Report: Financial planning = happiness

Pulling out some highlights of the Household Financial Planning Survey:

  • people who plan feel more confident about their financial decision‐making, manage to save more money, and feel better about their progress
  • only about a third (31%) of decision‐makers today report having ever put together a comprehensive financial plan. And just 35 percent of decision‐makers report having a plan in place to save for emergencies
  • Fed: devastating effects of financial crisis on the middle class: The median family… had a net worth of $77,300 in 2010 compared with $126,400 in 2007… wiping out nearly two decades of economic gains.
  • the crash of housing prices has been the single biggest factor that has reduced people’s wealth
  • only a third (34%) believes they will be able to retire [at 65, down from 50% fifteen years ago]. More than a quarter (27%) think they will not be able to retire before age 70, if ever.
  • 55% say “it’s hard for me to know who to trust for financial advice.”; 52% say “to me investing seems complicated.”; 55% say “I’m worried about losing my money if I invest it,” a significant increase from 1997 (45%)
  • half of household decision‐makers believe they “just don’t earn enough money to save regularly.”
  • American families today are less likely to be saving for their financial goals and taking steps to keep their family financially prepared.
  • The only area where families are more prone to save is toward a major purchase, like a new car, vacation, or home improvement project.
  • two‐thirds (65%) of decision‐makers say they follow a plan for at least one of their savings goals.
  • Forthoseathigherincomelevels,plannersputmoreoftheir income into savings than non‐planners and report having built greater wealth.
  • Among those in the $25,000‐$49,999 income category, 46 percent of those with a plan say they usually pay their credit card bill in full each month, compared with 26 percent of non‐planners.

Trends in Design for Financial Services, April 2014

I frequently design financial services, and having just rolled off a project took some time to reflect on trends I’ve noticed. Here’s the first three that came to mind:

  1. Active participation by the affluent: Sometimes financial services companies assume the affluent don’t want to interact with computer services themselves. In reality, the affluent don’t want to feel like they have second-class tools compared to their less-affluent friends who use sexy mass market services. I first saw this in 2008 doing international research for the private banking unit of a giant bank and again more recently with an insurance company.
  2. Breakdown of client vs. consultant views: It used to be common to pour all the design work into the client-facing screens and rush through the consultant-facing screens. With the spread of smartphones and tablets everyone expects top-notch design, and consultants will work on their tablets alongside the client.
  3. Breakdown of mobile vs. desktop: When mobile was new a lot of attention was paid to what it meant to design for mobile. Now people expect services to just work on whatever device they’re using.

Using Real Options to Value Design Concepts

The common way that financial people will judge the potential value of a project, or a design concept representing a potential future concept, is by building a model, usually a discounted cash flow model like Net Present Value (NPV). The calculation essentially asks, if we do this project and gain the profit we think we’ll gain, how much is it worth to us right now? That way we can compare it against our other options.

The problem with these models is that they assume the world doesn’t change. The model tries to predict everything that will happen in the project from beginning to end in order to arrive at a single numerical value. But in the technology world, there’s lots of change.

So peeps at the forward edge of product and service development have started using real options to value projects. Real options essentially breaks the project down into a series of decisions. At each decision point a number of outcomes can occur, and for each outcome there’s a probability it will occur. There’s also a revenue associated with each outcome that we receive if it occurs. By multiplying the probability by the revenue we get the value of the option.

This is often illustrated using a decision tree, as with this analysis of a drug in clinical trials

What’s the big deal? It turns out this is a better way to value investments in Internet services for at least three reasons I can think of off-hand…

  1. Versioning: The Web 2.0 way of doing things is to release our work in stages, the public beta being a perfect example. If the beta is a big fail, we stop there and cut our losses, or we go down a different path of the decision tree.
  2. Uncertainty: There’s a great deal of uncertainty in our work. Twitter, for example, is a big success, but at the cost of a very tricky technical challenge. Instead of an NPV model that would judge the value of the project to be either simply negative or positive, we can model this reality of “large audience / technologically expensive.”
  3. Fast Risk Management: The ease of building betas makes it tempting to skip a big financial modeling activity, especially if it can’t accurately reflect (i.e. predict) how customers will react. Creating at least a simple real options analysis can save a lot of investment before building a beta that is hard to emotionally trash once it’s built. And while it’s tempting to say predictions are impossible so we should just run a trial, few managers with any P&L responsibility will invest in that.

Real options isn’t a perfect technique, however. Proponents claim it supports decisions with “mathematical certainty,” but the probabilities are derived from managers’ experience and judgment which is subjective and imperfect. Getting a group of people to agree on the probabilities may be difficult, and once a project is up and running a team may be unwilling to revise their estimates downward to reflect new information, much less kill their own project. Still, for the kind of work we do it’s better than the old ways.


Banking joins bestiality and gambling on the banned in Second Life list

From TechCrunch:

Linden Lab has announced that virtual banking within Second Life is to be banned effective January 22 after receiving multiple complaints by Second Life residents scammed by bank operators.

I have a very early memory of pulling up to the drive-through window of our local bank in our station wagon, my mother depositing a little money I earned, and me excited to check my savings account book to see where the computer imprinted my new balance. Compare this fond memory to the recent mortgage loan crisis in the U.S. and I’d say trust in the banking industry has come a long way. Hopefully someone will see this as a business opportunity and focus on service and ethics.

The Bells remind Google who runs the Internet

From the Wall Street Journal today:

Phone Companies Set Off A Battle Over Internet Fees

Large phone companies, setting the stage for a big battle ahead, hope to start charging Google Inc., Vonage Holdings Corp. and other Internet content providers for high-quality delivery of music, movies and the like over their telecommunications networks.

Ah, the value chain. Expect to see Google buy the rest of it.

SarbOx flawed, but fixable

James Surowiecki’s Sarboxed In?

  • The Sarbanes-Oxley Act was a political knee-jerk even the Republicans couldn’t avoid, in reaction to Enron, Worldcom, etc.
  • The complexity of the new rules went too far, requiring six figure enforcement costs, and possibly hindering small companies from going public. There are now talks of easing enforcement or modifying the Act.
  • But the problem SarbOx addresses is very real: to fake earnings and revenue, companies made acquisitions and hires they didn’t need. Two researchers estimate that companies who restated financials fired between two hundred and fifty thousand and six hundred thousand people between 2000 and 2002, slashing payrolls by more than twenty-five per cent, while other companies cut them by just 1.5 per cent.