
ate, and philosophy. Every class I took had some kind of capstone project on top of the final exam. Two of


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the courses I was taking were at the graduate level, and each required a twentyplus-page paper on an ex
tremely complex topic to pass. I had far too much work to do in the time available. By the last two weeks o
f the quarter, I was an absolute wreck: sleep deprived, exhausted, and stressed beyond belief—my Gas T
ank was completely empty. Everything got done on time, but the workload took its toll, and it took me a fe


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w weeks of doing nothing after graduation to fully recover. Even though it wasn’t pleasant, I’m glad I found
 my breaking point. Here’s why: now I know how much I’m capable of doing, and how much is too much. I 
know more about how my mind and body react to stress, and I’m better able to identify the warning signs 
of taking on too much before things get out of hand. As a result, I’ve learned to keep myself running at ab


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out 90 percent capacity, which is enough to get a lot done without burning out. At any given time, I’m writi
ng, consulting, and working on a few interesting side projects. Paying attention to Stress and Recovery en
sures that I don’t take on too much to handle. Learning my breaking point has made it much easier to kno
w when to push and when to slow down. It’s impossible to know how much you’re capable of until you dec


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ide to push your limits. As long as you stay safe by limiting your Experimentation to things that won’t kill y
ou or do permanent damage, you can learn a ton about how you work by stretching yourself to the limit. T
he knowledge you gain will help you make better choices in the future about which projects to take on and
 how much is too much. That said, our bodies are not machines that are designed to operate at maximum


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capacity at all times. It’s remarkably easy to fall into the trap of comparing your output to an idealized versi
on of yourself who can build Rome in a day, then build the Great Wall of China as a fun side project. If tha
t’s your vision of personal effectiveness, you’ll always come up short. You are not a machine—the ideal of
 human productivity is not acting like a robot. Humans need rest, relaxation, sleep, and play in order to fun


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ction effectively. Too little of any of these things can seriously diminish your capacity to do good work and 
impact how much you enjoy your life. Dedicating guilt-free time to rest and recovery can simultaneously m
ake your life more enjoyable and more productive. SHARE THIS CONCEPT: http://book.personalmba.co
m/stress-recovery/ Testing Discoveries are often made by not following instructions, by going off the main


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road, by trying the untried. —FRANK TYGER, POLITICAL CARTOONIST AND COLUMNIST I write best 
early in the morning, after eight hours of sleep. After waking up, I drink two shots of espresso with a tables
poon of honey, eat three softboiled eggs with salsa, and turn on a bright blue LED lamp that simulates mo
rning sunlight. Once I’m nourished and alert, I open up my computer, turn off my Internet connection, and


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start writing. Once I get started, I can concentrate on writing for up to six hours without stopping if I’m not i
nterrupted. Writing is important to me, so this is what I do every day. I’ve Tested many different approach
es, Testing many different variables. This is what works best for me, so I’ve made it a Habit. Will this be m
y method forever? I doubt it—I’ll eventually find other methods that work even better. My Experimentation


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never stops. Testing is the act of trying something new—a way of applying the scientific method and the It
eration Cycle to your own life. The most happy and productive people I know all have something in comm
on: they’re always trying new things to see what works. You can’t make positive discoveries that make yo
ur life better if you never try anything new. Testing doesn’t have to be complicated. All that’s required is ch


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oosing some part of your life to focus on, then trying new ways to get what you want. You can Test rando
m approaches or read about what works for others, then test the approach yourself. Externalizing your res
ults in a notebook can help you keep track of what you’ve tried, what works, and what doesn’t. Here’s a si
mple structure that will help you plan and track your Experiments: � Observations—What are you observin


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g in your life or business that you want to improve? � Knowns—What have you learned from past Experim
ents that might be related to your observations? � Hypotheses—Based on what you’ve observed, what situ
ations or factors might cause or contribute to your observations? � Tests—What will you try or change to i
mprove your situation? Which hypotheses will this experiment Test? � Results—What happened after each


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Test? Does it support or disconfirm the hypothesis? Here are a few questions to help you discover things
 worth Testing: � How much sleep do you need to feel rested and alert? � Which foods make you feel energ
etic after eating? Which foods make you feel ill or lethargic? � When do you do your most productive work?
 Are there any patterns in your productivity? � When do you get your best ideas? What are you doing when


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they occur to you? � What is your biggest source of stress or concern? When do you start worrying, and w
hy? Once you’ve found a Pattern in one of these areas, it’s time to start Experimenting. Consciously chan
ge your approach to one of these areas of your life and Externalize your results. If you find a change usef
ul, keep doing it—if not, stop doing it and try something else. Testing is the best way to ensure that your lif


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e gets better over time. By constantly trying new things, you’re learning what works for you and what does
n’t. Over time, you’ll discover Patterns—things that make your life better and things that make your life wo
rse. The results of your Experiments Accumulate, until they inevitably produce the results you want. You n


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ever know until you try. SHARE THIS CONCEPT: http://book.personalmba.com/testing/ Mystique What gr
ief we’d avoid if we knew how to transfer emotional experience across generations, as we do money or sc
ientific knowledge. —ALAIN DE BOTTON, PHILOSOPHER AND ESSAYIST There’s a big difference bet
ween liking the idea of being/doing something and liking the actual being/doing. It’s easy to like the idea o


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f being the CEO of a Fortune 50 company. It’s harder to like the hours, the responsibility, and the pressur
e that comes with the top job. It’s easy to like the idea of being a manager. It’s harder to like the demands 
from C-level execs, surprises from your direct reports, and the necessity of defending your turf in a politic
al environment. It’s easy to like the idea of having an Ivy League MBA or law degree. It’s harder to like the


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six-figure debt and the corresponding necessity of getting a stressful 120-hour-a-week job to make the in
vestment “worth it.” It’s easy to like the idea of being self-employed. It’s harder to like the fact that 100 per
cent of your income comes from your own effort, and that if you screw up, you’re the one who will face the
 consequences. It’s easy to like the idea of raising millions of dollars of venture capital. It’s harder to like t


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he fact that you’ve given up control over the project you’re investing your life in. It’s easy to like the idea of
 being an author. It’s harder to like the solitude, self-doubt, and long hours of “butt in chair, hands on keyb
oard” that consistent writing requires. It’s easy to like the idea of being a celebrity. It’s harder to like the in
evitable scrutiny, loss of privacy, and constant fear that people will direct their attention away from you in f


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avor of the “next big thing.” Mystique is a powerful force—a little mystery makes most things appear to be 
a lot more attractive than they actually are. Fortunately, there’s an easy way to counteract the rose-colore
d glasses of Mystique: have a real, human conversation with someone who’s actually done what you’re in
terested in doing. Here’s what to ask: “I really respect what you’re doing, but I imagine it has high points a


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nd low points. Could you share them with me? Knowing what you know now, is it worth the effort?” This c
onversation will only take a few minutes, but you’ll be amazed by what you learn, on both the positive and
 the negative side. No job, project, or position is flawless—every course of action has Tradeoffs . Learning
 what they are in advance gives you a major advantage: you can examine an option without idealizing it, t


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hen choose if it’s really what you want to do before you start. That kind of knowledge is priceless. SHARE
 THIS CONCEPT: http://book.personalmba.com/mystique/ Locus of Control Grant me the serenity to acce
pt the things I cannot change, the courage to change the things I can, and the wisdom to know the differe
nce. —THE SERENITY PRAYER No matter how much you want a particular job, after the interview is ove


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r, you can’t control whether or not you get the job—you’ve done what you could. No matter how intently y
ou watch the stock market, you can’t will the stock price of a particular company to go up. No matter how 
much you’d like to retain a key employee or make a personal relationship work, you can’t prevent them fro
m leaving if they want to. Understanding your Locus of Control is being able to separate what you can con


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trol (or strongly influence) from what you can’t. Trying to control things that aren’t actually under your cont
rol is a recipe for eternal frustration. As much as we’d like to, we can’t control everything that happens to 
us. Natural disasters are a perfect example: if a tornado or earthquake destroys your home, there’s nothin
g you can do about it. As uncomfortable as it is to imagine, the Environment contains many things we can’


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t control. It’s a fundamental aspect of life that we can’t change, no matter how much we might want to. Fo
cusing on your efforts helps you stay sane—turning results you don’t directly control into Goals is a recipe
 for frustration. One of the reasons that diets drive people crazy is that they involve trying to control a resu
lt— weight—that is not directly under their control. If you focus on efforts— eating healthy food, exercising


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, and doing what you can to manage related medical conditions—your weight will handle itself. Worrying a
bout things you can’t influence or control is a waste of time and energy. One of the best things I’ve ever d
one was choose to stop paying Attention to the news—99.9 percent of the information you’ll find in a new
spaper or television newscast is completely outside of your Locus of Control. Instead of fruitlessly worryin


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g about “what the world is coming to,” ignoring the news helps me spend more of my time doing what I ca
n to actually make things better. The better you’re able to separate what you can control from what you ca
n’t, the happier and more productive you’ll be. Focus most of your energy on things that you can influence
, and let everything else go. Keep your Attention on what you’re doing to build the life you want to live, an


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d it’s only a matter of time before you get there. SHARE THIS CONCEPT: http://book.personalmba.com/l
ocus-of-control/ Attachment If thou wilt make a man happy, add not unto his riches but take away from his
 desires. —EPICURUS, ANCIENT GREEK PHILOSOPHER Imagine you’re on your way up Mount Everes
t, on the way to achieving your Goal. The night before you plan to summit, a massive storm appears witho


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ut warning. Visibility is zero, the temperature is steadily dropping, and conditions are so bad you risk fallin
g or freezing to death if you continue climbing. Have you failed? When something outside of our Locus of 
Control affects our plans or Goals, it’s easy to take it personally. If you have your heart set on summiting


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Mount Everest today, you’ll likely meet your doom. Far better to change your plans and live to climb the m
ountain another day. The more Attached you are to a particular idea or plan, the more you limit your flexib
ility and reduce your chances of finding a better solution. It’s good to be dedicated to the pursuit of your g
oals, but only to a point. If you become too Attached to the visions you have in your head, you’ll have a ha


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rd time adjusting to the inevitable twists and turns of life. Acceptance requires applying the concept of Sun
k Cost to yourself. Imagine losing millions of dollars in the stock market—a horrible situation. No matter h
ow much you rail against greedy bankers, corrupt politicians, or the unfairness of life, it’s not going to brin
g that money back. Spending time feeling down for not “knowing better” or being omniscient won’t improv


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e your situation. The solution to Attachment is accepting that your idea or plan is no longer feasible or use
ful. The less Attached you are to your plans, Goals, status, and position, the easier it will be to respond ap
propriately to inevitable change or unforeseen circumstances. If you suddenly lose your job, remaining Att
ached to your previous position is a hindrance, not a help. It’s better to spend your energy doing what nee


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ds to be done to bring in more income. The more you focus and accept the things that have happened an
d choose to work on things that you can do to make things better, the happier you’ll be. SHARE THIS CO
NCEPT: http://book.personalmba.com/attachment/ Personal Research and Development (R&D) If a man 
empties his purse into his head, no one can take it from him. An investment in knowledge always pays the


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highest return. —BENJAMIN FRANKLIN Every successful business dedicates a certain amount of resour
ces to trying new things. Research and Development (R&D) is what business leaders around the world co
unt on to determine what the company should work on next. Large companies spend millions (sometimes 
billions) of dollars in speculative research every year, experimenting with new techniques and processes i


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n order to enhance their capabilities. R&D exists because it works—companies that make Research and 
Development a priority often discover new products to offer their customers or process improvements that
 meaningfully contribute to the bottom line. If it works for them, it can work for you. What would it look like 
if you set aside a few hundred dollars a month as a Personal R&D budget? Using the techniques discuss


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ed in I Will Teach You to Be Rich by Ramit Sethi, it’s remarkably easy to automatically divert a certain am
ount of your monthly income into an account earmarked for Personal R&D. That money can then be used
—guilt free—for purchasing books, taking courses, acquiring equipment, or attending conferences: anythi
ng that will improve your skills and capabilities. Personal finance gurus might disagree with me here, but I


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think having a robust Personal R&D budget is more important than maximizing your savings. I’m all for ha
ving a well-funded emergency account and saving enough for future needs, but savings can only get you 
so far. Investments in improving your personal skills and capabilities can simultaneously enrich your life a
nd open doors to additional income sources. New skills create new opportunities, and new opportunities o


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ften translate into more income. Your ability to save is limited; your ability to earn is not. Here’s a simple pl
anning exercise that will help you establish your own Personal R&D budget: what would have to change t
o be able to dedicate at least 5 percent of your monthly income to personal development and Experiment
ation, assuming your current income stays the same? Any money-saving tip you find in good personal fin


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ance books or blogs can be used to fund your Personal R&D account: for details, I recommend reading Y
our Money or Your Life by Vicki Robin and Joe Dominguez, as well as following Get Rich Slowly (getrichsl
owly.org) and The Simple Dollar (thesimpledollar.com) online. All it takes is a little creativity and budgetin
g, and you’ll be well on your way to funding your own selfdirected Research and Development laboratory.


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SHARE THIS CONCEPT: http://book.personalmba.com/personal-researchand-development/ The Growth 
Mind-set Intelligent discontent is the mainspring of civilization. —EUGENE V. DEBS, LABOR UNION ACT
IVIST In general, there are two primary ways of looking at the world—two mindsets that influence your res
ponse to new experiences. The first basic mind-set is that your skills and abilities are fixed. If you try som


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ething and it doesn’t work, it’s because you’re “not good at that,” and you never will be. You were born wit
h innate skills and abilities that will never change. Using this mind-set, if you experience a challenge or dif
ficulty, you’re likely to stop—you’re obviously not good at it, so why bother? The second basic mind-set is 
that your skills and abilities are malleable. If you try something and it doesn’t work, it’s because you haven


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’t worked on it very much, but if you keep trying, you’ll inevitably get better. Your skills and abilities are like
 muscles—they strengthen with use. Using the Growth Mind-set, if you experience a challenge or difficulty
, you’re likely to keep going—you might not be good at it yet, but you’re always getting better. These two 
mind-sets color how you experience everything in the world. In Mindset: The New Psychology of Success,


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Dr. Carol Dweck calls these mind-sets the “fixed” and “growth” theories of intelligence. If you have a “fixe
d” mind-set, challenges are a commentary on your worth as a person— you’ve been tried and found wanti
ng, which makes trying new things feel threatening. If you have a “growth” mind-set, challenges are simpl


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y an obstacle to be overcome by working harder. The way you choose to respond to challenges determin
es how successful you ultimately will become. It’s important to realize that you have no “fundamental defe
cts”—there’s nothing that you’re fundamentally incapable of learning or doing. It may take time and effort, 
but you’ll improve eventually if you make the effort. Viewing your mind as a muscle is the best way to help


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it grow. SHARE THIS CONCEPT: http://book.personalmba.com/growth-mindset/ 9 WORKING WITH OT
HERS Take away my people but leave my factories, and soon grass will grow on factory floors. Take awa
y my factories but leave my people, and soon we will have a new and better factory. —ANDREW CARNE
GIE, NINETEENTH-CENTURY INDUSTRIALIST Working with other people is an ever-present part of bus
iness and life: you can’t escape it, even if you want to. Customers, employees, contractors, and partners


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are all individuals with their own unique motivations and desires. If you want to do well in this world, it pay
s to understand how to get things done with and through other people. In this chapter, we’ll discuss how t
o work effectively with others. You’ll learn how to communicate more effectively, earn the respect and trus
t of others, recognize the limitations and pitfalls of group interactions, and lead or manage a team of peopl


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e effectively. SHARE THIS CONCEPT: http://book.personalmba.com/working-withothers/ Power Force is 
all-conquering, but its victories are short-lived ... Nearly all men can stand adversity, but if you want to test
 a man’s character, give him power. —ABRAHAM LINCOLN, SIXTEENTH PRESIDENT OF THE UNITED
 STATES All human relationships are based on Power—the ability to influence the actions of other people


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. We can never control people in the sense that we’ve discussed in the section on Perceptual Control—w
e don’t have direct access to the inner processes that make people do the things they do. All we can reall
y do is act in ways that encourage people to do what we suggest. The use of Power typically takes one of 
two fundamental forms: influence or compulsion. Influence is the ability to encourage someone else to wa


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nt what you suggest. Compulsion is the ability to force someone else to do what you command. Encourag
ing an employee to “go the extra mile” out of a sense of loyalty or craftsmanship is influence. Forcing the 
employee to work over the weekend by threatening to fire them if they refuse is compulsion. The actions t
hat employee takes may be exactly the same, but how they feel about taking those actions will be quite di


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fferent. On the whole, influence is much more effective than compulsion. The vast majority of people natur
ally resist being forced to do something against their will or better judgment, so constantly relying on com
pulsion to get things done is a poor strategy. Bossing people around only serves to make them dislike you
, and they’ll find ways to retaliate or quit working with you at the earliest available opportunity. Influence, o


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n the other hand, is sustainable—encouraging people to want what you want gets you the results you’re l
ooking for without provoking unnecessary ill will. Like it or not, everyone relies on Power to get things don
e. In The 48 Laws of Power, Robert Greene argues that no one is completely exempt from dealing with ot
hers, which inevitably involves Power. Power is a neutral tool—one that can be used for good or ill. Power


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represents your ability to get things done through other people—the more power you have, the more thin
gs you can do. Accordingly, there’s nothing morally wrong with consciously seeking to increase your Pow
er, provided you respect the rights of other people. The more Power you have, the more you can ultimatel
y accomplish, but with great Power comes great responsibility. The reason that interactions among large


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groups of people inevitably become political is the ever-present nature of Power. If you don’t have a plan, 
your actions will be determined by someone else. By refusing to make the effort to move in the direction y
ou think is best, you’re ceding Power to those who do have plans. Refuse to understand that Power is imp
ortant, and you’re likely to find that any influence you have rapidly disappears. The only way to win is to d


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ecide to play. The best way to increase your Power is to do things that increase your influence and Reput
ation. The more people know your capabilities and respect the Reputation you’ve built, the more Power y
ou will have. SHARE THIS CONCEPT: http://book.personalmba.com/power/ Comparative Advantage Be 
a first-rate version of yourself, not a second-rate version of someone else. —JUDY GARLAND, ACTRES


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S AND SINGER Essential to the idea of working with other people is the question, Why work with other p
eople in the first place? If you can’t control them and get them to do exactly what you want them to do all t
he time, why bother? The answer is Comparative Advantage, a concept that originated in the “dismal scie
nce” of economics. Attributed to David Ricardo’s 1817 text On the Principles of Political Economy and Tax


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ation, “Ricardo’s Law of Comparative Advantage” provided an answer to a question of international politic
s: is it better for the economies of countries to be self-sufficient and produce everything themselves, or sp
ecialize in producing certain goods, then trade with one another? Using Portugal and England as example
s, Ricardo calculated that even if both countries were capable of producing cloth and wine, England could


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produce cloth with much less effort, and Portugal was much better at producing wine. As a result, instead
 of wasting time and money struggling to do something they weren’t good at, Portugal and England would


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both be better off if they specialized, then traded with each other. Comparative Advantage means it’s bett
er to capitalize on your strengths than to shore up your weaknesses. In First, Break All The Rules by Marc
us Buckingham and Curt Coffman, and StrengthsFinder 2.0 by Tom Rath, the authors share the results of
 the Gallup Organization’s comprehensive research on human productivity. As it turns out, Comparative A


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dvantage applies as much to individuals as it does to countries: businesses work better if the individuals 
who operate them focus on what they’re best at, working with other specialists to accomplish everything e
lse they need. “Strengths-Based Management” is simply another term for Comparative Advantage. Comp
arative Advantage explains why it often makes sense to work with contractors or outsourcers rather than t


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ry to do everything yourself. If you want to build a house, it’s probably more efficient to hire a general cont
ractor and specialists who do the kind of work the project requires every day. You could certainly try to do 
it yourself, but unless you know what you’re doing, it’ll probably take longer, and the results won’t be as g
ood. Comparative Advantage also explains why diverse teams consistently outperform homogenous team


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s. Having a wide variety of team members with different skills and backgrounds is a major asset: it increas
es the probability that one of your teammates will know what to do in any given circumstance. If every tea
m member has the same skills and the same background, it’s far more likely the team will get stuck or ma
ke a preventable error. Self-reliance naturally improves your flexibility and knowledge over time, but too m


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uch self-reliance is a mistake. I’m a huge advocate of selfeducation and learning how to do things yourself
, but taking the DIY ethic to an extreme can do more harm than good. Working with others can help you g
et more done, faster, and improve the quality of the end result. Even Thoreau left Walden Pond every onc
e in a while to buy things in town. The major benefit of self-education when working with others is knowing


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what skill looks like. You may be able to hire a programmer halfway around the world via Elance.com or 
oDesk.com, but if you’ve never done any programming yourself, you’re going to have a difficult time figuri
ng out whether or not their work is actually good. Learn a little programming, however, and your ability to i
dentify good programmers will increase, making you more likely to identify skilled colleagues and partners


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. In the immortal words of John Donne: “No man is an island.” Focus on what you can do well, and work w
ith others to accomplish the rest. SHARE THIS CONCEPT: http://book.personalmba.com/comparativeadv
antage/ Communication Overhead If you had to identify, in one word, the reason why the human race has
 not achieved, and never will achieve, its full potential, that word would be: “meetings.” —DAVE BARRY,


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COMEDIAN AND NEWSPAPER COLUMNIST There’s a reason high-performing surgical teams, military 
units, and sports teams tend to be small and focused: too much time spent in communication and coordin
ation can kill a team’s effectiveness. Communication Overhead is the proportion of time you spend comm
unicating with members of your team instead of getting productive work done. In order to keep everyone o


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n the same page, communication is absolutely necessary. The more team members you have to work wit
h, the more you have to communicate with them to coordinate action. As the number of people you work 
with increases, Communication Overhead increases geometrically until the total percentage of time each i
ndividual must devote to group communication approaches 100 percent. After a certain threshold, each a


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dditional team member diminishes the capacity of the group to do anything other than communicate. Larg
e companies are slow because they suffer from Communication Overhead. If you’re responsible for worki
ng with a group of more than five to eight people, at least 80 percent of your job will inevitably be commun
icating effectively with the people you work with. Objectives, plans, and ideas are worthless unless everyo


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ne involved understands them well enough to take action. I experienced this daily while working at P&G—
one of my primary projects consisted of creating a company-wide strategy on how to measure certain mar
keting tactics. Because it was a global project, my recommendation required input and/or approval from d
ozens of individuals across the company before anything could be implemented. Naturally, everyone invol


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ved had different ideas, argued endlessly over various approaches, and wanted a share of the credit with
out having to commit to too much work or expense. I spent three months of full-time effort simply putting t
ogether a workable proposal. In the meantime, no actual work was being accomplished—99 percent of m
y time was spent doing little more than communicating with other members of the group. That’s Communi


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cation Overhead. Dr. Michael Sutcliffe of the University of Cambridge1 has proposed “8 Symptoms of Bur
eaucratic Breakdown” that appear in teams suffering from Communication Overhead: 1. The Invisible Dec
ision—No one knows how or where decisions are made, and there is no transparency in the decisionmaki
ng process. 2. Unfinished Business—Too many tasks are started but very few are carried through to the e


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nd. 3. Coordination Paralysis—Nothing can be done without checking with a host of interconnected units. 
4. Nothing New—There are no radical ideas, inventions, or lateral thinking—a general lack of initiative. 5. 
Pseudo-Problems—Minor issues become magnified out of all proportion. 6. Embattled Center—The cente


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r battles for consistency and control against local/regional units. 7. Negative Deadlines—The deadlines fo
r work become more important than the quality of the work being done. 8. Input Domination—Individuals r
eact to inputs—i.e., whatever gets put in their in-tray—as opposed to using their own initiative. If any of th
ese qualities describe your daily work experience, your team is probably suffering from a case of Commu


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nication Overhead. The solution to Communication Overhead is simple but not easy: make your team as 
small as possible. You’ll be leaving people out, but that’s the point—including them is causing more work t
han it’s creating in benefits. Removing unnecessary people from the team will save everyone’s time and p
roduce better results. Studies of effective teamwork usually recommend working in groups of three to eigh


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t people. In Peopleware, project managers Tom DeMarco and Timothy Lister recommend keeping teams 
“elite and surgical.” Small groups tend to be more effective than large groups because Communication Ov
erhead is reduced—each team member adds more networking capacity to the team than they require in c
ommunication to be effective. Once group size expands above eight, each additional team member requir


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es more investment in communication than they add in productive capacity. If you want your team to perfo
rm at its best, make your teams as small and autonomous as possible. SHARE THIS CONCEPT: http://bo
ok.personalmba.com/communicationoverhead/ Importance The deepest principle in human nature is the c
raving to be appreciated. —WILLIAM JAMES, DOCTOR AND PIONEERING PSYCHOLOGIST Everyone 
has a fundamental need to feel Important. It doesn’t matter if you’re dealing with a customer, an employee


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, an acquaintance, or a friend. The more Important you make them feel, the more they’ll value their relatio
nship with you. Make someone feel small or unimportant, and you’ll earn their enmity in record time. How 
do you feel when you’re talking with someone who’s checking their BlackBerry, or interrupts your convers
ation to take a phone call? The more interest you take in other people, the more Important they will feel. T


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he reason you don’t feel valued when a sleazy car salesman asks “how you’re doing” is that you know the
 question doesn’t indicate genuine interest—it’s clearly a means to close the deal. People want to feel Imp
ortant even if they don’t buy from you, which is where canned sales scripts fail. Fortunately, making other
s feel Important is not particularly difficult if you make an effort to be present and curious. It mostly has to


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do with undivided focus: paying attention, listening intently, expressing interest, and asking questions. Bei
ng the complete focus of someone’s attention is so rare in today’s world that it makes a memorable impac
t almost immediately. Cultivating a genuine interest in other people goes a very long way. The more Impor
tant you make people feel when they’re around you, the more they’ll like you and want to be around you.


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SHARE THIS CONCEPT: http://book.personalmba.com/importance/ Safety You can’t operate a company 
by fear, because the way to eliminate fear is to avoid criticism, and the best way to avoid criticism is to do 
nothing. —STEVE ROSS, FORMER CEO OF TIME WARNER That’s the stupidest thing I’ve ever heard! 
Seriously—did you even think that through before you opened your mouth?” Ever had a meeting like that?


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I have. Unfortunately, this type of interaction happens all the time. In What Got You Here Won’t Get You 
There, veteran executive coach Marshall Goldsmith explains that high-level executives often subtly (and s
ometimes blatantly) put down their peers and subordinates to make themselves feel smarter or more Imp
ortant. What putting others down actually accomplishes is shutting down effective communication. Effectiv


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e communication can only occur when both parties feel safe. As soon as people start to feel unimportant 
or threatened in a conversation, they start “stonewalling,” shutting down communication. The threatened p
arty may continue to interact, but mentally and emotionally, they’ve withdrawn from the conversation. The 
only way to prevent stonewalling is to make the person you’re communicating with feel safe being open a


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nd honest with you. Just as people have a fundamental need to feel Important, people also have a need t
o feel safe when expressing what’s on their minds and talking about things that are Important to them. Th
e moment they begin to sense they’re being judged, evaluated, or looked down upon because of an idea t
hey have or a position they hold, they’ll shut down. In Crucial Conversations, a book about maintaining a


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sense of Safety while discussing important issues with colleagues and loved ones, authors Kerry Patterso
n, Joseph Grenny, Ron McMillan, and Al Switzler recommend using the STATE model to communicate wi
thout provoking anger or defensiveness: 1. Share your facts—Facts are less controversial, more persuasi
ve, and less insulting than conclusions, so lead with them first. 2. Tell your story—Explain the situation fro


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m your point of view, taking care to avoid insulting or judging, which makes the other person feel less safe
. 3. Ask for others’ paths—Ask for the other person’s side of the situation, what they intended, and what th
ey want. 4. Talk tentatively—Avoid conclusions, judgments, and ultimatums. 5. Encourage testing—Make 
suggestions, ask for input, and discuss until you reach a productive and mutually satisfactory course of ac


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tion. Some people are more sensitive than others. Becoming more aware of your words and actions and h
ow they might be interpreted by people with different attitudes is half the battle. If you want to communicat


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e with someone in a way that you both benefit from the conversation and get something done, both partie
s need to feel safe. The best way to make that happen is to avoid passing judgment and focus on making 
the other party feel Important. Books like Crucial Conversations, How to Win Friends and Influence Peopl
e by Dale Carnegie, and Emotional Intelligence by Daniel Goleman can help you learn how. SHARE THIS


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CONCEPT: http://book.personalmba.com/safety/ Golden Trifecta Any fool can criticize, condemn, and co
mplain—and most fools do. —DALE CARNEGIE, AUTHOR OF HOW TO WIN FRIENDS AND INFLUEN
CE PEOPLE If people have a fundamental need to feel Important and Safe, how do you go about making 
that happen? The Golden Trifecta is my personal three-word summary of How to Win Friends and Influen
ce People. If you want to make others feel Important and safe around you, always remember to treat peo


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ple with appreciation, courtesy, and respect. Appreciation means expressing your gratitude for what other
s are doing for you, even if it’s not quite perfect. Imagine that you’re designing a product, and your lead de
signer shows you some mockups that you believe won’t work. Bluntly responding, “This is totally wrong—
do it again,” is a good way to make your colleague feel unimportant and insecure. Instead, express Appre


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ciation: “Thanks—it’s clear you worked hard on this and I appreciate that. I’m not sure if we’re there yet, s
o here are a few ideas that may help... ” It’s the same content, but delivered in a very different tone. Court
esy is politeness, pure and simple. I once heard Courtesy defined as “accepting small inconveniences on 
behalf of another person,” and I think that’s a very useful definition. Opening the door for another person i


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s a small inconvenience, but it can have a major impact on how they perceive you. There’s no need to ma
ke every petty issue a big deal. Respect is a matter of honoring the other person’s status. No matter how 
you relate to the person you’re communicating with, Respecting them as an individual is critical if you wan
t to make them feel Important or safe, no matter how high or low their social status. It’s important to apply


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the Golden Trifecta to all of your interactions with other people, not just the people you’re particularly inter
ested in. If you’ve ever had lunch or dinner with someone who was nice to you but rude to the waitstaff, y
ou know what I mean. Treating other people poorly sends a clear signal to everyone that you can’t be trus
ted. If you make it a policy to treat people with Appreciation, Courtesy, and Respect in all circumstances,


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other people will feel Important and safe in your presence. SHARE THIS CONCEPT: http://book.personal
mba.com/golden-trifecta/ Reason Why Civilization advances by extending the number of operations we c
an perform without thinking. —ALFRED NORTH WHITEHEAD, MATHEMATICIAN AND PHILOSOPHER 
Here’s a fascinating quirk about asking people to do something: they’ll be far more likely to comply with yo


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ur request if you give them a reason to do what you ask. In Influence: The Psychology of Persuasion, Dr. 
Robert Cialdini describes an ingenious experiment that demonstrates this principle in action. In the 1970s,
 Ellen Langer, a psychologist at Harvard University, conducted a set of famous experiments about compli
ance—what makes people agree to a request. The experiments centered around a busy copy machine on


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the Harvard campus. Langer’s students asked people waiting in line to use the copy machine if they coul
d move to the front of the line, using various approaches. A straightforward request was honored 60 perce
nt of the time, but Langer found that adding a reason for the request increased the compliance rate to 95 
percent—an astounding improvement. The technique worked even if the reason was vacuous—“because


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I have to make copies” worked just as well as “because I’m late for class” or “because I’m in a rush.” All th
e reason had to do was supply a “because,” and it was enough to make people agree to the request. Hum
ans are predisposed to look for behavioral causes. People will be more receptive to any request if you giv
e them a reason why. Any reason will do. SHARE THIS CONCEPT: http://book.personalmba.com/reason-


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why/ Commander’s Intent Never tell people how to do things. Tell them what to do, and they will surprise 
you with their ingenuity. —GENERAL GEORGE S. PATTON Almost universally, people hate to be told ex
actly what to do. “Micromanagement” is the bane of any worker’s existence—if you’re a competent profes
sional, nothing is more demeaning than someone else defining and scrutinizing your work to the last detai


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l. Micromanagement isn’t simply annoying—it’s extremely inefficient. Not only does spelling out every sing
le detail make people feel less Important, it actually impairs their effectiveness. No set of instructions, no 
matter how detailed, is capable of covering every contingency. When something inevitably changes, micr
omanagement fails. Think of how overwhelmed a CEO who insists on micromanagement will inevitably be


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come—remember, human beings don’t Scale. The more people who work for the company, the more dire
ctions the CEO must give to keep everything moving. If you have ten employees, micromanagement is a 
hassle. If you have hundreds or thousands, it’s a nightmare. Commander’s Intent is a much better method
 of delegating tasks: whenever you assign a task to someone, tell them why it must be done. The more yo


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ur agent understands the purpose behind your actions, the better they’ll be able to respond appropriately 
when the situation changes. Commander’s Intent originated on the battlefield. If a general tells a field com


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mander precisely how to capture a hill and the situation changes, the field commander is forced to return t
o the general for new orders, which is slow and inefficient. If the general explains the strategy to the field 
commander and explains why that particular hill is important and how it will support the overall strategy, th
e field commander is free to use his knowledge of the Goal and fresh intelligence to act in a new way that


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supports the original intent. Commander’s Intent alleviates Communication Overhead. By communicating 
the intent behind a certain plan, a leader can make constant communication less critical for the success of
 the entire team. If everyone understands the purpose of the plan, everyone can act in ways that support t
he intent without requiring constant attention. When you communicate the intent behind your plans, you al


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low the people you work with to intelligently respond to changes as they happen. SHARE THIS CONCEP
T: http://book.personalmba.com/commandersintent/ Bystander Apathy Accountability is about one person 
taking responsibility. If two people are accountable for the same decision, no one is really accountable. —
GLYN HOLTON, INVESTMENT RISK MANAGEMENT CONSULTANT Growing up, I was very active in th
e Boy Scouts. The standard Scout program covers first aid, CPR, and emergency management—basic tr


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aining that prepares you to handle the most common emergencies you’re likely to face. Outside of specifi
c techniques, I remember two useful principles from this training: (1) always personally step up and take r
esponsibility, unless relieved by a more experienced professional, and (2) always direct commands or req
uests very clearly to one specific individual at a time. If someone appears to be experiencing a heart attac


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k in a crowded store and you yell, “Someone call 911,” it’s likely that no one will actually call—the more pe
ople around, the more likely everyone will assume that someone else is taking action. It’s far more effectiv
e to single someone out, make eye contact, point, and say very clearly, “YOU—CALL 911.” They will. Bys
tander Apathy is an inverse relationship between the number of people who could take action and the nu


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mber of people who actually choose to act. The more people available, the less responsibility each memb
er of the crowd feels to do anything about the situation. The 1964 murder of Kitty Genovese and the 2009 
shooting of Petru Barladeanu are dramatic, well-known examples of Bystander Apathy. In both cases, the
 victims were attacked in the presence of many bystanders, none of whom offered assistance. There’s so


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me controversy over exactly how many people witnessed the Genovese murder, but there’s no doubt abo
ut the Barladeanu case—it was captured on video. As Barladeanu bled to death from a gunshot wound on
 the floor of a metro station, scores of people who could clearly see what was going on simply walked by. 
Bystander Apathy explains why anything assigned to a committee never gets done. If you’ve ever worked


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with a group of people who have no Power over one another, you know what I’m talking about. Unless so
meone steps up and takes individual responsibility for actually making things happen and holding individu
als accountable for progress, a committee can deliberate for years without getting anything done. Each m
ember of the committee simply assumes someone else is working on it. The best way to eliminate Bystan


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der Apathy in project management is to ensure that all tasks have single, clear owners and deadlines. Unl
ess every individual on your team knows exactly what they’re responsible for and when it must be done, it
’s very unlikely that they’ll actually do it. When delegating responsibilities, always assign tasks to a single 
owner with a clear deadline. Only then will people feel responsible for getting things done. SHARE THIS


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CONCEPT: http://book.personalmba.com/bystander-apathy/ Planning Fallacy Hofstadter’s Law: it always 
takes longer than you expect, even when you take into account Hofstadter’s Law. —DOUGLAS HOFSTA
DTER, COGNITIVE SCIENTIST AND PULITZER PRIZE- WINNING AUTHOR OF GÖDEL, ESCHER, BA
CH: AN ETERNAL GOLDEN BRAID People are consistently and uniformly horrendous at planning. As un
comfortable as this sounds, any plan created by even the most intelligent and skilled CEO or project man


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ager is very likely to be grossly inaccurate. As Jason Fried and David Heinemeier Hansson memorably qu
ip in their book Rework, “Planning is guessing.” The reason we’re so bad at planning is because we’re not
 omniscient—unforeseen events or circumstances can dramatically impact even the most detailed plans. 
When we create plans, we’re simply guessing and using Interpretation to fill in the blanks, no matter how


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much we cloak that uncomfortable reality in official-sounding language and fancy-looking charts. The Plan
ning Fallacy means that people have a persistent tendency to underestimate completion times. The more 
complex the project, the more Interdependencies (discussed later) the project contains. The more Interde
pendencies there are, the more likely it is that something at some time will not go according to plan. When


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planning, we naturally tend to imagine a scenario in which everything goes well. As a result, we tend to u
nderestimate the likelihood of things that could impact the plan, as well as how much those contingencies 
will affect the project. Rare is the project plan that contains a line item that says, “Project manager contrac
ts mononucleosis: out for a month.” Most plans drastically underestimate the amount of Slack (discussed l


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ater) necessary to make the plan accurate. If you’re responsible for completing a complex project, includin


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g a few months of Slack time is appropriate— unexpected delays, vacations, sicknesses, and other unfore
seen events are likely to make things take longer than expected. The challenge is that including significan
t Slack time is almost never seen as acceptable or appropriate. If you go to a CEO, customer, or partner 
with a plan that involves three months of Slack time, the most common response is, “That’s not acceptabl


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e—get it done faster.” The Slack is eliminated, and as a result, almost every project plan is very likely to b
e completely wrong. The inaccuracy of plans doesn’t make planning worthless. Plans aren’t useful becaus
e they help you predict with better accuracy—they’re useful because the act of creating the plan helps you
 understand requirements, dependencies, and risks more thoroughly than when you started. In the immort


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al words of Dwight D. Eisenhower: “No battle was ever won according to plan, but no battle was ever won 
without one . . . Plans are useless, but planning is indispensable.” The value of planning is in Mental Simu
lation: the thought process required to create the plan itself. Use plans, but don’t depend on them—as lon
g as you keep working as quickly and effectively as possible, the project will be done as soon as it’s feasi


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ble. SHARE THIS CONCEPT: http://book.personalmba.com/planning-fallacy/ Referrals The way to get on 
in the world is to make people believe it’s to their advantage to help you. —JEAN DE LA BRUYÈRE, SEV
ENTEENTH-CENTURY ESSAYIST AND MORALIST When your car breaks down, whom would you rathe
r take it to—a mechanic who’s a friend of a friend, or a random operation you found in the phone directory


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? Given the choice, people always prefer to interact with people they know and like. Referrals make it far 
easier for people to Decide to work with someone they don’t know. Referrals are effective because they tr
ansfer the qualities of being known and liked. The reason you’re more likely to go to a mechanic your frien
d recommends is that you know and like your friend, and your friend knows and likes that mechanic. Even


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if the competing mechanic in the phone book is highly qualified, that doesn’t matter as much as being kno
wn and liked. The Referral transfers the knowing/liking effect to the recipient—instead of being a risky unk
nown quantity, they’re suddenly a friend. Cold calling doesn’t work very well because the caller is unknow
n. Remember, our minds tend to treat unknown people and situations as potential threats, which activates


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our natural defenses. If someone doesn’t already know or like you, you’re going to have a tough time con
vincing them to do what you want. Even the most obscure commonalities can significantly warm up a cold
 connection. If someone mentions they’re from the same area as you, or that they went to the same colleg
e, or know the same person, you’ll automatically start to like them more—even though the connection ma


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y be very tenuous. The last year Kelsey sold wedding gowns in Manhattan, over 70 percent of her sales c
ame from Referrals. When you’re considering spending $10,000 or more on a designer dress, you want to
 work with someone you know and like—and Kelsey’s previous customers really liked working with her. B
efore they entered the salon, most of Kelsey’s prospective customers already knew and liked her—and sh


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e closed many more sales as a result. The more people who know, like, and trust you, the better off you a
re. Referrals are the best way to expand your network of personal connections. SHARE THIS CONCEPT:
 http://book.personalmba.com/referrals/ Clanning It is a more inspiring battle cry to scream, “Die, vicious s
cum!” instead of “Die, people who could have been just like me but grew up in a different environment!” —
ELIEZER YUDKOWSKY, ARTIFICIAL INTELLIGENCE RESEARCHER AND FOUNDER OF LESSWRO


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NG.COM In 1954, twenty-two twelve-year-old boys were selected to attend a special summer camp in Ro
bbers Cave State Park in Oklahoma. Here’s what made the summer camp special: the camp was actually
 a psychology experiment, operated under the direction of Drs. Muzafer and Carolyn Sherif. Each of the b
oys was intentionally selected to be as similar to the rest of the group as possible—the psychologists ens


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ured that all of the boys had similar IQs, families, and childhood experiences. Before the experiment start
ed, the group of twenty-two was split into two groups and placed on opposite sides of the park. By design,
 neither group knew the other existed. The original plan was to let each group coalesce for a while, then m
ake them aware that the other group existed to see what would happen. The camp counselors were psyc


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hologists and graduate students, who would be watching the events unfold up close and personal. Here’s 
what happened: the groups accidentally discovered each other earlier than planned, and hostilities started
 immediately. As soon as the boys discovered there was another group in “their camp,” they rallied togeth
er in preparation and defense. Humans naturally tend to form distinct groups, a process called Clanning.


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One group of boys began calling themselves “the Eagles,” while the other group self-identified as “the Rat
tlers.” Distinct group identities formed to help members identify “insiders” and “outsiders.” The Eagles crea
ted an image of themselves as the heroic good guys, while the Rattlers took on the persona of misfits and
 rebels. With surprising speed, minor provocations like put-downs and stealing the other group’s flag turne


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d into chaos: campsite raids and dining hall fist fights. Competitive activities like sports were a disaster. Fo
r the safety of the campers, the researchers quickly tried to find a way to resolve the conflict. The psychol


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ogists introduced challenges and goals that required both groups to work together: solving a water shorta
ge, deciding on a movie to watch, and pushing a broken-down truck back to camp. When the campers sta
rted feeling like part of a larger group, the conflicts subsided. Clanning is a natural human tendency—we’r
e automatically and profoundly influenced by the people around us. Identifying ourselves as part of a grou


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p and distinguishing ourselves from other groups is an instinct that explains many of the ongoing wars an
d conflicts featured in the news every day. Think of sports fans. The players, coaches, and even stadiums
 and uniforms change so often it’s difficult to understand what exactly the fans are cheering for—the life of
 a rabid New York Yankees fan will go on unchanged, regardless of whether their team wins or loses. Whi


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le that may be true, it doesn’t feel that way to the fan—when the Yanks win, the fans feel like winners too. 
Sports rivalries happen for the same reason. I grew up in northern Ohio, where the Ohio State-Michigan S
tate rivalry is alive and well. Where I come from, during certain parts of the year, Michigan is evil in the ey
es of Ohio State fans. If you look at the situation from a distance, it’s absolutely silly—college kids scrambl


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ing for a little oblong brown ball while hundreds of thousands of people scream themselves hoarse. In the 
moment, however, for those two groups the enmity is everything. Groups naturally form around important i
ssues, positions, or events. Understand the group dynamic, or you’re likely to be caught up in it. SHARE T
HIS CONCEPT: http://book.personalmba.com/clanning/ Convergence and Divergence The individual has


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always had to struggle to keep from being overwhelmed by the tribe. If you try it, you will be lonely often, a
nd sometimes frightened. But no price is too high to pay for the privilege of owning yourself. —FRIEDRIC
H NIETZSCHE Over time, you become more and more like those whom you spend time with, and less lik
e people in other groups. Convergence is the tendency of group members to become more alike over tim


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e. In business, this is sometimes called a company “culture,” in the sense that people who work there tend
 to have similar characteristics, behaviors, and philosophies. Convergence also means that groups have a
 tendency to police themselves. The Norms (discussed later) of the group work like gravity—if they are vio
lated, others will exert an influence on the rebel to bring them back in line. As the proverb goes: “The talle


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st blade of grass is the first to be cut.” If you’ve ever worked for a company with a workaholic culture, you 
know how powerful Convergence can be. If it’s normal for workers to come in at 6:00 in the morning and s
tay until 10:30 at night, it can be difficult to keep shorter working hours, since violating the Norms is a Soci
al Signal that you don’t belong in the group. One of my clients, who works for a major medical research in


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stitution, often has conflicts with coworkers who believe he’s not “pulling his weight” because he leaves w
ork at 5:00 p.m. instead of 7:30 p.m., even though he does great work and gets everything done. Instead 
of being viewed as “working smart,” going home at a reasonable hour is seen as a form of treason. Sad, b
ut common. Divergence is the tendency for groups to become less like other groups over time. Since grou


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p behavior often evolves to clearly distinguish members of one group from another, the Norms of most gro
ups constantly change to resist being confused with another group or imitator. Divergence explains why fa
shions among the socialite class in New York City change so quickly and dramatically. In certain social cir
cles, dress is a way to signal your wealth or status. When the latest fashions start appearing in Target so


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people can imitate the look, fashions change to compensate. This constant Divergence keeps the group a
ffiliation signal valid. The groups you spend time with automatically and profoundly influence your behavio
r. According to the late Jim Rohn, author of The Art of Exceptional Living, “You are the average of the five 
people you spend the most time with.” The values and behaviors of the people you interact with on a daily


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basis exert constant pressures on you to adopt the same values and behaviors. Convergence can be use
ful if you consciously choose to spend time with people you’d like to become more like over time. If you’d l
ike to become less shy and more outgoing, spending time with social people in social situations can’t help
 but influence your behavior. You won’t become a social butterfly overnight, but you will naturally start to a


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dopt the behaviors and Norms of the people you’re spending time with. This approach works for anything
—if you want to test a raw-food diet for a while, spend more time hanging out with people who eat that wa
y. Used consciously, you can use convergence to make habit change easier. Breaking away from groups 
that aren’t serving you is painful but necessary to grow. People who want to quit smoking or drinking often


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find it extremely difficult to quit because a large portion of their social network engages in those behaviors
. Taking a smoke break at 3:00 p.m. or attending a 6:00 p.m. happy hour is a very significant social event
—if your friends are expecting you, the temptation is even harder to resist. To make significant changes, it
’s often necessary to leave one group and find another that’s more supportive of where you want to go, w


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hich is why joining support groups like Alcoholics Anonymous is a very effective way to change specific be
haviors. Once you realize how powerful Convergence and Divergence are, you can use them to your adv
antage. If your social circle isn’t supporting your goals, change your social circle. SHARE THIS CONCEP


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T: http://book.personalmba.com/convergencedivergence/ Social Signals The only rule is don’t be boring a
nd dress cute wherever you go. Life is too short to blend in. —PARIS HILTON, SOCIALITE A Rolex does
n’t tell time any better than a Timex. That’s not the point. People will expend huge amounts of money and 
energy to send Social Signals. A Gucci handbag doesn’t carry items any better than a JanSport backpack


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, and a Porsche 911 won’t (legally) get you from point A to point B any faster than a Honda Civic. “Luxury”
 items can cost many times more than their more functional counterparts, but function is not the purpose. 
The benefit lies in sending a message to other people. Social Signals are tangible indicators of some inta
ngible quality that increases a person’s social status or group affiliation. People don’t wear sports jerseys


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because they’re stylish—they’re ugly by any aesthetic measure. People wear them because they want to 
clearly affiliate themselves with their favorite team—it’s a statement of identity. Signals sometimes have lit
tle or nothing to do with the reality of what the signal is supposed to communicate. In The Millionaire Next 
Door, Thomas Stanley and William Danko describe the lives and habits of people who have a net worth of


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over $1 million. More often than not, they live in modest houses, drive used cars, and buy inexpensive clo
thing. If you think about it, that makes sense—the best way to build wealth is to earn a lot of money witho
ut spending it. People who want to signal they’re well off, on the other hand, tend to spend their money on
 items that communicate wealth and status—large houses, luxury cars, designer clothing, expensive vacat


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ions. These purchases are often financed with debt—if you look at the bank statements of the seemingly 
well-to-do, you’ll often find they’re in a precarious financial position. Social signals have real Economic Val
ue, so it pays to build them into your offer if you can. Part of building a signaling value into something is u
nderstanding what people want to signal to others. Since signals go back to the Core Human Drives (acqu


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isition, bonding, learning, defending, and feeling), people want to signal that they’re wealthy, attractive, int
elligent, high status, interesting, and confident. Connecting your offer to one of these qualities via Associat
ion is a surefire way to make people Desire your offer more strongly. Use Social Signals to your advantag
e, and you’ll make people want what you have to offer. SHARE THIS CONCEPT: http://book.personalmba


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.com/social-signals/ Social Proof If fifty million people say a foolish thing, it is still a foolish thing. —ANAT
OLE FRANCE, NOBEL PRIZE-WINNING NOVELIST AND POET Have you ever stood waiting for a stopli
ght to change before crossing the street when the person standing next to you suddenly started walking? 
Chances are, you unconsciously started moving too, unless you used Willpower to consciously Inhibit the


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response. In most situations, the actions of other individuals in our situation are a very strong indication th
at it’s okay to behave in a certain way. When a situation is ambiguous, we learn by watching the behavior 
of others. If you don’t know how to act in Rome, doing what the Romans do is a pretty safe bet. Social Pro
of can take on a life of its own. Fads often form when one person takes an action, others perceive it as a


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Social Signal, then act the same way, creating a social Feedback Loop (discussed later). Pet rocks, yello
w Lance Armstrong “Live Strong” bracelets, viral videos, and stock market bubbles all gain power via soci
al proof—if so many other people are doing it, it’s easy to come to the conclusion that you should probabl
y do it too. Testimonials are an effective form of Social Proof often used in business to close more sales.


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There’s a reason why Amazon.com and other online retailers prominently feature user reviews: stories ab
out people who have been pleased with a purchase send a clear signal that an item is safe to buy, so mor
e people purchase. The best testimonials don’t necessarily contain superlatives: amazing, best, life-chang
ing, and revolutionary have been so overused that people expect them and discount their expectations ac


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cordingly. The most effective testimonials tend to follow this format: “I was interested in this offer, but skep
tical. I decided to purchase anyway, and I’m very pleased with the end result.” The reason this format is m
ore effective than a litany of people gushing about your offer is that it more closely matches how your pros
pects are feeling: interested but uncertain. By signaling that the decision was a good one, testimonials tell


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your prospects that it’s safe to buy. Add a bit of Social Proof to your offers, and your sales will soar. SHAR
E THIS CONCEPT: http://book.personalmba.com/social-proof/ Authority Show respect to all men, but gro
vel to none. —TECUMSEH, EIGHTEENTH-CENTURY LEADER OF THE SHAWNEE TRIBE In the 1970s
, Sanka (a popular mass-market coffee brand) hired Robert Young, an actor, to promote the health benefit


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s of decaffeinated coffee. Young was better known to the public as Dr. Marcus Welby, the lead character 
of the popular television show Marcus Welby, M.D. Even though Young wasn’t an expert on the medical e
ffects of caffeine, people still perceived him as an authority—and bought Sanka. The approach worked so 
well that Sanka used “Dr. Welby” to promote their product for decades. People have an inherent tendency


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to comply with Authority figures. This tendency begins in childhood—we wouldn’t survive very long if we 
didn’t obey our parents most of the time. As we grow up, we’re socialized to respect and obey other Autho
rity figures: teachers, police officers, government officials, and clergy. As a result, when an Authority figur


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e asks us to do something, we’re very likely to comply—even if the request isn’t appropriate or doesn’t ma
ke sense. People tend to comply with Authority figures even if they’d refuse to take the same action under
 normal circumstances. In a famously disturbing social psychology experiment, Stanley Milgram proved th
at most individuals will comply with Authority figures to a surprising degree—even if the request appears t


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o be morally wrong. In a series of experiments that began in 1961, Milgram placed test subjects in a room
 with a “scientist” in a white lab coat and another individual, both of whom were actors. The subject was to
ld the study was about the effect of punishment on learning, and one of the participants was “randomly” s
elected to be the “learner”—the actor. The “learner” was taken to an adjacent room, strapped into a chair,


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and attached to electrodes. The test subject’s job as the “teacher” was to read the learner questions, then 
“shock” the learner if they responded incorrectly. The shocks weren’t real, but the actor would scream, cry
, and beg to be released from the study. Every few minutes, the “scientist” would instruct the teacher to rai
se the voltage of the shocks. The intent of the study was to see how long the test subject would obey the


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scientist before refusing to continue. The results were disturbing: 80 percent of participants continued past
 the point where the learner begged to stop, and 65 percent continued all the way to the maximum level of
 450 volts, which was clearly marked as deadly. Throughout the study, the subjects were clearly uncomfor
table and uncertain, but the scientist told them to continue, so they obeyed. Authority figures are automati


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cally and strongly persuasive. In the presence of an Authority figure, people will do things they’d otherwise
 view as reprehensible, or wouldn’t consider in the first place—the source of many a scandal involving fam
ous and powerful people. If you’re in a position of Authority, your Authority will change the way others inte
ract with you. Simply because you express an opinion, your subordinates will be far more likely to Interpre


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t your position as a truth or as a command. As a result, people will begin to filter the information they give 
you based on what they think you want to hear—which may not be what you need to hear. This filtering b
ehavior is how Authority figures often end up “living in a bubble”—the combination of Authority and Confir
mation Bias shelters them from information that contradicts their opinions. As a result, it’s difficult for Auth


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ority figures to compensate for the Excessive Self-Regard Tendency. Developing a strong Reputation in a
 certain area confers the benefits of Authority. Not all parts of Authority are insidious—if people respect yo
ur knowledge and experience, they’re more likely to do what you suggest. As a result, developing clear ex
pertise and a strong Reputation can be beneficial—it increases your own influence. Work to establish your


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self as an Authority on what you’re offering, and people will be more likely to accept your offer. SHARE T
HIS CONCEPT: http://book.personalmba.com/authority/ Commitment and Consistency A foolish consiste
ncy is the hobgoblin of little minds. —RALPH WALDO EMERSON A few months ago, Kelsey received a p
hone call from our alma mater, asking for a donation. Here’s the twist: they didn’t ask for the donation outr


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ight. Instead, they asked if she’d be “willing to donate money to the university in the future.” Thinking nothi
ng of it, she agreed—and promptly forgot about the call. Shortly before we moved from New York to Color
ado, an official-looking “invoice” for $150 from the university appeared in the mail. It said, “Here is your $1
50 commitment—you can send your check via the enclosed envelope.” Money was tight, since we were p


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aying for movers, buying cars, and purchasing furniture—but Kelsey sent the check anyway. After all, she 
had promised, right? No one wants to be considered an “oath breaker.” Commitments have been used thr
oughout history as a way of binding groups together. Breaking a promise or Commitment can often have 
a negative impact on social status and Reputation, so most people will do whatever they can to act in way


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s that are Consistent with previous positions and promises. Even small Commitments make it more likely t
hat individuals will take actions Consistent with those Commitments in the future. One of my favorite storie
s about Commitment comes from Michael Masterson, the author of Ready, Fire, Aim.2 On a trip to India, 
Masterson visited a rug merchant. He entered the shop with a healthy level of skepticism and absolutely n


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o intention of buying anything—he was just interested in the experience. The rug merchant was an excelle
nt salesman and relied on two primary strategies. To break down Masterson’s skepticism, he used stories
 (Narrative) of past sales to encourage Masterson to like and Trust him before the selling began. Then he 
used Commitment: whenever Masterson so much as looked at a rug, the proprietor would have his staff t


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ake it down off the racks to examine it closely. The rugs were heavy, and it was clear that the sales staff w
as working hard on his behalf. By making a small Commitment—expressing interest in a particular rug—M
asterson provoked a flurry of action. As the minutes passed, it became difficult for Masterson to imagine l
eaving without purchasing a rug—it would be inconsistent with the interest he’d expressed and the work t


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he proprietor’s staff were doing for him. The least he could do was Reciprocate—how could he tell them n
o? In the end, he purchased a rug for $8,200 and walked away a happy customer. Obtaining small Commi
tments makes it more likely people will choose to act Consistently with them later. Salespeople are often t


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aught to do what they can to encourage their customers to start saying yes as soon as possible. By gettin
g a “foot in the door,” they increase the probability that their prospect will take further action. That’s why s
o many activists use opening questions like “Do you care about child safety?” or “Do you care about the e
nvironment?” when telemarketing or collecting signatures on a petition. Most people do care about these t


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hings, so the reply is automatic and swift. Once you’ve said you care about something, however, it would 
be rude of you to refuse their request—it’s inconsistent with your previous statement. Obtain a small Com
mitment, and you’ll make it far more likely that others will comply with your request. SHARE THIS CONCE
PT: http://book.personalmba.com/commitmentconsistency/ Incentive-Caused Bias It is difficult to get a ma


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n to understand something when his salary depends upon his not understanding it. —UPTON SINCLAIR, 
PULITZER PRIZE-WINNING AUTHOR OF THE JUNGLE If you’re working with a real estate agent or mor
tgage broker, they’re primarily interested in convincing you to buy a house. Accordingly, most agents won’
t tell you it’s in your best interest to rent,3 even if it’s true. Incentive-Caused Bias explains why people with


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a vested interest in something will tend to guide you in the direction of their interest. We touched on the id
ea of Incentive-Caused Bias when talking about Buffers. If you’re working with an agent who’s paid on co
mmission, it’s not necessarily in their best interest to tell you that purchasing something is not a good idea
. As the saying goes: don’t ask the barber if you need a haircut. Incentives automatically influence the way


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people act, based on how they’re rewarded. As a result, the structure of the incentives people are expose
d to has a significant impact on behavior. Assuming that the things people are controlling for stay the sam
e, changing the incentives is also likely to change behavior. In The Knack, Norm Brodsky and Bo Burlingh
am describe how they compensate their salespeople. Most companies compensate salespeople on a com


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mission basis: closing more sales nets the salesperson more money. Under this incentive structure, their 
salespeople were hyperfocused on closing sales—even if those sales weren’t profitable or in the long-ter
m interest of the company. By compensating their salespeople on a salary basis and giving generous bon
uses based on long-term performance, Brodsky and Burlingham encouraged them to focus on making pro


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fitable sales versus sales at any cost. Sometimes incentives create unintended Second-Order Effects (dis
cussed later). Stock options were created under the theory that executives who had an interest in the com
pany’s stock price would act in ways to make the stock go up in value over time, which was in the best int
erest of the shareholders. That’s true, but only to a point: the actual interest of those executives is in maki


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ng the stock price go up right before they intend to sell. Once the options are sold, they no longer care so 
much, leading to policies that sacrifice long-term stability for short-term gains. Incentives are tricky becaus
e they inevitably interact with our Perceptual Control systems. For example, giving an employee a bonus 
or raise for doing something good can create a curious result—they stop doing what got them the reward.


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That makes no sense until you realize there was always a reward—they did what they did because they w
anted to, so the reward was internal. Paying them makes the action part of their job, which reduces their i
nner drive to complete it for its own sake. In the case of Conflict, Perceptual Controls win over incentives 
every time. Incentives can be useful if used appropriately, but tread cautiously. If the incentives of the peo


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ple you work with aren’t aligned with your interests, you’re bound to have problems. SHARE THIS CONC
EPT: http://book.personalmba.com/incentive-causedbias/ Modal Bias We find comfort among those who a
gree with us, and growth among those who don’t. —FRANK A. CLARK, MINISTER AND NEWSPAPER C
OLUMNIST A few years ago, I was traveling on business with a colleague who was amazed that I was car
rying a shoulder bag instead of a rolling suitcase. It was an overnight trip, so I didn’t need much—a chang


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e of clothes, my computer, and a book. I had everything I needed and the bag wasn’t heavy, so my solutio
n worked just fine. My colleague thought my solution was absurd and spent the next ten minutes telling m
e so: “It’s much better to carry a rolling suitcase! It would be more comfortable, and there’d be less weight.
 You should always carry a rolling suitcase...” Modal Bias is the automatic assumption that our idea or app


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roach is best. Most of us like to assume we have everything together—that we know what we’re talking ab
out, we know what we’re doing, and that our way of doing things is best. Very often, we are quite mistake
n. There is always more than one way to get something done, and good ideas can come from anywhere. I
n the absence of evidence to the contrary, the HiPPO rules—decisions are made according to the “Highes


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t Paid Person’s Opinion.” HiPPO is a term coined by Avinash Kaushik in Web Analytics: An Hour a Day to
 explain why it’s critically important to support business proposals and decisions with data. In the absence
 of data, you’ll ultimately be forced to do things the boss’s way: Modal Bias ensures that the bosses think t
hat their way is best, unless you can prove otherwise. In a battle of opinions, the HiPPO always wins. The


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best way to avoid Modal Bias is to use Inhibition to temporarily suspend judgment. Part of the value of un
derstanding cognitive biases is the knowledge that you’re not immune to them, and simply knowing they e


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xist doesn’t make them any less influential. Modal Bias is automatic—we have to use Willpower to overco
me it. If you’re a leader or manager, it pays to consciously suspend your judgment long enough to thoroug
hly consider the perspectives and suggestions of the people you work with. Otherwise, you’re very likely t
o miss important information. Remind yourself to keep an open mind, and you’ll enhance your ability to m


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ake wise decisions. SHARE THIS CONCEPT: http://book.personalmba.com/modal-bias/ Pygmalion Effect
 High achievement always takes place in the framework of high expectation. —CHARLES KETTERING, P
ROLIFIC INVENTOR AND FORMER HEAD OF RESEARCH FOR GENERAL MOTORS Individuals tend t
o rise to the level of other people’s expectations of them. In general, people tend to perform up to the level
 that others expect them to perform. If you don’t expect much from the people you work with, it’s likely you


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won’t inspire them to perform to the limits of their capabilities. Let them know you expect great things fro
m them, and more often than not, you’ll find that they perform well. The Pygmalion Effect is a tendency na
med after the protagonist of a Greek myth. Pygmalion was a gifted sculptor who created a statue of a wo
man so perfect that he fell in love with his creation. After Pygmalion desperately prayed to Aphrodite, the


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goddess of love, she took pity on him by bringing the statue to life. The Pygmalion Effect explains why all 
of our relationships are, in a very real sense, self-fulfilling prophecies. The effect was first verified in studie
s that examined the relationship between teachers and students. If a teacher believed a student was “gifte
d” or “smart,” the teacher would act in ways that encouraged the student to live up to that assessment. If t


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he teacher believed a student was “difficult” or “challenged,” they wouldn’t receive as much support and w
ouldn’t perform as well—a self-fulfilling prophecy. In How to Win Friends and Influence People, Dale Carn
egie recommends “Giving others a great reputation to live up to.” He was a wise man—raise your expecta
tions of others, and they’ll naturally do their best to satisfy those expectations. The Pygmalion Effect isn’t


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an excuse to have unrealistic expectations of other people. Even the best builder on earth couldn’t replicat
e the pyramids of Egypt in an afternoon, so expecting that level of performance from anyone is a recipe fo
r disappointment and frustration. Expecting quality and performance is one thing—expecting miracles is u
nrealistic. The Pygmalion Effect also features a paradox: having high expectations of people will produce


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better results, but it also increases the probability that you’ll be disappointed. The Expectation Effect mea
ns that our perception of the quality of someone’s work is a function of our original expectations. The high
er our expectations are to begin with, the higher their performance will generally be, but the risk that our e
xpectations will be violated is also much higher. If you’re doing a formal assessment of someone’s perfor


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mance, remember to judge performance objectively and quantitatively as much as possible. Let others kn
ow you expect great work from them, and they’ll do their best to live up to your expectations. SHARE THI
S CONCEPT: http://book.personalmba.com/pygmalion-effect/ Attribution Error Rare is the person who ca
n weigh the faults of others without putting his thumb on the scales. —BYRON J. LANGENFELD, WORLD


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WAR I AVIATOR Let’s assume you hire a contractor to build a house and give him a clear deadline for co
mpletion. The deadline comes and goes, and the project isn’t done. Three months go by before the house
 is complete. Unless you’re feeling particularly charitable, you’re likely to think the contractor is unprofessi
onal, lazy, or inexperienced. You tell all of your friends who are interested in building a house not to hire t


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hat contractor— he overpromises and underdelivers. Now imagine the situation from the contractor’s point
 of view. The original plan was to buy lumber from a particular supplier that is typically trustworthy, but one
 of their trucks broke down, delaying the shipment. The situation required finding another supplier on short
 notice, which was difficult, since supplies of the materials were scarce. The contractor moved heaven an


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d earth to get the job done as quickly as possible—without the contractor’s intervention, the project would 
have been delayed six months instead of three. The Attribution Error means that when others screw up, w
e blame their character; when we screw up, we attribute the situation to circumstances. By assuming the 
contractor’s actions were due to a character flaw, you made an error in judgment—the contractor actually


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went above and beyond the call of duty, given the circumstances. Because you weren’t completely aware 
of the circumstances, however, you blamed his character. Avoiding the Attribution Error makes it easier to
 stay on good terms with the people you work with. If you’re working with someone who consistently fails t
o perform to expectations or deliver what they’re supposed to, then you have a legitimate issue that needs


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to be resolved. Otherwise, it’s beneficial to give people the benefit of the doubt unless a particular behavi
or clearly becomes a Pattern. When you understand the reason behind a person’s actions, it usually make
s you see their behavior in a different light. When something isn’t going as expected, try to find out as muc
h as you can about the circumstances surrounding the behavior you’re noticing. More often than not, you’l


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l find that it’s a matter of circumstance, not a fundamental character flaw. SHARE THIS CONCEPT: http://
book.personalmba.com/attribution-error/ Option Orientation The important work of moving the world forwa


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rd does not wait to be done by perfect men. —GEORGE ELIOT, NINETEENTH-CENTURY NOVELIST W
hen something goes wrong, how you handle the crisis matters. Mistakes and issues happen all the time, s
o planning your response in advance goes a long way toward minimizing the impact of the unexpected. Fi
xating on the issue is the least productive thing you can do when something goes wrong. By the time you’


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re aware of an issue, preventing it is beyond your Locus of Control. The issue has already occurred—the 
only question is how you plan to respond to it. Imagine that you report to the CEO of a company that mak
es microwaves, and you’ve just received a report that a few of your microwaves have exploded, burning s
everal homes to the ground. That’s a major issue. How do you think the CEO will respond if your approac


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h is, “Boss, we have an issue. What do we do? Tell us what to do!” Unless your CEO is a very patient soul
, the response will probably be, “I know we have a $&#@&% issue—help me figure out our options!” F ixa
te on the hand-wringing, and you’ll soon be out of a job. Instead of dwelling on the problem, focus on your
 Options. Ruminating on the issue doesn’t solve anything; what are you going to do about it? By focusing


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your energy on evaluating potential responses, you’re far more likely to find a way to make things better. 
Here’s an alternate approach your hypothetical CEO is probably going to find more useful: We’ve receive
d several reports of fires caused by our microwaves. Here are our options—we can have our engineers ru
n a full diagnostic before we issue a statement and risk further issues, or we can issue an immediate recal


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l. Based on the information we have available right now, it appears our microwaves are at fault, and prese
nt a major risk to the safety of our customers. Based on our options, I recommend an immediate recall, w
hich we estimate will cost $4 million. Focusing on the potential Options is far more constructive—you’re pr
esenting several courses of action and the costs and benefits associated with each, then recommending a


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solution based on the available information. The CEO (or client) can then review your recommendation a
nd the Options you present, ask follow-up questions, then make the best Decision possible. Do this often 
and well, and you’ll develop a Reputation for clearheadedness in the midst of crisis. Focus on Options, no
t issues, and you’ll be able to handle any situation life throws at you. SHARE THIS CONCEPT: http://book


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.personalmba.com/option-orientation/ Management Management is doing things right; leadership is doing 
the right things. —PETER DRUCKER, FATHER OF MODERN MANAGEMENT THEORY Much has been
 made in business schools of “scientific management” and the need for highly educated, professionally tra
ined managers. In reality, you can’t learn to be a competent manager in a classroom—beyond a few simpl


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e principles, it’s a skill best learned through experience. Management is simple, but not simplistic. In esse
nce, Management is the act of coordinating a group of people to achieve a specific Goal while accounting 
for ever-present Change and Uncertainty (both discussed later). It’s like taking the helm of a ship during a 
storm: all you can do is move the wheel back and forth, which is simple, but it takes experience and skill t


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o do it well. Based on what we’ve learned thus far, here are six simple principles of effective real-world Ma
nagement: 1. Recruit the smallest group of people who can accomplish what must be done quickly and wi
th high quality. Comparative Advantage means that some people will be better than others at accomplishi
ng certain tasks, so it pays to invest time and resources in recruiting the best team for the job. Don’t make


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that team too large, however—Communication Overhead makes each additional team member beyond a
 core of three to eight people a drag on performance. Small, elite teams are best. 2. Clearly communicate 
the desired End Result, who is responsible for what, and the current status. Everyone on the team must k
now the Commander’s Intent of the project, the Reason Why it’s important, and must clearly know the spe


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cific parts of the project they’re individually responsible for completing— otherwise, you’re risking Bystand
er Apathy. 3. Treat people with respect. Consistently using the Golden Trifecta—appreciation, courtesy, a
nd respect—is the best way to make the individuals on your team feel Important and is also the best way t
o ensure that they respect you as a leader and manager. The more your team works together under mutu


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ally supportive conditions, the more Clanning will naturally occur, and the more cohesive the team will bec
ome. 4. Create an Environment where everyone can be as productive as possible, then let people do their
 work. The best working Environment takes full advantage of Guiding Structure—provide the best equipm
ent and tools possible and ensure that the Environment reinforces the work the team is doing. To avoid ha


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ving energy sapped by the Cognitive Switching Penalty, shield your team from as many distractions as po
ssible, which includes nonessential bureaucracy and meetings. 5. Refrain from having unrealistic expectat
ions regarding certainty and prediction. Create an aggressive plan to complete the project, but be aware i
n advance that Uncertainty and the Planning Fallacy mean your initial plan will almost certainly be incompl


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ete or inaccurate in a few important respects. Update your plan as you go along, using what you learn alo
ng the way, and continually reapply Parkinson’s Law to find the shortest feasible path to completion that w
orks, given the necessary Trade-offs required by the work. 6. Measure to see if what you’re doing is worki


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ng—if not, try another approach. One of the primary fallacies of effective Management is that it makes lea
rning unnecessary. This mind-set assumes your initial plan should be 100 percent perfect and followed to 
the letter. The exact opposite is true: effective Management means planning for learning, which requires c
onstant adjustments along the way. Constantly Measure your performance across a small set of Key Perf


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ormance Indicators (discussed later)—if what you’re doing doesn’t appear to be working, Experiment with 
another approach. Do these well, and your team will be highly productive. Do them poorly, and you’ll be fo
rtunate to get anything useful done at all. SHARE THIS CONCEPT: http://book.personalmba.com/manage
ment/ 10 UNDERSTANDING SYSTEMS You do ill if you praise, but worse if you censure, what you do no
t understand. —LEONARDO DA VINCI, INVENTOR, ARTIST, AND POLYMATH Businesses are complex


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Systems that exist within even more complex systems—markets, industries, and societies. A complex sy
stem is a selfperpetuating arrangement of interconnected parts that form a unified whole. In this chapter, y
ou’ll learn common elements of all systems, how Environmental factors influence the function of systems, 
and the everpresent nature of Uncertainty and Change. SHARE THIS CONCEPT: http://book.personalmb


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a.com/understandingsystems/ Gall’s Law A complex system that works is invariably found to have evolve
d from a simple system that worked. The inverse proposition also appears to be true: a complex system d
esigned from scratch never works and cannot be made to work. You have to start over, beginning with a s
imple system. —JOHN GALL, SYSTEMS THEORIST Here’s a weekend project for you: build a car from s


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cratch. No premanufactured parts or plans allowed. Just a block of metal, a few simple tools, your knowle
dge, and your imagination. How do you think your project will turn out? Even if the project takes a year, ch
ances are it will be a complete disaster— if your car works at all (which is very, very unlikely), it’ll be far le
ss efficient and reliable than even the worst car from a commercial manufacturer. Now imagine building a


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modern computer, creating a cure for cancer, or cloning a human being from scratch without relying on an
ything someone else has already discovered. Inevitably, you’ll suffer through a series of expensive and de
moralizing failures. If you succeed, it’ll take decades. Why is it so hard to build working complex Systems f
rom scratch? John Gall, one of the first major complex systems theorists, provided the answer. Here’s Gal


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l’s Law : all complex systems that work evolved from simpler systems that worked. Complex systems are f
ull of variables and Interdependencies (discussed later) that must be arranged just right in order to functio
n. Complex systems designed from scratch will never work in the real world, since they haven’t been subj
ect to environmental selection forces while being designed. Uncertainty (discussed later) ensures that you


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will never be able to anticipate all of these Interdependencies and variables in advance, so a complex sys
tem built from scratch will continually fail in all sorts of unexpected ways. Gall’s Law is where environment
al Selection Tests (discussed later) meet systems design. If you want to build a system that works, the be
st approach is to build a simple system that meets the Environment’s current selection tests first, then imp


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rove it over time. Over time, you’ll build a complex system that works. Gall’s Law is why Prototyping and It
eration work so well as a Value Creation methodology. Instead of building a complex system from scratch,
 building a Prototype is much easier—it’s the simplest possible creation that will help you verify that your s
ystem meets critical Selection Tests. Expanding that Prototype into a MEVO allows you to validate your C


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ritically Important Assumptions, resulting in the simplest possible system that can succeed with actual pur
chasers. Iteration and Incremental Augmentation, over time, will produce extremely complex systems that 
actually work, even as the Environment changes. If you want to build a system that works from scratch, vi
olate Gall’s Law at your peril. SHARE THIS CONCEPT: http://book.personalmba.com/galls-law/ Flow A pr


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ocess cannot be understood by stopping it. Understanding must move with the flow of the process, must j
oin it and flow with it. —FRANK HERBERT, SCIENCE FICTION NOVELIST AND AUTHOR OF DUNE No
 matter what a System actually does, it will have Flows—movements of resources into and out of the syst
em. Imagine an automotive assembly line —raw materials like steel, plastic, silicon, rubber, and glass flow


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in, and a finished car flows out. Inflows are resources moving into a system. Water into a sink. Money int
o a bank account. Raw materials into an assembly line. New hires into a company. Outflows are resource
s flowing out of a system. Water draining from a sink. Money flowing out of a bank account. Finished good
s exiting an assembly line. Employees leaving the company due to retirement, termination, or changing jo


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bs. Follow the Flows, and you’re on your way to understanding how the system works. SHARE THIS CON
CEPT: http://book.personalmba.com/flow/ Stock Goods in any storehouse are useless until somebody tak
es them out and puts them to the use they were meant for. That applies to what man stores away in his br
ain, too. —THOMAS J. WATSON, FORMER PRESIDENT OF IBM Follow a system’s Flows, and you’ll in


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evitably find places where resources tend to pool together. In this case, a Stock isn’t a certificate of busine
ss ownership—it’s a pool or holding tank of resources. A bank account is a good example of a Stock: it’s a


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pool of money waiting to be used. Inventories, queues of customers, and waiting lists are also examples 
of Stocks. To increase a Stock, increase Inflows and/or decrease Outflows. If you want to increase the siz
e of your bank account, put more money in and take less money out. If you’re building cars and you’re co
nsistently running out of engines, either slow down the line or add more engines to your inventory. To dec


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rease a Stock, decrease Inflows and/or increase Outflows. If you have too much inventory, stop producing
 units or increase sales. If waiting lists are too long, increase Throughput or reduce the number of people 
entering the line. Find the system’s Stocks, and you’ll discover pools of resources waiting to be used. SH
ARE THIS CONCEPT: http://book.personalmba.com/stock/ Slack A man with a surplus can control circum


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stances, but a man without a surplus is controlled by them, and often has no opportunity to exercise judg
ment. —HARVEY S. FIRESTONE, FOUNDER OF THE FIRESTONE TIRE AND RUBBER COMPANY Si
nce Stocks are pools of resources, it pays to understand how many resources you have to work with. Slac
k is the amount of resources present in a Stock. The more resources you have in a Stock, the more Slack


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you have. For a System to operate efficiently, Stocks should be just the right size—not too big, and not to
o small. Think of our hypothetical automotive manufacturing system: it’s a combination of many smaller sy
stems, each of which is designed to create a Stock of parts. If there’s no Stock of engines waiting to be in
stalled when a car reaches that part of the assembly line, that’s an issue—the car will have to wait until an


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engine is ready, which holds up everything in line behind it. To avoid this issue, it’s best to ensure that th
e Stock is big enough to handle the level of Outflows that are required to keep the system running. Inflows
 replenish the Stock as it’s depleted. Large Stocks have the most Slack, but that flexibility comes at a cost
. If you have five hundred engines waiting around to be installed, you’ll have a lot of funds tied up in invent


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ory, which reduces your cash flow. You’ll also have to pay for space to store the engines so they aren’t los
t or damaged, which increases your costs and decreases your Profit Margin. Small Stocks are more effici
ent but have less Slack. If you only have a Stock of two or three engines, you won’t have a huge amount 
of resources tied up in inventory, but the probability of running out of engines is much higher if the assem


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bly line speeds up or there’s a problem with the engine manufacturing system. Slack is tricky to manage: t
oo much, and you’re wasting time and money. Too little, and your system faces the risk of running out of t
he resources necessary to continue operating. SHARE THIS CONCEPT: http://book.personalmba.com/sl
ack/ Constraint Once you eliminate your number one problem, number two gets a promotion. —GERALD 
WEINBERG, CONSULTANT AND AUTHOR OF THE SECRETS OF CONSULTING The performance of


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a System is always limited by the availability of a critical input. Eliminate the Constraint, and the system’s 
performance will improve. In The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt explains wh
at he calls the “Theory of Constraints”: any manageable system is always limited in achieving more of its 
Goal by at least one Constraint. If you can identify the Constraint and eliminate or alleviate it, you’ll increa


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se the Throughput of the system. Creating or increasing the size of a Stock in front of a Constraint can hel
p alleviate the issue. If you’re constantly running out of engines, increasing the Slack in your engine Stock
 is the best way to alleviate the Constraint. By ensuring that the Constraint isn’t “starved,” you can increas
e the performance of the entire system. In order to find and eliminate a Constraint, Goldratt proposes the “


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Five Focusing Steps,” a method you can use to improve the Throughput of any System: 1. Identification: e
xamining the system to find the limiting factor. If your automotive assembly line is constantly waiting on en
gines in order to proceed, engines are your Constraint. 2. Exploitation: ensuring that the resources related
 to the Constraint aren’t wasted. If the employees responsible for making engines are also building windsh


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ields, or stop building engines during lunch-time, exploiting the Constraint would be having the engine em
ployees spend 100 percent of their available time and energy producing engines, and having them work in
 shifts so breaks can be taken without slowing down production. 3. Subordination: redesigning the entire s
ystem to support the Constraint. Let’s assume you’ve done everything you can to get the most out of the e


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ngine production system, but you’re still behind. Subordination would be rearranging the factory so everyt
hing needed to build the engine is close at hand, instead of requiring certain materials to come from the ot
her end of the factory. Other subsystems may have to move or lose resources, but that’s not a huge deal, 
since they’re not the Constraint. 4. Elevation: permanently increasing the capacity of the Constraint. In the


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case of the factory, elevation would be buying another engine-making machine and hiring more workers t
o operate it. Elevation is very effective, but it’s expensive—you don’t want to spend millions on more equi
pment if you don’t have to. That’s why Exploitation and Subordination come first: you can often alleviate a 
Constraint quickly, without resorting to spending more money. 5. Reevaluation: after making a change, re


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evaluating the system to see where the Constraint is located. Inertia is your enemy: don’t assume engines
 will always be the Constraint: once you make a few Changes, the limiting factor might become windshield


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s. In that case, it doesn’t make sense to continue focusing on increasing engine production—the system 
won’t improve until windshields become the focus of improvement. The “Five Focusing Steps” are very si
milar to Iteration Velocity—the more quickly you move through this process and the more cycles you com
plete, the more your system’s Throughput will improve. SHARE THIS CONCEPT: http://book.personalmb


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a.com/constraint/ Feedback Loop Systems of information-feedback control are fundamental to all life and 
human endeavor . . . Everything we do as individuals, as an industry, or as a society is done in the contex
t of an information-feedback system. —JAY W. FORRESTER, SYSTEMS THEORIST AND PROFESSOR
 AT MIT Cause and effect are easy enough to consider, but what happens when the effects become caus


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es themselves? Feedback Loops exist whenever the output of a System becomes one of the inputs in the 
next cycle. Feedback is how systems learn—if the system is capable of perceiving its Environment, that fe
edback helps the system understand whether it’s under control and satisfying the required Selection Tests
. Balancing Loops dampen each system cycle’s output, leading to system equilibrium and resistance to ch


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ange. Think of dropping a tennis ball from shoulder height: it’ll bounce up and down, each bounce smaller 
than the last. Friction and air resistance dampen each cycle until the energy in the system reaches equilib
rium and the ball sits at rest upon the ground. Balancing Loops stabilize the system, dampening oscillatio
ns and keeping the system in a certain state. Perceptual Control systems are usually made up of Balancin


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g Loops. Going back to the thermostat example: If the temperature of a room is higher than the Reference
 Level, the cooling system will kick in to move the temperature lower. If the temperature is lower than the 
Reference Level, the heater will turn on to bring the temperature up. As a result, the system tends to main
tain a stable temperature, which is the purpose of the system. Reinforcing Loops Amplify the system’s out


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put with each system cycle. Reinforcing Loops tend to lead to runaway growth or decay over time. Think o
f a price war between two companies, each of which is competing to have the lowest price. Company A lo
wers its price, then Company B retaliates by moving its price even lower. As long as each company’s Ref
erence Level stays at “our price must be lower than our competitor’s,” prices will continue to drop until bot


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h companies eliminate their Profit Margins on that offering. Compounding is an example of a positive Rein
forcing Loop. Each cycle of interest payments makes the principal of the next cycle bigger, resulting in ev
en more interest, continuing the cycle. Over time, accumulated interest can build to enormous sums, whic
h is the purpose of the system. More often than not, the size of every Stock is influenced by several loops,


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all pulling it in different directions. Consider your bank account balance : there are Feedback Loops contr
olling your income, rent/mortgage, food expenditures, and other expenses. You’re constantly evaluating w
hether each cycle is too much or not enough, which represents a Balancing feedback Loop. Too much or 
not enough Inflow or Outflow causes you to jump into action, which affects the next cycle. Look around yo


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u—there are Feedback Loops everywhere. Once you start noticing them, you’ll fully appreciate the ever-c
hanging complexity of the systems we live in. SHARE THIS CONCEPT: http://book.personalmba.com/fee
dback-loops/ Autocatalysis The system that will evolve most rapidly must fall between, and more precisely
 on, the edge of chaos—possessing order, but with the parts connected loosely enough to be easily altere


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d. —E. O. WILSON, SYSTEMS THEORIST Autocatalysis is a concept that comes from chemistry: it’s a re
action whose output produces the raw materials necessary for an identical reaction. An Autocatalyzing Sy
stem produces the inputs necessary for the next cycle as a by-product of the previous cycle, Amplifying th
e cycle. Autocatalysis is a Compounding, positive, self-reinforcing Feedback Loop—the system will contin


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ue to grow until the system changes in a way that produces less output. Television advertising from the 19
50s to the 1990s is an excellent example of Autocatalysis. Companies could spend $1 in advertising and, 
via increased demand and distribution, get $2 or more in return. That $2, reinvested in advertising, becam
e $4, which became $8, which became $16, etc. Companies like Procter & Gamble, GE, Kraft, and Nestlé


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used this cycle to become the behemoths they are today. Now, $1 invested in television advertising is luc
ky to return $1.20—there are more channels, advertising is more expensive, and people have the technol
ogy to filter out unwanted distractions. The loop still works in some circumstances, but it doesn’t work as 
well as it used to. Autocatalysis doesn’t always have to be money: “network effects” and “viral loops” are a


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lso examples of Autocatalysis. Every time someone signs up for Facebook, they’ll naturally invite even mo
re users to the network. Every time someone sees a funny video on YouTube, they’ll pass it along to seve
ral friends. That’s Autocatalysis. If your business includes some Autocatalyzing element, it’ll grow more qu
ickly than you expect. SHARE THIS CONCEPT: http://book.personalmba.com/autocatalysis/ Environment


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Reality is that which, when you stop believing in it, doesn’t go away. —PHILIP K. DICK, SCIENCE FICTI
ON NOVELIST AND SHORT STORY WRITER No System stands alone: every system is inevitably affect
ed by all of the other systems around it. An Environment is the structure in which a system operates. The


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Environment primarily influences or impacts the system’s Flows or processes, changing the output of the 
system. Think of how your body responds when it’s either too hot or too cold. Too much or too little heat c
an be deadly: your body must respond to the change in its Environment to keep operating, either by sweat
ing to shed excess heat or by sheltering to preserve it. When the Environment changes, the system must


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change with it to continue operating. According to most leading theories, the dinosaurs became extinct be
cause of changes in the Environment, due to either an ice age or a meteorite impact that kicked up enoug
h dust to blot out the sun. Colder temperatures and less sunlight resulted in major food shortages, resultin
g in mass extinction. The conditions present in the Environment affect the operation of the system in that


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Environment. In 2005, oil prices skyrocketed, and many businesses that relied on oil to manufacture plasti
cs or transport goods suddenly ran into trouble. The increase in variable costs made many businesses les
s profitable than they were before, and many businesses that couldn’t absorb the increase in costs closed
. If you don’t want to go the way of the dinosaur, you must always consider how conditions in the Environ


