tag:blogger.com,1999:blog-64952307626478219382024-03-13T02:59:03.942-05:00Treasury CafeEmpowering Strategy and Finance People with Tools, Information and InsightsDavid Waltzhttp://www.blogger.com/profile/03415644204743030961noreply@blogger.comBlogger13713tag:blogger.com,1999:blog-6495230762647821938.post-21769989186299359222015-12-30T11:14:00.000-06:002015-12-30T11:14:09.111-06:00Are You Experienced?<div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p><i>"Tell me, are you experienced? Well, uh, have you ever been experienced?"</i> - Jimi Hendrix</p><p>The other day I ran across a series of articles by Boston Consulting Group (BCG), one of the prominent strategy consulting firms, revisiting their "classics".</p><p>One of these articles was <a href="https://www.bcgperspectives.com/content/articles/growth_business_unit_strategy_experience_curve_bcg_classics_revisited/" target="_blank">The Experience Curve</a>, a concept that has many uses in our work as strategy and finance practitioners.</p><p>Let's see how we can deploy this amazingly simple strategy concept.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>The Basics</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"> <div style="width:50%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(42,109,125);">Figure A</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Generic Experience Curve</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8wo6VzMC2OkxMJ91sbyQ50U-Kac1v1AzhQ3oDiJ-EuZ3NSyeNczo4X9so823kaLNDtJcgAt0YBcyAKWv1iJSyT0kSrlCrk3EZ73XoXbXozhjRcGnbIDL09xg5GatUIoDT6RDMjCgm-T7M/s1600/areyouexperienced_basic_curve.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>As more units are produced, the cost per unit is less. The graph is on a log-log basis.</i></div> </div><p>The experience curve theory resulted from industry studies performed by BCG and others. In essence, what they observed was that as experience was accumulated in production, the cost per unit went down in a fairly predictable fashion.</p><p>The basic curve is thus a plot of cost per unit on the y-axis and number of units produced on the x-axis, as shown generically in Figure A.</p><p>We can model the experience curve using the equation shown in Figure B. Essentially, the cost of the first unit is modified by the cumulative production (the n) by a factor (the exponent in the equation). Putting the reduction factor in the exponent allows us to<div style="width:50%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(99,127,38);">Figure B</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Experience Curve Equation</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBngfy7Qgzs6RF40scb_zMYc-wTB0gKDic4bZXQyw3yo9HOiWgTt7lfc2UI2I7PW6oPUSL1orwMvyiYT6OdZ4pIhbxL8sc7jz9yDn8cUl5d2VI_dDiJtkpAXiDFJ_aAfPqT1BPqIb1UNCK/s1600/areyouexperienced_equation.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i></i></div> </div>model the costs by order of magnitude. The reduction factor reflects the lowering of costs for every doubling of volume. Since going from 2 to 4 is different than going from 4 to 8, or 32 to 64, placing this factor in the exponent creates the correct doubling factor.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Impact of Learning Example</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>BCG notes that it has been fairly well established that as people perform a task over and over there is a learning effect. This learning effect has been set at between 10% to 15% per doubling of production.</p> <div style="width:50%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(146,34,35);">Figure C</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Experience Curve Spreadsheet</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEwTeAx8DVZ4BznAigYk6OXlhmuldke2knzl8nryNdYylrjp1jwpEgBo9DAU4sWvOknjDzVJ6bASB-5-jGL268aU0QG8nmlC6DBTZ-16bzGjcp2JJpm0VgqrD2BeDBRdvqWQvBW82hBrtP/s1600/areyouexperienced_lcspsh.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>From an intial hourly expenditure of 40, the time spent to perform each additional unit decreases. Arrows indicate doubled volume from previous arrow, and show a 10% reduction.</i></div> </div><p>Figure C is an example of the Figure B equation in spreadsheet form. For this example we assumed a 10% reduction for doubled volume. The initial unit took 40 hours to perform. The 2nd unit was 36 hours (10% of 40 is 4, and 40-4 is 36). The arrows indicate further points where exact doubling has occurred.</p><p>The last column shows the cumulative hours spent. This is where we can see the ongoing impacts of the learning curve effect.</p><p>If we used our starting cost of 40 hours per unit, we would calculate that to make 6 units would take 240 hours. In the cumulative column, we see that after making the 7th unit, we had spent a total of slightly over 233 hours, so through the learning curve we were able to make 1 more unit than 'anticipated' using our initial hourly estimate.</p><p>This example helps explain some common corporate behaviors.</p><p>Often during <b>goal setting</b>, employees are told that they need to 'raise the bar' on their past performance. So long as they are performing the same task, the learning curve effect shows that this should in fact not be a problem.</p> <div style="width:75%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(197,141,1);">Figure D</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Annual Production</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcYjsQxMo64OPD5V_uPoFF9CqFhOaNzOyxiQwsv3RzvzYHao8w22ZVwQdGDpuA8_Afj0RCBFCZRfmRiVz_8jIqGoIXuQR2JiF7acA2BrlkQE57L_GSnkgA_-i6lqU0gxlodvHQDmaoCqHN/s1600/areyouexperienced_taper.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>Annual production increases every year due to the learning curve effect, but increases are fewer and fewer. The rate of increase along arrow A's path is greater than arrow B's.</i></div> </div><p>As part of the <b>employee development</b> process, organizations seek to provide opportunities to their promising 'high potential' candidates, which means assigning responsibilities to someone more junior than some of the more experienced employees. Figure D, which uses the data from Figure C carried out further into time, shows that as experience progresses the rate of improvement slows down. This makes sense, it takes less to go from 1 to 2 than from 2 to 4, and so on. Thus, the 'biggest bang for the buck' collectively might be to get those further to the left of the curve to move further to the right. In Figure D this is shown by the two lower arrows. The annual improvement when moving along the path of arrow A is greater than the improvement along arrow B.</p><p>If we imagine Figure D to be a company-wide phenomenon, we can also see how it becomes more difficult for them to grow as they age. If we've been in business for 100 years, it becomes awfully difficult to double the cumulative units to create a 10% reduction in time spent.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>The Wealth of Nations (and Companies)</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>Adam Smith, in the economics classic <a href="">The Wealth of Nations</a>, discusses the benefit of <b>Division of Labor</b>. In the book he uses pin manufacturing as an example. We can use our experience curve equations to illustrate the division of labor benefit.</p><p>Let's suppose that 5000 years ago there were two societies, each composed of 3 people.</p><p>In this ancient time, they made only Food, Goods, and Raw Materials (which were consumed in the production of Food and Goods). In Society A, each member was self-sufficient, devoting part of their time to producing each of the 3 basic items.</p><p>In Society B, each member <b>specialized</b> in one of the items.</p><p>Each item takes 70 hours to produce the intial item, had a 10% learning curve effect, and there are 2000 working hours per year.</p> <div style="width:95%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(42,109,125);">Figure E</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Division of Labor</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYhBoxEbz6KAPhmjicsj1sRWLo8QeLVE-KVrSha31rMScpw1l7HZ-sinvqaPl7Hhy2YnL39ClYm1OcSrJwidzjIjI7RRwb3QT4TG7MZjyVDkiqLjIFJn_cKqRmwTMNjt3F3RfjNt9T-XkD/s1600/areyouexperienced_society.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>Society B, which divided their members into specialization, was able to produce 19% to 25% more items than Society A, which did not divide labor amongst its members.</i></div> </div><p>Figure E compares the production output of the 2 societies. Society B, the one that divided their labor, produced a lot more than Society A (19%, 20%, and 25% respectively per year). This is due to the fact that each person, who is improving at 10%, is able to 'move up the curve' faster than their counterparts due to their specialization.</p><p>This example illustrates some of the underlying economics of strategy concepts like <b>core competence</b>. Firms that follow this paradigm often end up outsourcing activities that do not relate to their "critical" competencies - a form of specialization.</p><p>By focusing on activities that relate to our core competence, we are specializing in one specific thing, such as Worker A in Society B compared to Society A. This will allow us to do it at lower cost and effort than those who are doing a host of other things in addition to that activity.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Fortune Favors The Quick</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>The term "first mover advantage" is used in the strategy context to explain the benefit of a firm being first to market with a product or service.</p><p>Being first to enter can sometimes bring about domination of a niche due to the experience curve.</p><p>To illustrate, let's assume that Company A creates and develops a new market. It's intial cost of producing the first unit is 100, and it experiences a 20% experience curve effect (the 20% is the low end of BCG's assessment of the impact). During the first year it produces and sells 20 units.</p><p>Using this information in conjunction with the spreadsheet shown in Figure C, it's first year costs (the cumulative column in the spreadsheet) would be about 1,050. Let's further assume that starting up this operation requires a 10,000 investment which requires a 10% return, or 1,000 per year.</p><p>Based on this, the company will need to sell the 20 units at 102.5 each.</p><p>During their second year, still producing 20 units per year, they will incur costs of about 670 per year, which, after adding the 1,000 per year return requirement, means during year 2 they need to sell the 20 units at 83.5.</p> <div style="width:50%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(146,34,35);">Figure F</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">First Mover Advantage</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh5A9CDJi-1wm9ILagW2BRaxJhR2_QNJEEHaIL0iJiHi5gtkam_w4fD5g_7reHuJp9SxEWtJ7ZZetRk9uF7aJgw3uMnKdqgzZ8XYM36EvBqFUfsUEBlTYOWPet2xzFtoOK_jd1z1T6zVhI/s1600/areyouexperienced_first_mover.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>If Company B assumes it will enter and split the market, it's price will need to be 25% higher than Company A's in order to recoup its investment.</i></div> </div><p>Figure F shows what occurs if Company B decides to enter the market in year 3, and the market will be split 50/50 upon their entry. Company B will need to charge 25% more per unit than Company A in order to earn the same returns. Given this situation, if the market remains at 20 units per year, Company A will sell all 20 of their units (since they are 25% less expensive), and Company B will sell none, rendering their 10,000 investment worthless!</p><p>This type of dynamic helps explain why the cluster of firms in Lititz Pennsylvania can maintain its dominance in the sound, stage and lighting services for major musical tours (WSJ article <a href="http://www.wsj.com/articles/rock-n-rolls-company-town-1407452570" target="_blank">here</a>).</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>What You Can Do</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>The experience curve phenomenon can be used in a number of ways:</p><p><b>Inventory Tasks Performed</b> - by going through our firm's, department's, or individual job's roles, and classifying these by activity (or units of service or production) we can identify potential experience curve opportunities. These may be cultivated by reorganizaing work flows or selectively adding or eliminating certain steps in the process. The important thing here is to focus on the actual tasks. Many like to take shortcuts, such as classifying experience by department: "oh, they have three years in general accounting and two years in tax". While easy to do because it's easy to measure, it often does not help unearth the fundamental unit of service or production. For instance, if reconciling items from two different sources is a critical activity, someone with loads of experience in general accounting can make an immediate impact in tax if what they are doing in that area is reconciling accounts or calculations. </p><p><b>Use the Portfolio Effect</b> - if we aggregate our firm's or department's experience curve, we can calculate how to best allocate experiential assignments versus their cost in order to remain on the 'efficient frontier' of our training and development program.</p><p><b>Have Faith</b> - while evidence for the experience curve exists, it is difficult to see it tangibly in our day to day work lives - "Hey, that transaction took you 0.23 seconds less than yesterday!". Thus, while our Figure B equation is great and works in spreadsheets, it can be more difficult to implement when setting the budget for the year because manager's feel like they would be going out on a limb. It feels aggressive. Thus, to incorporate this into our planning process will feel like we are taking a leap of faith.</p><p><b>Use Our Synergies</b> - when evaluating potential merger, acquisition, and divestiture scenarios, the experience curve can have a significant impact. The increased volume will accelerate the impact. For instance, if our firm started out doing 2 units per year the past two years (a total of 4), it would take us another two years to double the volume (4 + 2 + 2). If we combined with another entity that did the same volume (2 per year), we would achieve doubling in one year's time rather then two ( 4 + 4), reducing our costs more quickly.</p><p><b>Understand the "Other Side of the Coin"</b> - actors / actresses in Hollywood who only get certain types of roles are considered 'typecast'. This can be a difficult situation for someone who is intent on learning, growing and discovering, since they never encounter anything new. Taken to the extreme, the experience curve would lead us to ever increasing specialization and narrowing of focus. While some might suggest the world is headed this way, we must also understand that assembly lines are not necessarily the best approach to an organization's structure and meeting its' peoples' needs. My kids love pizza, but they do not want it every night. We therefore need to maintain a balanced approach as we seek to leverage this opportunity.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Key Takeaways</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p><b>The experience curve is a concise concept that explains a wide variety of critical business phenomemon, from competitive advantage to personnel management to strategic transactions. Because it takes work to analyze, many organizations do not take the time to do it, providing an opportunity to those that choose to do so.</b></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>You May Also Like</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p style="text-indent:5%;"><a href=”http://maaw.info/LearningCurveSummary.htm“ target=”_blank”>The Learning Curve or Experience Curve</a></p><p style="text-indent:5%;"><a href=”http://www.cmu.edu/epp/iecm/rubin/PDF%20files/2010/Yeh&Rubin_Uncertainties%20in%20Experience%20Curves_18May2010.pdf “ target=”_blank”>Uncertainties in Technology Experience Curves for Energy-Economic Models</a></p> <br />
<p style="text-indent:5%;"><a href=”http://en.wikipedia.org/wiki/Experience_curve_effects“ target=”_blank”>Experience Curve Wikipedia Entry</a></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Questions</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><div style="font-family:'Calibri',Arial,sans-serif;font-size: 100%;margin: 0px 0px 3.6%;"> <ul> <dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>How might you divide up your work into units to which the experience curve may apply?
</dl> <dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>How much change is required before an experience curve is extinguised?
</dl> </ul></div></div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0% 0% 3.6% 0%; color: #ac5c06;"><p><i><b>Add to the discussion</b> with your thoughts, comments, questions and feedback! <b>Please share Treasury Café</b> with others. Thank you!</i></p></div><br />
David Waltzhttp://www.blogger.com/profile/03415644204743030961noreply@blogger.com18tag:blogger.com,1999:blog-6495230762647821938.post-71234741057733326072014-06-05T10:35:00.000-05:002014-06-05T10:40:07.623-05:00When Correlations Go To One<div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>Frequent readers know that I am always reading something.</p><p>Recently a co-worker lent me Nate Silver's <a href="http://en.wikipedia.org/wiki/The_Signal_and_the_Noise" target="_blank">The Signal and the Noise</a>. In the first chapter the author discussed the financial crisis and how mortgage pools change based on the correlation of their risks.</p><p>In prior posts (see <a href="http://treasurycafe.blogspot.com/2013/12/meis-monte-carlo-adventure.html" target="_blank">Mei's Monte Carlo Adventure</a> for example) we have modeled investment portfolios assuming that the correlation between securities was constant. We have always cautioned, however, that <b>this assumption may not be correct</b>.</p><p>In his book, Mr. Silver provided some data on how default rates in mortgage pools change under both an uncorrelated assumption and a perfect correlation assumption, and I thought it would be fun to replicate this and to take <b>a deeper dive</b> into what happens when correlations change.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>The Uncorrelated Pool</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>Say we have bought 5 mortgages, and the risk of default on these is 5%. If this rate is too risky for some investors, we can create an investment that they <u>can</u> invest in by using them to create a different type of security.</p><p>We place the 5 mortgages together, creating a "pool". We then sell 5 securities to the market, A through E, whose payout will be based on order of default. Securities A through E are called "tranches" of the pool.</p><p>If all mortgages pay out, all 5 of our created securities pay investors. If one defaults,then investors in A through D get paid but E does not. If two default, investors in A through C get paid but D and E do not, and so on.</p><div style="width:75%; float:right;"><div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(99,127,38);">Figure A</div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Mortgage Pools</div><div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfXUIQlgd-dOoQIpz1BIIwpdEOL2oVTG3lNjRxlkOvYOTGbdIR9tkWpzjzoH3NFzicckoxY_s7ETEzSOO7kiQtxrX5NZsV7i4KEYqyQxyevAclX8W431IND7CkmN4-zNIfcmV6N7UxJQme/s1600/uniformdistsim_pool.png" /></div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>Five mortgages are pooled and five new securities are created. Payout for each security is based on the number of defaults.</i></div></div><p>Figure A depicts this structure.</p><p>One way to think about this is to imagine we have large soup pot on the stove. Each of the payments for the five mortgages are the ingredients that go into the soup.</p><p>After we stir a little bit, we ladle out the soup, only we do so in a certain order. Person A always gets the first ladle full, Person B the second, and so on. If one of the mortgages defaults, so we only have 4 ladles full of ingredients going into the soup, then there will not be enough for person E when they show up holding out their bowl.</p><div style="width:75%; float:right;"><div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(146,34,35);">Figure B</div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Uncorrelated Default Rates</div><div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQwjwiNJLYWWsXvGFcAmOy7Mf7jzVzJOYDh-c2k-kkvfGOKQLpjYGmyhk48KY8yjcYRDpe619_jm9peC_PumQZUmGyLZ99LkPKHm-1kbxlMKjxUA456RiSNshtvWyktHh_AktbVzQlWqkQ/s1600/uniformdistsim_indsim.png" /></div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>First column is occurrence of the specific event - answering the question 'what percent of the time was there</i><b> exactly x </b><i>defaults?'. The second column is cumulative occurrence, answering the question 'what percent of the time was there </i><b>at least x </b><i>defaults?'</i></div></div><p>If we assume that the mortgage defaults are <b>uncorrelated</b> - meaning that if one defaults it in no way indicates that any of the other four default, then the probabilities of default occurrence for each of our newly created securities will be close to that of the results in Figure B, which is R output for a simulation of 10 million runs. Sometimes we will hear the phrase 'the variables are independent', which is stat-speak for uncorrelated.</p><p>These results match (with rounding) those produced in Mr. Silver's book.</p><p>Back to our mortgage situation, we had the case where an investor would not be able to purchase the 5% default risk mortgage securities because of their risk.</p><p>By creating our pool structure, we have created mortgage securities where three of them (A, B and C) have less than 0.12% probability of default, a much less risky proposition for these investors.</p><p>Of course, these results only hold if the securities <b>are in fact</b> uncorrelated.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>The Correlated Pool</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>In the prior example the mortgages going into the pot were uncorrelated, meaning that the behavior of one does not impact the other.</p><p>In our simulation every now and then a mortgage would default and person E did not get paid. In a few instances 2 mortgages defaulted at the same time, but the other ones did not. In well over 99% of the simulation cases no more than 2 defaulted at any one time, so persons A through C would almost always get paid.</p><p>However, if the mortgages are correlated, meaning they move more "together" rather than "independently", this dynamic changes.</p><p>At the extreme, if the correlation is 1 (the highest a correlation can go), then when one defaults all five of them default. This means either there is soup for everyone or soup for no one - nothing in between.</p><p>In this case, the benefit of carving out different tranches of the pool is of no benefit whatsoever. The investor may as well have invested in one mortgage with a 5% chance of default, because that is the same probability as their perfectly correlated tranche security offers.</p><div style="width:75%; float:right;"><div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(197,141,1);">Figure C</div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Bond Prices By Tranche</div><div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgj1IrSdpspQJBXQm0vDWR8WApNjVL8j3LTMDg3SgPwbNB2Wgx36cfHY9NPAh0xC6Oef01JW7kEpUvcVmvMLH9oJKMUX2WkHVk9zX3vgsUmS92vNY1ZbvixxYC2HG13LWcPj-PFDlSh_gMf/s1600/uniformdistsim_bond.png" /></div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>Bond prices are calculated based on (loss given default * probability of default)/risk-free rate</i></div></div><p>This brings us to an interesting point. By creating a structure based on one assumption, should that assumption change it creates both winners <u>and</u> losers. Figure C shows theoretical bond prices based on the probability of default and 100% loss under that scenario.</p><p>Under the uncorrelated scenario, tranche E is worth about 73.69 cents on the dollar, since it is the tranche that gets hit with the vast majority of defaults.</p><p>However, under the perfect correlation assumption it is worth a little over 90 cents on the dollar. All the other tranches experience decreases in value from the uncorrelated to perfectly correlated scenarios.</p><p>In total, however, the entire pool of bonds is worth the same amount. This has to be so, as we have not changed the inherent risk of the mortgages (i.e. 5% default probability) in either case, only the correlation.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>The Spaces In Between</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>Between the perfectly correlated and the perfectly uncorrelated, we have the <b>partially correlated</b>.</p><p>In <a href="http://treasurycafe.blogspot.com/2014/01/cholesky-to-rescue.html" target="_blank">Cholesky to the Rescue</a>, we discussed how to create partial correlation between different simulated events according to a target correlation matrix.</p><p>But in that situation, we were using the <b>normal distribution</b>. In the mortgage default case, we are using the <b>uniform distribution</b>, one that has a range between 0% and 100%. There is no normally distributed mean or standard deviation to use like there is in the former case.</p><p>How do we go about creating a simulation that creates correlation between variables while staying true to the original variables' uniform distribution parameters?</p><p>For one answer to this, we can turn to the work done by Enrico Schuman in his post <a href="http://comisef.wikidot.com/tutorial:correlateduniformvariates" target="_blank">Generating Correlated Uniform Variates</a>.</p><p>In this approach, we perform 4 steps.</p><div style="font-family:'Calibri',Arial,sans-serif;font-size: 100%;margin: 0px 0px 3.6%;"><ul><dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>Create our correlation matrix </dl><dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>Convert the matrix to Spearman correlation </dl><dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>Simulate variables using the Cholesky decomposition of this matrix using normal distribution </dl><dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>Convert the normal variables to the uniform distribution by using their p-values (probability of occurrence) </dl></ul></div><p>Under this method, we can use the well-developed normal distribution processes and simply convert the results to the uniform distribution in a manner that maintains the correlation.</p><div style="width:75%; float:right;"><div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(42,109,125);">Figure D</div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Default Probability at Different Correlation Levels</div><div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqqgbzF1qvjcnItzeQi78JItyTLRFuAZS3G9Yjn3nG-eVlAH4LWqjVRjwKgvNM7uCIZ5xAKfT6aUM5u5JkhttnFEnz-1U3beQw4Czx9_cbO6G4hGQ5jnhHLoTsCCzKHN2nGzHaI-XZpnDl/s1600/uniformdistsim_compare.png" /></div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>As correlation trends towards 1 default probabilities converge to .05</i></div></div><p>Figure D shows the default rates for each tranche of our pool resulting from one thousand simulations performed at each level of correlation (to the second decimal point, or for each .01). During each simulation the variables were run 100 times, so the total for each correlation level is 10,000.</p><p>As the correlation approaches 1, each of the security's default rates converge to 5%. The change in the price of these securities shown in Figure C, will change as the lines in Figure D change (opposite the sign of the change, so <u>increases</u> in Figure D mean <u>decreases</u> in bond prices).</p><p>The impact to each tranche varies. Tranche D's probability of default almost immediately starts to increase (thus it's value is decreasing) as things become more correlated, while Tranche A's holds out almost to the very end, but then increases rapidly.</p><p>Tranche D also has the interesting dynamic that it's probability of default increases and then decreases - the only security to do so. All the others <u>only</u> increase or <u>only</u> decrease.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>What You Can Do</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>Correlation is a condition often stipulated for a model but not always completely thought out. Yet its' impacts in certain situations can be quite significant. Some questions to ask when analyzing our models or the results from them are:</p><p><b>What happens if our correlation assumption changes?</b> - using Figure C as our example, asking this question allows us to consider the fact that our correlation assumption will drive a 5% change in our investments value.</p><div style="width:75%; float:right;"><div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(99,127,38);">Figure E</div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Average and 100-Day Rolling Correlation</div><div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgGIPKCpOogz3YuMmHHhsQ1BUpvgIL59KNcowprYqE81CfKetzukIMp3tlVJB8JAsCMezFGOZ3u1IfaTHsbZlCu2zBSo1xaKXm3yTxSUQixSoLkkpWbM85ztraxC99ybYGjknqqbU32h_z/s1600/uniformdistsim_histcor.png" /></div><div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"><i>Average correlation for entire time period is shown by the colored dashed line, and the rolling 100 day correlation by the solid lines</i></div></div><p><b>How strong is our correlation assumption?</b> - For whatever period of time we calculate a correlation, we are inherently assuming that it will apply to the time period going forward. This is almost never the case. Figure E shows the correlation between Short and Long Term Fixed Income funds and US and Global Equity Funds (original data from <a href="http://treasurycafe.blogspot.com/2013/03/should-you-rebalance-your-investment.html" target="_blank">Should You Rebalance Your Investment Portfolio?</a>) from 1996 to 2012. The entire period correlation is almost never equal to the 100 day correlations, and the 100 day correlations can change dramatically in relatively short periods of time. In addition, there are distinct correlation differences in different time periods, such as equity correlations being slightly higher than .5 (and volatile) for much of the 90's compared to being close to 1 during the past few years (and not so volatile).</p><p><b>Insist on Scenario Analysis</b> - one way to achieve the objectives in our first two "What Can You Do" items, we can insist on reviewing results of scenarios where the correlation conditions have been altered. For example, looking at the Equity correlations in Figure E, some possible scenarios are "Maintain recent high correlation", "Regress to the average", "Intermittent periods between high and low", "Return to the 90's", and "Go to Zero". Comparing the results of these scenarios will help us to understand the risk potential, though <u>not</u> necessarily the probability of each.</p><p><b>Learn From the Traders</b> - a book I read once (though the name of it escapes me) made the claim that in security trading "every trader's position will eventually get wiped out", implying that trading is fundamentally a race to cash out before that eventuality occurs. Long Term Capital Management did great...until it didn't. Mortgage Bond traders and banks did great...until they didn't. So it will go with correlation, at <u>some point</u> the uncorrelated will go to 1, or the strongly correlated will go to 0. We need to make sure we are clear what we will do when that occurs.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Key Takeaways</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p><b>The assumptions that go into a model are essential to the results it generates. Investigating what can occur if a) the assumptions change, or b) are simply incorrect, is an essential component of building an actionable analytical framework.</b></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>You May Also Like</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>Simulations Using Correlation</p><p style="text-indent:5%;"><a href="http://treasurycafe.blogspot.com/2013/12/meis-monte-carlo-adventure.html" target="_blank">Mei's Monte Carlo Adventure</a></p><p style="text-indent:5%;"><a href="http://treasurycafe.blogspot.com/2014/01/cholesky-to-rescue.html" target="_blank">Cholesky to the Rescue</a></p><p>Uniform Distribution</p><p style="text-indent:5%;"><a href="http://comisef.wikidot.com/tutorial:correlateduniformvariates" target="_blank">Generating Correlated Uniform Variates</a></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Questions</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><div style="font-family:'Calibri',Arial,sans-serif;font-size: 100%;margin: 0px 0px 3.6%;"><ul><dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>What assumptions have you challenged that significantly impacted the results of a model's output? </dl><dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>What is the best way to proceed if correlation is uncertain? </dl><dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>Do you agree that eventually "all correlations will go to 1" or "all correlations will go to 0"? Why or why not? </dl></ul></div></div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0% 0% 3.6% 0%; color: #ac5c06;"><p><i><b>Add to the discussion</b> with your thoughts, comments, questions and feedback! <b>Please share Treasury Café</b> with others. Thank you!</i></p></div><br />
David Waltzhttp://www.blogger.com/profile/03415644204743030961noreply@blogger.com2tag:blogger.com,1999:blog-6495230762647821938.post-40532890601538260172014-04-08T17:57:00.001-05:002014-04-08T17:57:36.230-05:00The Madness Isn't Over Yet!<!Begin copy here---------><br />
<div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>We have come to the end of the time period US sports fans refer to as "March Madness" - 68 collegiate basketball teams have competed in a single elimination tournament - and UConn has been crowned "national champion".</p><p>In the past we have used this event as a reason to perform a statistical project (see <a href="http://treasurycafe.blogspot.com/2012/03/who-will-be-in-final-four-lessons-from.html" target="_blank">Who WIll Be in the Final Four - Lessons From an Analytical Journey</a>).</p><p>This year we'll do things a little different.</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Be Strong!</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p><a href="http://www.gallup.com/corporate/21364/George-Gallup-19011984.aspx" target="_blank">George Gallup</a> founded the firm that bears his name in the 1930's. Their initial claim to fame was public opinion polling. Results of their inquiries were often cited in news media (tv, radio, print, etc.), especially around election season. They have to be one of the original data analytics firms.</p><p>At the turn of this century a group of Gallup consultants authored a pair of best-seller books - <a href="http://en.wikipedia.org/wiki/First,_Break_All_the_Rules" target="_blank">First, Break All the Rules</a> and <a href="http://en.wikipedia.org/wiki/Now,_Discover_Your_Strengths" target="_blank">Now, Discover Your Strengths</a> - based on Gallup insights developed over the years from their work with companies and industries.</p><p>One of the main themes coming out of this research was, as this <a href="http://www.forbes.com/sites/georgeanders/2013/09/04/how-gallup-hit-a-goldmine-with-strengthsfinder/" target="_blank">Forbes</a> article states, a "ceaseless belief that people should focus on making the most of their talents, rather than struggling to mend their flaws".</p><p>One of the ways this was described in the books was that the neurons in our brains form millions of connections with each other, which we can think of like a transportation network. Some connections, reinforced through time, are like super-highways, while others, rarely used, are like back country dirt roads.</p><p>The super-highways become strengths, while the others do not.</p><p>Ultimately, Gallup distilled the number of these strengths to a total of 34 (you can see a listing of these at this <a href="http://en.wikipedia.org/wiki/Now,_Discover_Your_Strengths" target="_blank">Wikipedia entry</a>).</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Are Some Strengths Better Than Others?</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>The question that has always come up for me is that while all the strengths are positive, for the finance practitioner it would make sense that some are better than others.</p><p>Put in a slightly different way, if we were given a listing of 20 people, and the only information we had about these folks was their top 5 strengths, who should be the one that we would hire?</p><p>So to have some fun with NCAA "bracketology" while seeking to achieve insight into the issues above, this year we will focus on the Strangthsfinders tournament!</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Setting Up The Tournament</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>Unfortunately, 34 strengths do not fit neatly into a bracket structure, since in each round we need a number of teams that is a square of 2 (1,2,4,8,16,32 etc).</p><p>In order to achieve this, we have a 'play-in' round, where 4 of the strengths compete for 2 spots. Once this round is complete we will have a field of 32, which can then be arrayed in the normal bracket structure.</p><p>The 34 strengths were taken and randomly assigned to two groups: A or B. In each of these groups, a further random assignment of 'seeds' was performed, from 1 to 17. In the NCAA structure, a 1 plays a 16 in the first round, a 2 plays a 15, and so on.</p><p>The play-in games were between the strengths identified as the 16th and 17th seeds.</p><p>For the play-in games, I solicited votes within my Twitter and Linked In communities, randomly selecting individuals to answer the question: "Which of the following strengths is it more important for a Finance Person to possess?".</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Play-In Teams</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>The first play-in is between:</p><p style="margin: 0% 5% 3.6% 5%;"><i><b>Activator</b> - one who acts to start things in motion. People strong in the Activator theme can make things happen by turning thoughts into action. They are often impatient</i></p><p style="margin: 0% 5% 3.6% 5%;"><i><b>Analytical</b> - one who requires data and/or proof to make sense of their circumstances. People strong in the Analytical theme search for reasons and causes. They have the ability to think about all the factors that might affect a situation</i></p><p>And the second play-in is between:</p><p style="margin: 0% 5% 3.6% 5%;"><i><b>Empathy</b> - one who is especially in tune with the emotions of others. People strong in the Empathy theme can sense the feelings of others people by imagining themselves in others’ lives or others’ situations.</i></p><p style="margin: 0% 5% 3.6% 5%;"><i><b>Responsibility</b> - one who, inexplicably, must follow through on commitments. People strong in the Responsibility theme take psychological ownership of what they say they will do. They are committed to stable values such as honesty and loyalty.</i></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Results</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p> <div style="width:75%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(99,127,38);">Figure A</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Play-In Game Results</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDMVBVkTZF06cmqK1NjpYWY-sdoJX6dfPQRTEPmoITyutrNphok2EcYkOyWi3oFblYdA4BISGWCi2LwT1nrMhyphenhyphen_KFaS984WAq8EekGeXAld652wNsh7H2LDIwDKmETqGptXA37HIGdI7yA/s1600/sfinder1_playin1.png" /></div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE6r3y1IFWf2Xy4mVdR9EbdLQELYocPgu0J4SZM9o_hNKikUdNWGGUGB4Gu0oXCRkefbyPa-AXruOD04J5qWeQz1QjIrACczY-vBEJGyQUcdRVAYGaBE3UKsrCshC71pkw4M1PjDt97Ac3/s1600/sfinder1_playin2.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"></div> </div></p><p>Figure A shows that both of these games were blow-outs, with Responsibility and Analytical sprinting easily to the win.</p><p>Given the number of job roles the finance profession has with the word analyst in it - financial analyst, budget analyst, business analyst, cost analyst, etc. - it only makes sense that this strength would prevail over Activator, which seems suited to business entrepreneuers.</p><p>Yet, as <a href="https://twitter.com/fundingprofiles" target="_blank">@fundingprofiles</a>, one of the survey respondents, noted "Activators are rare in finance. Analytical minds are too, but not as rare", suggesting that while the talent is valuable not many actually have it!</p><p>Perhaps those job titles are simply a matter of wishful thinking?</p><p>In the second matchup, Responsibility came out well ahead of Empathy. As a fan of Design Thinking (see <a href="http://treasurycafe.blogspot.com/2013/01/should-cfos-be-design-thinkers.html" target="_blank">Should CFO's Be Design Thinkers</a>), this was a disappointing result since Empathy plays a major role in that process.</p><p>Yet, given that Responsibility involves "following through on commitments" and "honesty", these are valuable when the books need to get closed and accurate numbers need to get reported, so we can see that while it might be nice to have a Design Thinking mindset, the ongoing day-in, day-out requirements of the finance role make the one strength more valuable than the other.</p><p>As one anonymous respondent stated "Both are good but Empathy without Responsibility would not work". Amen to that brother or sister!</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>The Bracket</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>With the play-ins complete, the Finance Strengths bracket now looks like that shown in Figure B. There are lots of potential items to discuss as we move through the "games", so stay tuned, either by adding this blog to your reader, following me on Twitter, Linked In or Google + (buttons for all those are located along the right side of this blog).</p><p> <div style="width:98%; float:right;"> <div style="font-family:'Arial Black',Arial,sans-serif;margin:1.78% 1.78% 1.78% 7.14%;font-size:100%;color:rgb(99,127,38);">Figure B</div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;">Finance Strengths Brackets</div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOk7Qsx7fSpqhL9snUaRR4f2sPdIJWbagUtnha0ioZhNw4sdAJEJDdWnqGtE0VnQmxK-ifiEpuaJYDrl8yUxb1_EUNN-E6yX8Ng0faOa-MbSJr6bogxHTwbIWr81pp9Ic3GEhOrLK9zJpz/s1600/sfinder1_east.png" /></div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtM9ZH2LIByP49gP97vDFGKw_yCdjfQVP7UNgvWY_ZUR4tTM0G4UVG28B0HOkRHRRdZoeIZ4kBrqRuU8QPXKDmQMyZB72tOAuf9qajOtH4zSzCNd6UdRK3a5HxQ22dmAPaotPabTrDhli9/s1600/sfinder1_midwest.png" /></div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhemYHmTpk5NIJJ3zkBqzloJx0UqdJzzPqXAWQxEsv0QXSJOeLvZ0FCQn4owPGBPNQk0uoKiz7me5JXF3m7Y4r66kPtx2RSORTRzHaqIGriQwTayunMjtBSAonWPsiFd-5AAPzrkn5RChUP/s1600/sfinder1_south.png" /></div> <div><img border="0" style="width:100%;margin:1.78% 1.78% 1.78% 7.14%;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3MZ1iRbQGum327x6gQICXGpDg4Lml-qTeIfE0mh3iOJZrjMrOhmzg3UT46IKu4eKOhWqvZYxjM8qEUwQb4myMQORb25KTFbNQ-fiuYSaBqF6mnQkgIPFwQtoV5jMRlxdvXSG-vZpsRcGA/s1600/sfinder1_west.png" /></div> <div style="font-family:Arial,sans-serif; margin:1.78% 1.78% 1.78% 7.14%;font-size:75%;"></div> </div></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>What You Can Do</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p><b>Vote in one of the next round matchups!</b></p><p>Having first hand knowledge of the abuse of half hour long surveys, I designed each of the following to take less than a minute of your time - each one has only two match-ups. You don't have to do them all, but <b>completing one would certainly help out</b> for the next round.</p><p><b>Thank you</b> in advance for participating!</p><p> <br />
<div style="width:50%; float:left; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/VYFNSNS" target="_blank">East and Midwest</a></div><div style="width:50%; float:right; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/VY5C7XC" target="_blank">South and West</a></div></p><p style="margin:0 0 3.6%;"> <br />
<div style="width:50%; float:left; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/V2DCZNX" target="_blank">East and Midwest</a></div><div style="width:50%; float:right; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/V2WYWV7" target="_blank">East and Midwest</a></div></p><p style="margin:0 0 3.6%;"> <br />
<div style="width:50%; float:left; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/V2T2QWX" target="_blank">South and West</a></div><div style="width:50%; float:right; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/V2G8QNG" target="_blank">South and West</a></div></p><p style="margin:0 0 3.6%;"> <br />
<div style="width:50%; float:left; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/V2ZCK93" target="_blank">South and West</a></div><div style="width:50%; float:right; margin:0 0 3.6%;"><a href="https://www.surveymonkey.com/s/K7HZ8GF" target="_blank">East and Midwest</a></div></p><p style="margin:0 0 3.6%;">These are half of the first round games. Others to come once these results are in!</p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Key Takeaways</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p><b>Finance people need to have Analytic strengths and a strong sense of Responsibility.</b></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>You May Also Like</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><p>NCAA Tournament</p><p style="text-indent:5%;"><a href="http://treasurycafe.blogspot.com/2012/03/who-will-be-in-final-four-lessons-from.html" target="_blank">Who WIll Be in the Final Four - Lessons From an Analytical Journey</a></p><p>Strengthsfinder Test</p><p style="text-indent:5%;"><a href="http://www.forbes.com/sites/georgeanders/2013/09/04/how-gallup-hit-a-goldmine-with-strengthsfinder/" target="_blank">Need a Career Tuneup? Gallups's Tom Rath has a Quiz for You</a></p></div><div style="font-family:'Gill Sans MT', 'Calibri',Arial,sans-serif; font-size: 180%; color:rgb(172,92,6); margin: 7.1% 0% 3.6%;"><b>Questions</b><br />
</div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0px 0px 3.6%;"><div style="font-family:'Calibri',Arial,sans-serif;font-size: 100%;margin: 0px 0px 3.6%;"> <ul> <dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>Do you agree that Empathy without Responsibility would not work for a finance role?
</dl> <dl style="margin: 0px 8.9% 1.78% 3.57%; text-indent: -5.35%;"><span style="color: #ac5c06; margin: 0px 3.57% 0px 0px;"><b>::</b></span>Are Analytic strengths rare in those who hold finance positions? Can you share a story about this?
</dl> </ul></div></div><div style="font-family:'Calibri',Arial,sans-serif;font-size: 120%;margin: 0% 0% 3.6% 0%; color: #ac5c06;"><p><i><b>Add to the discussion</b> with your thoughts, comments, questions and feedback! <b>Please share Treasury Café</b> with others. Thank you!</i></p></div><br />
<!End copy here---------><br />
David Waltzhttp://www.blogger.com/profile/03415644204743030961noreply@blogger.com2