Methodology for business - Understanding

How you can DO economic reasoning to improve your business

Running a successful business is HARD, and everyone's looking for shiny solutions with plenty of snake-oil salesmen waiting in the wings. But what if the most powerful tool for success has been around for nearly a century? Let's talk about understanding, and why your business’ history is the key to your business’ future.

The concept of understanding we're talking about isn't just some vague notion of empathy or awareness (though these psychological ideas help!). It's a specific approach to analysing human choices and the results of those choices, developed by Ludwig von Mises in the mid-20th century. Mises recognised that unlike the physical sciences, where constant relationships exist that can be measured and predicted, human affairs lack any constant relationships. He argued that to describe and explain the dynamics of human choices - including business decisions - we need a different tool. Enter "understanding."

But Mises also didn’t intend for this concept to be reserved for professors. In his chapter on understanding (Part 1 Ch2 of Human Action) Mises writes:

“Understanding is not a privilege of the historians. It is everybody’s business. In observing the conditions of his environment everybody is a historian. Everybody uses understanding in dealing with the uncertainty of future events to which he must adjust his own actions. The distinctive reasoning of the speculator is an understanding of the relevance of the various factors determining future events. And--let us emphasize it even at this early point of our investigations--action necessarily always aims at future and therefore uncertain conditions and thus is always speculation. Acting man looks, as it were, with the eyes of a historian into the future.”

So how do we DO understanding? In short it’s about listing the factors that happened in the past and assigning a relevance to them. This is followed by reasoning through which factors have a causal relationship to a particular event and which are merely correlated with the event.

This is a subjective process. You also need to consider the relevance of different people, their motives, their actions, and even their own knowledge (or what you know of it).

To help, I offer here a worksheet that walks you through the process. This is also available on Google Drive as an Excel workbook (it technically works in Sheets but I suggest downloading the .xlsx file)

1. Identify key events or decisions in your business

   1. List significant occurrences or choices that have impacted your business

   2. Consider both positive and negative outcomes

   3. Focus on events that were particularly complex or had far-reaching consequence

2. Analyse the factors that contributed to these events

   1. Break down each event into its component parts

   2. Identify all relevant internal factors (e.g., team decisions, resource allocation)

   3. Consider external factors (e.g., market conditions, competitor actions, regulatory changes)

   4. Look for less obvious influences that may have played a role

3. Assess the relevance of each factor

   1. Evaluate the importance of each identified factor

   2. Consider both direct and indirect impacts

   3. Try to determine which factors were most crucial in shaping the outcome

   4. Be aware that this assessment involves subjective judgment

4. Consider the motives behind actions (yours and others)

   1. Reflect on your own intentions and goals at the time of the event

   2. Try to understand the motivations of other key players involved

   3. Consider how different perspectives might have influenced decisions and actions

5. Evaluate the effects and their intensity

   1. Analyse the immediate consequences of the event or decision

   2. Consider long-term impacts and potential ripple effects

   3. Assess the magnitude of these effects on your business

   4. Try to distinguish between correlation and causation in observed outcomes