The Problem with Cause and Effect

We think in straight lines

Cause and effect. If I do this, then that will happen.  If I make this change then I will get that outcome.

Unfortunately the world isn’t like that.  An initiative might work for a while, but then it will stop or backfire. Unintended consequences and side effects bedevil us.  Performance will plateau or spiral out of control.  Systems balance and reinforce and decay, they do anything but move in straight lines.

Let me give you a couple of examples:

The balancing loop

A balancing loop happens when two actions work against each other. They keep things constant.  Picture the water level in a toilet cistern. You can work as hard as you like to empty it, flush and flush and flush, but it will keep filling up.  It self-levels.

Now think about prohibition.  U.S. law enforcement worked tirelessly to cut the supply of alcohol into the country.  The mobsters worked just as hard to smuggle it in.  The warring groups escalated their activity, but the amount of alcohol on the street remained constant.

Finally, an example that is a little closer to home.

Imagine you own a pizza delivery service.  When it starts it has few customers and surplus capacity.  Pizza delivery is fast.  Word gets out and customer demand builds.  Then it gets busy and there are delays.  What happens next?  Customers get fed up of waiting and go elsewhere.  Demand falls, and surplus capacity increases, and then…  I think you get the picture, supply and demand level each other out.

There are balancing loops everywhere.  They are why we struggle to lose weight or gain market share.

The reinforcing loop

Different types of loop altogether.  They are sometimes called virtuous cycles or the vicious spirals.  It all depends on which way they are spinning.

The easiest example is interest on a bank account.  If you keep paying money in then the amount of interest will take off.  Eventually the interest you earn will be greater than the amount you deposit.

A rather less pleasant example was the collapse of Northern Rock.  A rumour got out that the bank was short of money.  Worried customers started to take their cash out and move it elsewhere.  Then the rumour became a clamour. There were queues of people standing outside the door, pictures on national TV. Before we knew it, the other banks got drawn in and there was a horrendous race to the bottom.

Fortunately things don’t spiral out of control that badly every day. But it can happen on a less dramatic scale. If you run a service centre you will know all about an abandon rate spiral:

• Something goes wrong, you mail a confusing letter, or a system fails.  Suddenly you have more customer calls than staff.  A queue builds.
• Customers get tired of waiting and hang up. They phone back the next day (along with the normal customer calls).  The queue gets longer.
• When the customers finally get through they are more than unhappy and give the agent a hard time.
• The calls take longer to deal with, disgruntled customers take time to calm down.
• The agents get fed up and decide to pull a sicky.  Who needs to work in an environment like that?

And all the while the queue gets longer and longer and longer.

Systems loops exist the world over

Think about your business, can you see a loop in..?

• The budgeting process
• The appraisal process
• Your pricing strategies
• Employee satisfaction, customer churn, stock levels…

All have a loop or two associated with them. Side effects and spin-offs are ubiquitous.

The only straightforward cause and effect relationships you will see are short-term.  Sooner or later, a feedback loop will cut in.

So what can you do?

As a start I have three pieces of advice, two professional and one personal.

On a professional level:

• Take the time to stand back and look a little more widely at your problem.  Don’t just worry about the process. Think about the customers and the employees and the incentives and the competitors and how they all interlink.  You will never get to see the whole picture, but the more you understand, the more likely you are to be able to fix it.
• Once you think you have a solution, try it out.  Run a test and see what actually happens.  Don’t bet on what you think will work but what you have tested.

On a personal level:

• You don’t need that fancy new car.  Buying a depreciating asset (spiraling down) on an interest bearing loan (spiraling up) is a spectacularly fast way to lose money.

P.S. I am in no way qualified to give financial advice.