Consumption I: Preferences

 

Profiles of consumption preferences

Summary

In this Learning Path we look at consumer behaviour from a theoretical perspective, trying to solve the basic problem we all face every day: how to get as much of what we want or need without blowing our budget.

The foundation for Economics is rationality. Rationality implies that people will act in ways that best suit their particular set of circumstances, including, but not limited to, the choices they face. In order to choose, you must necessarily have a set of preferences over the options you are presented with. Although utility theory was born in the 18th century, this approach, which simply implied consumers being able to rank preferences (and not assign a numerical ‘utility factor’ to each choice) really took off at the beginning of the 20th century because it offered an empirical, logical structure to microeconomics. Frisch was a pioneer in this in the early 1920s, but the definite birth of consumer behaviour as an economic science is probably attributable to Samuelson in the 1940s.

These preferences must fulfil a set of criteria in order to fulfil the necessary requirement of being classed as ‘rational’ (in a purely economic sense of the word).

• The first axiom is completeness. That is, whether one is indifferent to, or prefers, one set of options over another, they must always be able to make that choice. That is, a consumer can always rank a set of possibilities as either better, worse, equal or at least as good/bad as another.

• Transitivity. This simply means that consumers are able to order their preferences in a logical way- that is, if you prefer A to B and B to C, you must prefer A to C. It is useful to express this in binary logical form, with a set of symbols that represent:

• Continuity: in order for preference theory to be useful mathematically, we need to assume continuity. Continuity simply means that there are no ‘jumps’ in people’s preferences. In mathematical terms, if we prefer point A along a preference curve to point B, points very close to A will also be preferred to B. This allows indifference curves to be differentiated.

• Sometimes, and for purely formal purposes, a fourth axiom, reflexiveness, is mentioned:

Which simply implies that A is at least as good as itself.

 This is the basic set of premises, or axioms that Economics requires of individuals in order to be rational economic agents. It also enable us to represent preferences graphically. However, a later set of axioms was studied and added by Samuelson as ‘preferable’, because their functions will also behave ‘preferably’, i.e., will be easier and more useful to work with:

• Because people are inherently insatiable, and we always want more of what we like, we derive the premise of monotonicity: weak monotonicity implies that if A contains more than B, A is at least as good as B. On the other hand, strong monotonicity implies that if A and B contain the same amount, but A contains more of at least one good, then A is strictly preferred to B.

• Convexity: Further developing our taste for variety, we inherently prefer baskets of goods, or choices, which contain a wider range. This can be represented with an indifference curve, which shows the rate at which we are willing to substitute units of A for B.   

As tends to happen with any axiom, there are plenty of examples of people violating them. A good example is when deciding what shade of blue to paint your living room. If presented with two shades, where one is very slightly lighter than the other, you will probably be indifferent to either if you cannot tell the difference. However, when presented with a thousand shades, each progressively lighter, and asked to choose between the original shade (midnight blue) and the last shade (azure), you will probably find you have a definite preference. This, of course, violates the premise of transitivity.
 
Video – Utility function:

https://bit.ly/3wdXSdM

The Best Ways to Hire Salespeople

Frank V. Cespedes and 

Daniel Weinfurter

Many firms talk about talent management, but few deal systematically with a basic fact: average annual turnover in sales is 25 to 30%. This means that the equivalent of the entire sales organization must be hired and trained every four years or so, and that’s expensive.

Consider these stats. Direct replacement costs for a telesales employee can range from $75,000 to $90,000, while other sales positions can cost a company as much as $300,000. Moreover, these figures don’t reflect the lost sales while a replacement is found and trained. In sectors like medical devices, big capital equipment, and many professional services, including these opportunity costs can push turnover cost to $1 million or more per event.

The challenge is compounded by the fact that there is no easily identified resource pool for sales positions. According to Howard Stevens in Achieve Sales Excellence,more than 50% of U.S. college graduates, regardless of their majors, are likely to work in sales. But of the over 4,000 colleges in this country, less than 100 have sales programs or even sales courses. And, even if companies are lucky enough to find qualified grads, the increased data and analytical tasks facing many sales forces mean that productivity ramp-up times have increased. Each hire is now a bigger sunk cost for a longer time.

Bottom line: companies typically spend more on hiring in sales than they do anywhere else in the firm. So how do you improve the returns on this investment? Here are four places to start:

Hire for the task. In business, you hear so many opinions about what makes for a good salesperson. But most are a bland summary of the Boy Scout Handbook, with traits like extroversion, assertiveness, empathy, modesty, and an “achievement orientation.” These platitudes are often reflected in firms’ competency lists and are so broad that, at best, they simply remind us that people tend to do business with people they like (but not always and not as often as many sales trainers assume). At worst, these abstractions are irrelevant to the execution of business strategy, and they make hiring, in sales and other functions, a classic example of the cloning bias: managers use these slogans to hire in their own image.

Selling jobs vary greatly depending on the product or service sold, the customers a salesperson is responsible for, the relative importance of technical knowledge, and the people contacted during sales calls. A review of hundreds of studies about sales productivity finds that “[t]he results of this research have simply failed to identify behavioral predispositions or aptitudes that account for a large amount of variance in performance for salespeople. In addition, the results of this research are quite inconsistent and, in some cases, even contradictory.” Common stereotypes about a “good” salesperson (e.g., pleasing personality, hard-wired for sociability, and so on) obscure the realities you face.

Selling effectiveness is not a generalized trait. It’s a function of the sales tasks, which vary according to the market, your strategy, the stage of the business (i.e., startup or later stage), the customers targeted by your strategy, and buying processes at those customers. This is true even for firms in the same industry. Think about the difference between sales tasks at Nordstrom, where personalized service and advice are integral to strategy execution, and Costco, where low price and product availability make sales tasks less complex and variable.

The first step in smart hiring and productivity is understanding the relevant sales tasks in your market and strategy and then reflecting those tasks in hiring criteria and a disciplined hiring process.

Focus on behaviors. Research based upon thousands of exit interviews shows that a primary cause of poor performance and turnover is poor job fit. People, especially salespeople with a variable pay component, become frustrated when they’re hired for tasks that are a poor fit with their skills and preferences. Conversely, as the saying goes, “You hire your problems.” Zappos CEO Tony Hseih estimates that bad hires have cost his firm $100 million. Famously, Zappos will pay people to leave voluntarily after a few months on the job.

The key is to focus on the behaviors implied by the sales tasks. In many firms, this means upgrading assessment skills. Managers are excessively confident about their ability to evaluate candidates via interviews. In reality, studies indicate a low correlation (generally, less than 25%) between interview predictions and job success, and some indicate that interview processes actually hurt in hiring decisions: the firm would have done better with blind selection procedures! The best results, by far, occur when those making hiring decisions can observe the potential hires’ job behaviors and use a recruitment process based on a combination of factors, as illustrated in the following graphic:

There are many ways to do this, including simulations, interviewing techniques, or (as at Zappos) providing an incentive for self-selection after recent hires experience the required behaviors. Especially in expensive sales-hiring situations, many organizations could emulate the practice used by investment banks and consulting firms when hiring MBAs: the summer job is, in effect, an extended observation by multiple people at the firm of the candidate’s abilities before a full-time offer is extended.

Then, immerse reps in the tasks they will encounter in working with customers. AtHubSpot, which provides web-based inbound marketing services to businesses, Mark Roberge has sales hires spend a month in classroom-style training but also doing what their customers do: create a website from scratch and keep that site populated with relevant content. Roberge notes, “they experience the actual pains and successes of our primary customers: professional marketers who need to generate leads online. As a result, our salespeople are able to connect on a far deeper level with our prospects and leads.”

Be clear about what you mean by relevant “experience.” Previous experience is the most common criterion used by sales managers in talent assessment. In one survey, over 50% of respondents cited “selling experience within the industry” as their key selection criterion, and another 33% cited “selling experience in [an] other industry.” Driving this view is a perceived trade-off between hiring for experience and spending money on training. But because selling effectiveness depends upon a company’s sales tasks, “experience” is an inherently multidimensional attribute. It may refer to experience with any (or any combination of) the following:

• A customer group: e.g., a banker or other financial services recruit hired by a software firm to call on financial firms; or, in health care, firms sell different products, but many sell to hospitals.
• A technology: an engineer or field-service tech hired to sell a category of equipment.
• Another part of the organization: a service rep moved to sales because internal cross-functional support is a key sales task and that rep “knows the people and the organization.”
• A geography or culture: a member of a given nationality or ethnic group who knows, and has credibility within, the norms of the relevant customer’s culture.
• Selling: an insurance agent or retail associate with experience in another sales context.

The relevance of each type varies with your sales tasks. So consider what type is, and is not (see below), relevant, and require the people doing sales hiring to clarify what they mean by experience.

On-going talent assessments. Markets have no responsibility to be kind to your firm’s strategy and sales approach. It is leadership’s responsibility to adapt to markets and develop the competencies required today, not yesterday.

As organizations confront new buying processes, required competencies are changing. The figure below, based on an extensive database of company sales profiles, indicates the changing nature of sales competencies at many firms. Competencies that, only a decade ago, were considered essential are now lower in priority.

Does this mean that developing leads, qualifying prospects, and adapting to different buyer motivations are no longer important? No. Rather, as one should expect in a competitive activity where success is ultimately measured by relative advantage, the focus of productivity improvement in sales is shifting. Yesterday’s sales strengths have become today’s minimum skill requirements.

This underscores the need for on-going talent assessments to stay in-touch with changing tasks and required behaviors. The good news is that the tools for doing such assessments, based on behavioral research findings, are more available and have more granularity and practicality for sales leaders. Conducting a skills inventory and determining the best fit for your sales tasks need not be the standard mix of folklore, various embedded biases by front-line managers, and the content-free platitudes about “selling” that populate many blogs. And it is increasingly necessary because companies must ultimately be worthy of real talent.

It’s often said that many firms maintain their equipment better than they do their people. If so, you ultimately get what you don’t maintain, especially in sales.

Challengers win and Relationship Builders lose

Selling Is Not About Relationships

Ask any sales leader how selling has changed in the past decade, and you’ll hear a lot of answers but only one recurring theme: It’s a lot harder. Yet even in these difficult times, every sales organization has a few stellar performers. Who are these people? How can we bottle their magic?

To understand what sets apart this special group of sales reps, the Sales Executive Council launched a global study of sales rep productivity three years ago involving more than 6,000 reps across nearly 100 companies in multiple industries.

We now have an answer, which we’ve captured in the following three insights:

1. Every sales professional falls into one of five distinct profiles.

Quantitatively speaking, just about every B2B sales rep in the world is one of the following types, characterized by a specific set of skills and behaviors that defines the rep’s primary mode of interacting with customers:

• Relationship Builders focus on developing strong personal and professional relationships and advocates across the customer organization. They are generous with their time, strive to meet customers’ every need, and work hard to resolve tensions in the commercial relationship.
• Hard Workers show up early, stay late, and always go the extra mile. They’ll make more calls in an hour and conduct more visits in a week than just about anyone else on the team.
• Lone Wolves are the deeply self-confident, the rule-breaking cowboys of the sales force who do things their way or not at all.
• Reactive Problem Solvers are, from the customers’ standpoint, highly reliable and detail-oriented. They focus on post-sales follow-up, ensuring that service issues related to implementation and execution are addressed quickly and thoroughly.
• Challengers use their deep understanding of their customers’ business to push their thinking and take control of the sales conversation. They’re not afraid to share even potentially controversial views and are assertive — with both their customers and bosses.

2. Challengers dramatically outperform the other profiles, particularly Relationship Builders.

When we look at average reps, we find a fairly even distribution across all five of these profiles. But while there may be five ways to be average, there’s only one way to be a star. We found that Challenger reps dominate the high-performer population, making up close to 40% of star reps in our study.

What makes the Challenger approach different?

The data tell us that these reps are defined by three key capabilities:

Challengers teach their customers. They focus the sales conversation not on features and benefits but on insight, bringing a unique (and typically provocative) perspective on the customer’s business. They come to the table with new ideas for their customers that can make money or save money — often opportunities the customer hadn’t realized even existed.

Challengers tailor their sales message to the customer They have a finely tuned sense of individual customer objectives and value drivers and use this knowledge to effectively position their sales pitch to different types of customer stakeholders within the organization.

Challengers take control of the sale. While not aggressive, they are certainly assertive. They are comfortable with tension and are unlikely to acquiesce to every customer demand. When necessary, they can press customers a bit — not just in terms of their thinking but around things like price.

We’ll discuss each of these capabilities in more depth in our upcoming posts, but just as surprising as it is that Challengers win, it’s almost more eye-opening who loses. In our study, Relationship Builders come in dead last, accounting for only 7% of all high performers.

Why is this? It’s certainly not because relationships no longer matter in B2B sales–that would be a naïve conclusion. Rather, what the data tell us is that it is the nature of the relationships that matter. Challengers win by pushing customers to think differently, using insight to create constructive tension in the sale. Relationship Builders, on the other hand, focus on relieving tension by giving in to the customer’s every demand. Where Challengers push customers outside their comfort zone, Relationship Builders are focused on being accepted into it. They focus on building strong personal relationships across the customer organization, being likable and generous with their time. The Relationship Builder adopts a service mentality. While the Challenger is focused on customer value, the Relationship Builder is more concerned with convenience. At the end of the day, a conversation with a Relationship Builder is probably professional, even enjoyable, but it isn’t as effective because it doesn’t ultimately help customers make progress against their goals.

This finding — that Challengers win and Relationship Builders lose — is one that sales leaders often find deeply troubling, because their organizations have placed by far their biggest bet on recruiting, developing, and rewarding Relationship Builders, the profile least likely to win.

Here’s how one of our members in the hospitality industry put it when he saw these results: “You know, this is really hard to look at. For the past 10 years, it’s been our explicit strategy to hire effective Relationship Builders. After all, we’re in the hospitality business. And, for a while, that approach worked well. But ever since the economy crashed, my Relationship Builders are completely lost. They can’t sell a thing. And as I look at this, now I know why.”

3. Challengers dominate the world of complex “solution-selling”

Given the first two findings, it might be reasonable to conclude that Challengers are the down-economy reps and that when things return to normal, Relationship Builders will once again prevail. But our data suggest that this is wishful thinking.

When we cut the data by complexity of sale — that is, separating out transactional, product-selling reps from complex, solution-selling reps — we find that Challengers absolutely dominate as selling gets more complex. Fully 54% of all star reps in a solution-selling environment are Challengers. At the same time, Relationship Builders fall off the map almost entirely, representing only 4% of high-performing reps in complex environments.

Put differently, Challengers win because they’ve mastered the complex sale, not because they’ve mastered a complex economy. Your very best sales reps — the ones who carried you through the downturn — aren’t just the top performers of today but the top performers of tomorrow, as they are far better able to drive sales and deliver customer value in any kind of economic environment. For any company on a journey from selling products to selling solutions — which is a migration that more than 75% of the companies I work with say they are pursuing — the Challenger selling approach represents a dramatically improved recipe for driving top-line growth.

From The Challenger Sale: Taking Control of the Customer Conversation by Matthew Dixon and Brent Adamson (Nov 10, 2011)

Elliott Wave Principle

The idea of wave personality is a substantial expansion of the Wave Principle. It has the advantages of bringing human behavior more personally into the equation and even more important, of enhancing the utility of standard technical analysis.

The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure. The personality of each wave type is usually manifest whether the wave is of Grand Supercycle degree or Subminuette. These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one's present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations. As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that a knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern. The following discussions relate to an underlying bull market picture, as illustrated in Figures 2-14 and 2-15. These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

Figure 2-14

Wave Personality


1) First waves — As a rough estimate, about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other fifty percent of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced.

2) Second waves — Second waves often retrace so much of wave one that most of the advancement up to that time is eroded away by the time it ends. This is especially true of call option purchases, as premiums sink drastically in the environment of fear during second waves. At this point, investors are thoroughly convinced that the bear market is back to stay. Second waves often produce downside non-confirmations and Dow Theory "buy spots," when low volume and volatility indicate a drying up of selling pressure.

3) Third waves — Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. Increasingly favorable fundamentals enter the picture as confidence returns. Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence. Such points invariably produce breakouts, "continuation" gaps, volume expansions, exceptional breadth, major Dow Theory trend confirmations and runaway price movement, creating large hourly, daily, weekly, monthly or yearly gains in the market, depending on the degree of the wave. Virtually all stocks participate in third waves. Besides the personality of "B" waves, that of third waves produces the most valuable clues to the wave count as it unfolds.

4) Fourth waves — Fourth waves are predictable in both depth (see Lesson 11) and form, because by alternation they should differ from the previous second wave of the same degree. 
More often than not they trend sideways, building the base for the final fifth wave move. Lagging stocks build their tops and begin declining during this wave, since only the strength of a third wave was able to generate any motion in them in the first place. This initial deterioration in the market sets the stage for non-confirmations and subtle signs of weakness during the fifth wave.

5) Fifth waves — Fifth waves in stocks are always less dynamic than third waves in terms of breadth. They usually display a slower maximum speed of price change as well, although if a fifth wave is an extension, speed of price change in the third of the fifth can exceed that of the third wave. Similarly, while it is common for volume to increase through successive impulse waves at Cycle degree or larger, it usually happens below Primary degree only if the fifth wave extends. Otherwise, look for lesser volume as a rule in a fifth wave as opposed to the third. Market dabblers sometimes call for "blowoffs" at the end of long trends, but the stock market has no history of reaching maximum acceleration at a peak. Even if a fifth wave extends, the fifth of the fifth will lack the dynamism of what preceded it. During fifth advancing waves, optimism runs extremely high, despite a narrowing of breadth. Nevertheless, market action does improve relative to prior corrective wave rallies. For example, the year-end rally in 1976 was unexciting in the Dow, but it was nevertheless a motive wave as opposed to the preceding corrective wave advances in April, July and September, which, by contrast, had even less influence on the secondary indexes and the cumulative advance-decline line. As a monument to the optimism that fifth waves can produce, the market forecasting services polled two weeks after the conclusion of that rally turned in the lowest percentage of "bears," 4.5%, in the history of the recorded figures despite that fifth wave's failure to make a new high!

Figure 2-15

6) "A" waves — During "A" waves of bear markets, the investment world is generally convinced that this reaction is just a pullback pursuant to the next leg of advance. The public surges to the buy side despite the first really technically damaging cracks in individual stock patterns. The "A" wave sets the tone for the "B" wave to follow. A five-wave A indicates a zigzag for wave B, while a three-wave A indicates a flat or triangle.

7) "B" waves — "B" waves are phonies. They are sucker plays, bull traps, speculators' paradise, orgies of odd-lotter mentality or expressions of dumb institutional complacency (or both). They often involve a focus on a narrow list of stocks, are often "unconfirmed" (Dow Theory is covered in Lesson 28) by other averages, are rarely technically strong, and are virtually always doomed to complete retracement by wave C. If the analyst can easily say to himself, "There is something wrong with this market," chances are it's a "B" wave. "X" waves and "D" waves in expanding triangles, both of which are corrective wave advances,
have the same characteristics. Several examples will suffice to illustrate the point.

— The upward correction of 1930 was wave B within the 1929-1932 A-B-C zigzag decline. Robert Rhea describes the emotional climate well in his opus, The Story of the Averages (1934):

...many observers took it to be a bull market signal. I can remember having shorted stocks early in December, 1929, after having completed a satisfactory short position in October. When the slow but steady advance of January and February carried above [the previous high], I became panicky and covered at considerable loss. ...I forgot that the rally might normally be expected to retrace possibly 66 percent or more of the 1929 downswing. Nearly everyone was proclaiming a new bull market. Services were extremely bullish, and the upside volume was running higher than at the peak in 1929.

— The 1961-1962 rise was wave (b) in an (a)-(b)-(c) expanded flat correction. At the top in early 1962, stocks were selling at unheard of price/earnings multiples that had not been seen up to that time and have not been seen since. Cumulative breadth had already peaked along with the top of the third wave in 1959.

— The rise from 1966 to 1968 was wave [B]* in a corrective pattern of Cycle degree. Emotionalism had gripped the public and "cheapies" were skyrocketing in the speculative fever, unlike the orderly and usually fundamentally justifiable participation of the secondaries within first and third waves. The Dow Industrials struggled unconvincingly higher throughout the advance and finally refused to confirm the phenomenal new highs in the secondary indexes.

— In 1977, the Dow Jones Transportation Average climbed to new highs in a "B" wave, miserably unconfirmed by the Industrials. Airlines and truckers were sluggish. Only the coal-carrying rails were participating as part of the energy play. Thus, breadth within the index was conspicuously lacking, confirming again that good breadth is generally a property of impulse waves, not corrections.

As a general observation, "B" waves of Intermediate degree and lower usually show a diminution of volume, while "B" waves of Primary degree and greater can display volume heavier than that which accompanied the preceding bull market, usually indicating wide public participation.

8) "C" waves — Declining "C" waves are usually devastating in their destruction. They are third waves and have most of the properties of third waves. It is during this decline that there is virtually no place to hide except cash. The illusions held throughout waves A and B tend to evaporate and fear takes over. "C" waves are persistent and broad. 1930-1932 was a "C" wave. 1962 was a "C" wave. 1969-1970 and 1973-1974 can be classified as "C" waves. Advancing "C" waves within upward corrections in larger bear markets are just as dynamic and can be mistaken for the start of a new upswing, especially since they unfold in five waves. The October 1973 rally (see Figure 1-37), for instance, was a "C" wave in an inverted expanded flat correction.

9) "D" waves — "D" waves in all but expanding triangles are often accompanied by increased volume. This is true probably because "D" waves in non-expanding triangles are hybrids, part corrective, yet having some characteristics of first waves since they follow "C" waves and are not fully retraced. "D" waves, being advances within corrective waves, are as phony as "B" waves. The rise from 1970 to 1973 was wave [D] within the large wave IV of Cycle degree. The "one-decision" complacency that characterized the attitude of the average institutional fund manager at the time is well documented. The area of participation again was narrow, this time the "nifty fifty" growth and glamour issues. Breadth, as well as the Transportation Average, topped early, in 1972, and refused to confirm the extremely high multiples bestowed upon the favorite fifty. Washington was inflating at full steam to sustain the illusory prosperity during the entire advance in preparation for the election. As with the preceding wave [B], "phony" was an apt description.

10) "E" waves — "E" waves in triangles appear to most market observers to be the dramatic kickoff of a new downtrend after a top has been built. They almost always are accompanied by strongly supportive news. That, in conjunction with the tendency of "E" waves to stage a false breakdown through the triangle boundary line, intensifies the bearish conviction of market participants at precisely the time that they should be preparing for a substantial move in the opposite direction. Thus, "E" waves, being ending waves, are attended by a psychology as emotional as that of fifth waves.

Wave Tendencies

Because the tendencies discussed here are not inevitable, they are stated not as rules, but as guidelines. Their lack of inevitability nevertheless detracts little from their utility. For example, take a look at Figure 2-16, an hourly chart showing the first four Minor waves in the DJIA rally off the March 1, 1978 low. The waves are textbook Elliott from beginning to end, from the length of waves to the volume pattern (not shown) to the trend channels to the guideline of equality to the retracement by the "a" wave following the extension to the expected low for the fourth wave to the perfect internal counts to alternation to the Fibonacci time sequences to the Fibonacci ratio relationships embodied within. It might be worth noting that 914 would be a reasonable target in that it would mark a .618 retracement of the 1976-1978 decline.

Figure 2-16 

There are exceptions to guidelines, but without those, market analysis would be a science of exactitude, not one of probability. Nevertheless, with a thorough knowledge of the guide lines of wave structure, you can be quite confident of your wave count. In effect, you can use the market action to confirm the wave count as well as use the wave count to predict market action.

Notice also that Elliott Wave guidelines cover most aspects of traditional technical analysis, such as market momentum and investor sentiment. The result is that traditional technical analysis now has a greatly increased value in that it serves to aid the identification of the market's exact position in the Elliott Wave structure. To that end, using such tools is by all means encouraged.

Learning the Basics

With a knowledge of the tools in Lessons 1 through 15, any dedicated student can perform expert Elliott Wave analysis. People who neglect to study the subject thoroughly or to apply the tools rigorously have given up before really trying. The best learning procedure is to keep an hourly chart and try to fit all the wiggles into Elliott Wave patterns, while keeping an open mind for all the possibilities. Slowly the scales should drop from your eyes, and you will continually be amazed at what you see.

It is important to remember that while investment tactics always must go with the most valid wave count, knowledge of alternative possibilities can be extremely helpful in adjusting to unexpected events, putting them immediately into perspective, and adapting to the changing market framework. While the rigidities of the rules of wave formation are of great value in choosing entry and exit points, the flexibilities in the admissible patterns eliminate cries that whatever the market is doing now is "impossible."

"When you have eliminated the impossible, whatever remains, however improbable, must be the truth." Thus eloquently spoke Sherlock Holmes to his constant companion, Dr. Watson, in Arthur Conan Doyle's The Sign of Four. This one sentence is a capsule summary of what one needs to know to be successful with Elliott. The best approach is deductive reasoning. By knowing what Elliott rules will not allow, one can deduce that whatever remains must be the most likely course for the market. Applying all the rules of extensions, alternation, overlapping, channeling, volume and the rest, the analyst has a much more formidable arsenal than one might imagine at first glance. Unfortunately for many, the approach requires thought and work and rarely provides a mechanical signal. However, this kind of thinking, basically an elimination process, squeezes the best out of what Elliott has to offer and besides, it's fun!

As an example of such deductive reasoning, take another look at Figure 1-14, reproduced below:

Figure 1-14

Cover up the price action from November 17, 1976 forward. Without the wave labels and boundary lines, the market would appear as formless. But with the Wave Principle as a guide, the meaning of the structures becomes clear. Now ask yourself, how would you go about predicting the next movement? Here is Robert Prechter's analysis from that date, from a personal letter to A.J. Frost, summarizing a report he issued for Merrill Lynch the previous day:

Enclosed you will find my current opinion outlined on a recent Trendline chart, although I use only hourly point charts to arrive at these conclusions. My argument is that the third Primary wave, begun in October of 1975, has not completed its course as yet, and that the fifth Intermediate wave of that Primary is now underway. First and most important, I am convinced that October 1975 to March 1976 was so far a three-wave affair, not a five, and that only the possibility of a failure on May 11th could complete that wave as a five. However, the construction following that possible "failure" does not satisfy me as correct, since the first downleg to 956.45 would be of five waves and the entire ensuing construction is obviously a flat. Therefore, I think that we have been in a fourth corrective wave since March 24th. This corrective wave satisfies completely the requirements for an expanding triangle formation, which of course can only be a fourth wave. The trendlines concerned are uncannily accurate, as is the downside objective, obtained by multiplying the first important length of decline (March 24th to June 7th, 55.51 points) by 1.618 to obtain 89.82 points. 89.82 points from the orthodox high of the third Intermediate wave at 1011.96 gives a downside target of 922, which was hit last week (actual hourly low 920.62) on November 11th. This would suggest now a fifth Intermediate back to new highs, completing the third Primary wave. The only problem I can see with this interpretation is that Elliott suggests that fourth wave declines usually hold above the previous fourth wave decline of lesser degree, in this case 950.57 on February 17th, which of course has been broken on the downside. I have found, however, that this rule is not steadfast. The reverse symmetrical triangle formation should be followed by a rally only approximating the width of the widest part of the triangle. Such a rally would suggest 1020-1030 and fall far short of the trendline target of 1090-1100. Also, within third waves, the first and fifth subwaves tend toward equality in time and magnitude. Since the first wave (Oct. 75-Dec.75) was a 10% move in two months, this fifth should cover about 100 points (1020-1030) and peak in January 1977, again short of the trendline mark.

Now uncover the rest of the chart to see how all these guidelines helped in assessing the market's likely path.

Christopher Morley once said, "Dancing is a wonderful training for girls. It is the first way they learn to guess what a man is going to do before he does it." In the same way, the Wave Principle trains the analyst to discern what the market is likely to do before it does it.

After you have acquired an Elliott "touch," it will be forever with you, just as a child who learns to ride a bicycle never forgets. At that point, catching a turn becomes a fairly common experience and not really too difficult. Most important, in giving you a feeling of confidence as to where you are in the progress of the market, a knowledge of Elliott can prepare you psychologically for the inevitable fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today's trends linearly into the future.

Practical Application

The Wave Principle is unparalleled in providing an overall perspective on the position of the market most of the time. Most important to individuals, portfolio managers and investment corporations is that the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.
Despite the fact that many analysts do not treat it as such, the Wave Principle is by all means an objective study, or as Collins put it, "a disciplined form of technical analysis." Bolton used to say that one of the hardest things he had to learn was to believe what he saw. If the analyst does not believe what he sees, he is likely to read into his analysis what he thinks should be there for some other reason. At this point, his count becomes subjective. Subjective analysis is dangerous and destroys the value of any market approach.

What the Wave Principle provides is an objective means of assessing the relative probabilities of possible future paths for the market. At any time, two or more valid wave interpretations are usually acceptable by the rules of the Wave Principle. The rules are highly specific and keep the number of valid alternatives to a minimum. Among the valid alternatives, the analyst will generally regard as preferred the interpretation that satisfies the largest number of guidelines, and so on. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Let no one assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances does the analyst ever know exactly what the market is going to do. One must understand and accept that even an approach that can identify high odds for a fairly specific outcome will be wrong some of the time. Of course, such a result is a far better performance than any other approach to market forecasting provides.

Using Elliott, it is often possible to make money even when you are in error. For instance, after a minor low that you erroneously consider of major importance, you may recognize at a higher level that the market is vulnerable again to new lows. A clear-cut three-wave rally following the minor low rather than the necessary five gives the signal, since a three-wave rally is the sign of an upward correction. Thus, what happens after the turning point often helps confirm or refute the assumed status of the low or high, well in advance of danger.

Even if the market allows no such graceful exit, the Wave Principle still offers exceptional value. Most other approaches to market analysis, whether fundamental, technical or cyclical, have no good way of forcing a change of opinion if you are wrong. The Wave Principle, in contrast, provides a built-in objective method for changing your mind. Since Elliott Wave analysis is based upon price patterns, a pattern identified as having been completed is either over or it isn't. If the market changes direction, the analyst has caught the turn. If the market moves beyond what the apparently completed pattern allows, the conclusion is wrong, and any funds at risk can be reclaimed immediately. Investors using the Wave Principle can prepare themselves psychologically for such outcomes through the continual updating of the second best interpretation, sometimes called the "alternate count." Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of investing with it. In the event that the market violates the expected scenario, the alternate count immediately becomes the investor's new preferred count. If you're thrown by your horse, it's useful to land right atop another.

Of course, there are often times when, despite a rigorous analysis, the question may arise as to how a developing move is to be counted, or perhaps classified as to degree. When there is no clearly preferred interpretation, the analyst must wait until 
the count resolves itself, in other words, to "sweep it under the rug until the air clears," as Bolton suggested. Almost always, subsequent moves will clarify the status of previous waves by revealing their position in the pattern of the next higher degree. When subsequent waves clarify the picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%.

Practical Application

The ability to identify junctures is remarkable enough, but the Wave Principle is the only method of analysis which also provides guidelines for forecasting, as outlined in Lessons 10 through 15 and 20 through 25 of this course. Many of these guidelines are specific and can occasionally yield results of stunning precision. If indeed markets are patterned, and if those patterns have a recognizable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, real world experience shows that they do.

It is our practice to try to determine in advance where the next move will likely take the market. One advantage of setting a target is that it gives a sort of backdrop against which to monitor the market's actual path. This way, you are alerted quickly when something is wrong and can shift your interpretation to a more appropriate one if the market does not do what is expected. If you then learn the reasons for your mistakes, the market will be less likely to mislead you in the future.

Still, no matter what your convictions, it pays never to take your eye off what is happening in the wave structure in real time. Although prediction of target levels well in advance can be done surprisingly often, such predictions are not required in order to make money in the stock market. Ultimately, the market is the message, and a change in behavior can dictate a change in outlook. All one really needs to know at the time is whether to be bullish, bearish or neutral, a decision that can sometimes be made with a swift glance at a chart.

Of the many approaches to stock market analysis, the Elliott Wave Principle, in our view, offers the best tool for identifying market turns as they are approached. If you keep an hourly chart, the fifth of the fifth of the fifth in a primary trend alerts you within hours of a major change in direction by the market. It is a thrilling experience to pinpoint a turn, and the Wave Principle is the only approach that can occasionally provide the opportunity to do so. Elliott may not be the perfect formulation since the stock market is part of life and no formula can enclose it or express it completely. However, the Wave Principle is without a doubt the single most comprehensive approach to market analysis and, viewed in its proper light, delivers everything it promises.


http://www.traderslaboratory.com

Emotions drive the decision making process

The decision making process is pivotal to business success. For years we believed that the best decisions were a result of rational, logical thought. Breakthroughs in neuroscience have proven that human beings are wired to feel first, think second.

To use the example cited in, “Your Brain at Work” an article published in the July/August 2013 Harvard Business Review, “Suppose you see a spider. We used to think you would identify the spider as scary and then feel fear.” Nope. That’s not how we are wired. The thought that the spider is a threat follows the feeling of fear. But, we were taught, and now firmly believe, the exact opposite.

The education system got it wrong. The business schools that taught us about business got it wrong. Everybody got it wrong.

*Feelings DRIVE Thoughts

*Thoughts DO NOT drive Feelings

We feel things first, often at the subconscious level, then, we become consciously aware. The feelings trigger thought. We make sense of the world through our feelings, which inform out thoughts. Our “Feelings inform thoughts, not the other way around.” “The brain’s affect network seems to know what’s going on before we consciously recognize it”.

The actual decision making process

This simple re-sequencing of the mechanics of behaviour has huge repercussions for the mechanics of business. No business runs independently of human beings. The relationship between business and human beings is an interdependent endeavour. And it is causal.

                       *Human Beings RUN Business

                       *Business DOES NOT run Human Beings

Business is all about human beings interacting with human beings, through process, to create value and sell it to customers.

                       *Mechanics of Behaviour DRIVE Mechanics of Business

                       *Mechanics of Business DO NOT DRIVE Mechanics of Behaviour

Causality

From a causal perspective, the mechanics of business rely on the foundation that is the mechanics of behaviour. The recent breakthroughs regarding the sequencing of feelings à thinking is a fundamental change to the conventional approach to the mechanics of behaviour, with dramatic implications for the mechanics of business.

Best practices?

The common “best practices” approach to strategy, planning, decision making, problem solving, communication and learning was to lead with a “think first and whatever you do, don’t let your feelings get in the way” mindset. Emotions in business just didn’t make any sense.

Actually, not so much

Wrong! This rational-logical-first approach worked when the economy was relatively stable. With the economy behaving in unpredictable ways, it has become impossible for scientists to avoid concluding that feelings take a back-seat. When people feel fear, they behave according to how they have been conditioned to behave relative to the experience of fear.

*Feelings inform Thought

*Human Beings run Business

*Mechanics of Behaviour is foundational to Mechanics of Business

 The power of expectations

Almost every single person in the developed world has come to expect that the world of business, and the world at large, is relatively stable and predictable. As a result of this expectation, we are triggered to disengage, avoid and procrastinate when the opposite occurs.  If we do not learn new sense-making skills, we will then enter into the next phase of disengagement, burnout, anxiety and depression.  The resulting impact on business productivity is massive.

The root of the problem

The problem is not the economy. Nor is the problem, business. The problem is that each and every one of us has an incorrect and irrelevant understanding of why we behave the way we do What is at issue here is that people do not understand the implications of what they are feeling. We have not yet been educated to understand the mechanics of sense-making behaviour. Nor have we been educated about the impact of emotions on our thoughts.

To get you started

Here are some suggestions for how you can start to wrap your head around the fact that emotions drive thought, not the other way around:

1. Embrace the fact that you are human and therefore, you feel. In some cases, you feel deeply. As a start, expect to feel fear. It’s a natural response to constant, unpredictable change. It’s no big deal. Fear is just information + energy. Move into it so you can use the information.
2. Expect to be overwhelmed by the energy connected with your feelings. In order to be able to assess the information in your feelings, you have to be able to deal with the energy part. Build regular physical activity into your life. Go for a walk. Work out at the gym. Ride a bike. Throw a ball. Do anything to discharge the extra build-up of anxious energy.
3. Take advantage of the wealth of information out there to help you broaden your thinking:

• On the behavioural mechanics side, start here: The Brain that Changes Itself talks about how we can literally change the way we think. “A Leader’s Framework for Decision Making“ is a fantastic resource for understanding how understanding context improves the decision making process. It’s also a great primer on complexity theory.
• On the business mechanics side start here: “Reinventing your Business Model” starts you down the road of taking a holistic perspective of your entire business. “Transforming Corner Office Strategy to Frontline Action” This introduces the concept of working the AND instead of the Either/Or.

Your thoughts?

How are you using your emotions to drive effective decision making processes?

Filed under Bandwidth, Decision making by Tim Glover

Author : Tim Glover

As co-founder of Light-Core, Tim brings his 30 years of experience to entrepreneurial and corporate clients in a variety of industries. As a CA, CMA, musician and corporate strategist, Tim Glover fine-tunes and simplifies the challenges of profit and growth. He specializes in identifying an organization’s core strengths and mapping them to the best opportunities in today’s marketplace. Through his work as CFO and general manager of 3 Fortune 500 companies, Tim learned to translate the fundamentals of business into bite-sized, practical chunks. His careers in advertising, music and art taught Tim how to apply innovation, adaptability and creativity to business, resulting in a powerful fusion that drives sustained, above-average financial results.