Six Reasons Today’s Business Leaders Must Understand Islamic Finance

To be blunt, Islamic finance will change the world. It is already doing so. Any business student with aspirations of becoming a leader in their field must understand this fast growing force in the financial marketplace. Here are six reasons why:

Reason 1. The Islamic world is growing. Muslims already comprise nearly 20% of the world’s population and the pace of population growth in majority Muslim countries is nearly 1% above the world’s population growth rate. As a growing number of businesses compete for customers it will become increasingly important to cater to this growing sector of the world economy. The majority of these countries lie in a corridor from Northern Africa through the Middle East and throughout Central Asia. Many regard this region as a candidate for rapid economic development in the coming decades.

Reason 2. The Islamic world is becoming more devout. Over the past thirty years Muslims have become more devout and have been more eager to embrace the tenants of their religion. This has led to a steep rise in Shari’ah compliant banking practices in majority Muslim countries and in other areas of the world where there is a high concentration of Muslims such as the United Kingdom and Canada. Much of the world’s energy wealth is concentrated in majority Muslim countries and there is a desire to invest these funds in halal financial instruments.

Reason 3. Islamic finance is growing. Since the mid-1970s Islamic financial institutions (IFIs) have experienced a sustained and explosive rate of growth averaging 20-30% a year by most estimates. In November 2009 an annual survey published by The Banker magazine confirmed the fact that even during the worst financial crisis in global memory IFIs experienced an amazing 28.6% growth rate in 2008. The number of IFIs now exceeds 600 worldwide and assets in Islamic financial institutions now nearly $1 trillion.

Reason 4. Islamic financial products don’t just appeal to Muslims. Many customers of Islamic banks are non-Muslims who like the application of such Islamic financing principles as asset-backed lending and full-reserve banking. These principles are built on the holistic concept of community responsibility and benefit. Citizens of many countries are asking themselves if the beneficial effects of easily available unsecured credit are worth the social consequences. We have noticed where debt is more freely available people have a tendency to underestimate risks.

Reason 5. During a period of global financial reform many financial institutions are reevaluating their approach to risk management. Even though they may not refer to their products as “Islamic”, many banks are increasingly offering essentially Shari’ah compliant options for their customers. In fact, Silicon Valley venture capital firms have been practicing Islamic financial principles for years without explicitly stating this fact. In November 2009 GE Capital, tacitly acknowledging the appeal of Islamic finance, announced it would issue a $500 million Shari’ah compliant sukuk.

Reason 6. As Thomas Friedman famously observed, the world is flat. As business leaders today look for ways to break into new markets and find blue water opportunities, they will increasingly find themselves interacting with Islamic customers. While oil prices have receded from their 2008 highs, they are still high by historical standards and the world shows no sign of weaning itself from this precious resource anytime soon. This will continue to pour money into Middle Eastern sovereign wealth funds for decades to come making Muslim customers an attractive demographic. An understanding of Islamic principles will be essential in developing relationships with these customers.

Why Understanding Context is Essential for Leaders

Leadership principles are timeless but the application of those principles requires an understanding of the context in which they are being applied. Leaders without followers can be admirable individuals to be sure but in order to be an effective leader you must have followers and because a leader must have followers he or she must understand other people. Determining how to engage and inspire others is an essential part of leadership.

The mistake most business leaders make is not failing to grasp the principles of leadership, but in failing to connect with their workforce. They make the mistake of trying to lead from the worldview of their own generation instead of the worldview of their followers. While people of every age share similarities, each generation is different in their perceptions and expectations.

In today’s business environment the workforce is comprised of a generation referred to as Millennials or Generation Y. This generation, born between the late 1970s and the late 1980s, grew up with computers in their home, cell phones and the internet. Any business leader today will be familiar with these technologies as well but if they are older than thirty these products came along after their worldview was formed and consequently had less of an impact on shaping who they are. They are visitors not natives and while they may take up residence as expatriates they will always be speaking a second language. In order to relate to today’s workers leaders must understand how these technologies impacted their lives and formed their worldview.

Just as children born in late eighteenth century United States were raised on the idea of democracy and individual freedom, Millennials were raised in an era of mass participation and the wisdom of crowds. It is as preposterous to suggest an idea has more value because it came from a manager or supervisor as it is to suggest a king’s will is ordained by God. The internet has created the ultimate meritocracy for ideas where theories succeed or fail based on what the group thinks of them rather than on who proposed them.

Millennials expect more control of their lives and time to pursue personal goals; at the same time they are constantly plugged in to work. Cell phones and internet access have blurred the lines between work and personal life. Elders perceive this as an intrusion; Millennials accept this as the way things are. They did homework on the computer while sending IM messages to friends, texted friends during school and completed work projects while watching online videos. As work became more about what was in your head instead of where your body was, leisure became more about mental breaks rather than not being in the office.

In many ways Millennials can be considered the “teamwork” generation. They are highly connected with their friends and stay in touch constantly. They often share flaws and extremely personal information openly. They give and expect authenticity. To put it bluntly, they share everything. This has been a blessing and a curse for marketers who have benefited from positive word of mouth advertising and been burned by the proliferation of negative experiences.

Leaders who can adapt their leadership style to the expectations of their followers and are able to relate to their unique worldview will be the truly successful leaders of tomorrow. Those who fail to connect with their followers will become irrelevant.

Is Social Media to Blame for the Failure of Democracy?

[photo by Tony the Misfit]

In 2008 the United States elected its first black President. By the time the elections actually took place on 3 November however, there was little doubt about the outcome of the voting.

The following year, in an off-year election, residents of Salt Lake City turned out in record low numbers. A local paper reported these statistics:

“The U.S. Census Bureau estimated that of the 1,022,651 residents living in Salt Lake County in 2008, 518,448 residents are registered voters. Last week’s election recorded an 18 percent turnout in Salt Lake County.”

This was the main thrust of an article by Kelly O’Neill in the 11 November 2009 edition of The Daily Utah Chronicle, the school newspaper for the University of Utah.

Both the tone and content of the article conveyed her deep disappointment with Utahns for not fulfilling their civic duty.

It’s a popular argument but in my opinion, she failed to make her case.

Some people have suggested the fascination with social media and other forms of online entertainment have caused people to withdraw from society. I feel the opposite is true. In any social media network people are selecting leaders all the time, they’re just not voting.

I understand the desire to have a robust participative democracy and from that perspective low voter turnout indicates a lack of appropriate and desirable civic responsibility. Rather than take a pejorative view of Utah voters however, and say they have failed, I have asked myself if there is an alternative, and more positive, explanation.

Maybe they are just happy with their leaders.

Where citizens have the ability but not the obligation to vote you can generally find four distinct conditions: voters who care and vote, voters who care but don’t vote, voters who don’t care and vote, and finally, voters who don’t care and don’t vote.

Of these, the “everyone should vote” philosophy comprises both voters who do and don’t care. Following this way of thinking injects an element of random noise in the voting data and allows politicians who get massive media exposure to gain an inordinate share of the vote simply through name recognition.

In social media this is known as the Ashton Kutcher effect. As a social media icon he is supremely successful, as a social media leader he is a failure.

Isn't there a better way?

Wouldn’t it be better to allow voters who don’t care about the outcome to not vote without feeling guilty about their decision? This would leave the voters who do care about the outcome, and make the effort to vote, essentially de facto representatives of those who don’t care and those who do care but chose not to vote.

This is the way communities are built. Social media sites have used the idea of connected communities to provide guidance and leadership.

Governments whose citizens are unhappy with the performance of their elected officials will express that dissatisfaction by voting out the offending politicians. In societies where the people are pleased with the performance of their government you would expect to see a lower voter turnout as there would be fewer people concerned about the outcome of the election.

The article continues:

“Utah and Hawaii are among the states with the lowest voter turnout, reporting 52 percent in the last presidential election, compared to the 75 percent turnout rates of Minnesota and Washington, D.C.”

I find it interesting both states mentioned in the article, Utah and Hawaii, were recently reported to be the two happiest states in the U.S. according to a Gallup poll.

Perhaps rather than castigating the people who didn’t vote, and seeing low voter turnout as a shameful sign of voter apathy, we can simply thank those who did take the time to vote for being self-selecting representatives of the people and view low voter turnout as a positive sign of a well run state.

Social media sites beware; the happier your followers are the more likely you’ll be considered a failure.

Not for of a lack of leadership however.

Why Using OPM (Other People’s Money) Can Be Disastrous

The recent Global Financial Crisis has been a wakeup call for some financial institutions, and a death knell for others. There has been no end to the finger pointing and blame laying from government regulations (or lack thereof) to executive compensation.

As has been clear from the beginning, there are no easy answers yet reformers of every stripe have been eager to use the crisis to point out why drastic changes are necessary. The clamor for attention has been deafening; with each person trying to be heard above the other while the cacophony of shouting voices in the midst of a storm are drowning each other out.

Perhaps what we ought to realize is our entire economic system is built on an evolutionary model of continuous adaptation and mutation which leads to both phenomenal successes and catastrophic failures. If we try to prevent the possibility of failures we have to restrict at the same time the opportunities for successes.

In a previous post I talked about the evolution of economic advancement in terms of a landscape of all possible ideas. In this land idea explorers set out to locate the ideas which will be most advantageous for society. The more explorers there are the more likely it is they will find the best ideas. At the same time the chances of stumbling across really bad ideas increase as well.

We want many explorers. But we want them to be intrepid, not foolhardy. One of the ways of mitigating the harm done by explorers inclined to be foolhardy is by encouraging them to be cautious in their exploration. We can do this by causing them to experience some of the pain of failure. Explorers must have a measure of their own welfare at risk.

Creating this balance between risk taking and caution is tricky business. It’s not surprising, nor necessarily a bad thing, we got it wrong. But clearly we did get it wrong and it’s time to correct in the other direction.

William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, illustrates how bankers have been conditioned to take too much risk by insulating them from the effects of their poor choices.

In an interview with EconTalk host Russ Roberts on September 22, 2009, Cohan talks about compensation on Wall Street and the equity participation of WS executives. These executive often point to their stock options as evidence they are “in it with us [investors]”. This is reality only on paper. Their compensation is so excessive they don’t really rely on the equity portion to pay off.

Having the executives’, and the institution’s, financial welfare on the line would bring a much needed injection of caution into the system. By tying executive pay to their performance they get the true effect of the motivation for success and the prudence to avoid failure.

“When these were private partnerships their whole net worth was on the line. Therefore, they were much more careful about the business lines they got into,” Cohan goes on to say. “They weren’t using other people’s money to make huge, risky bets while paying themselves outrageous salaries and bonuses.”

Can Islamic Finance Prevent Future Financial Crises?

Those familiar with this small discipline of social science generally recognize interest free banking as its primary characteristic. It is the most apparent aspect of Islamic finance and the thing that differentiates it most from conventional finance. Yet, while this is true, for me it is not its most compelling feature.

The idea of risk sharing is a central principle of Islamic finance.

This stems from the Islamic ban on interest. For many in the West, the idea of paying for the use of money is so ingrained, so natural, they hardly know how to process its prohibition. They don’t know what a financial system would look like without interest.

The usual approach of westerners unfamiliar with Islamic finance is to investigate just long enough to find out about Murabaha financing [a financed sale at a specified profit margin]. After some contemplation they will usually decide the profit from a financed sale looks a lot like interest.

Some at this point will make a snide comment about “sleight of hand” and say Islamic finance is the same as conventional finance; its practitioners just use Arabic words and pretend it’s different.

In doing so these people miss the deeper view. Yes, you can recreate some of the functionality of conventional, interest based finance using Shari’ah compliant contracts. After all, the point of all financial systems is to facilitate the flow of capital from those with excess reserves to those with a shortage.

We should not be surprised to find similarities between the products offered by conventional and Islamic banks since these are the products customers want. There is nothing inherently wrong with paying over time; people still need to buy cars and houses without having to pay in full at the time of sale.

And in the purchase of physical assets such transactions will have many of the same features.

But the really interesting aspects of an interest free financial system come when you consider financial operations other than for financing physical commodities. It is then the systems begin to look quite different and the advantages of Islamic finance become apparent.

When financing a business venture for example, Shariah compliant banks will usually enter into a partnership [either Mudarabah or Musharaka] with the business seeking capital. The bank will earn a return on its investment in the form of a portion of the profit from the business rather than as interest.

According to Shariah, money is not recognized as a commodity as it is in conventional finance. Under Islamic law money cannot be bought or sold for anything other than its face value [to do otherwise would be tantamount to earning interest].

Therefore Islamic financial institutions are not allowed to sell long-term debt at a discount. This prohibition on debt sales severely restricts the ability of banks to sell off receivable accounts and essentially forces them to carry the loans they originate.

Islamic Financial institutions are therefore more selective in the loans they originate both because they are not easy to offload and because their profits are often tied to the profitability of the businesses they finance.

When conventional financial institutions loan money with interest their concern is not with whether the venture will be profitable but with the ability of the borrower to pay back the loan with interest. If a background check indicates a person has stable employment and ties to the community, they are likely to be able to borrow money for whatever purpose they desire.

In the end, the risk is borne by the borrower who has to pay back the loan with interest even if the venture is unprofitable. This shifting of risk from those with capital to those without is seen by Islamic scholars as one of the most unacceptable features of conventional finance.

How to Develop Trust

Trust is one of those concepts that by our initial, intuitive definition appears clear enough but under analysis reveals itself to be much more complex.

Off the top of my head for example I can think of two distinct definitions for trust:

1. trust a person will be honest, that is, what they say is true, and

2. trust a person will have integrity, that is, do what is right.

The accuracy of definition 1 is obscured by differing perceptions. We have all had the experience of going to dinner with someone and later finding they had a completely different perception of the experience.

Some differences are to be expected; you thought the food was okay, they thought it was delectable. We all recognize variation in taste. But what about more objective things? Was the wait staff pleasant or rude, the service timely or slow, the bill reasonable or outrageous?

You may even disagree on things that can be measured. How long did it take to get the food, was it fifteen minutes or forty-five? What was the bill, seventy-five dollars or ninety-five?

When your dining companion later recounts the food was delicious, but the service slow and the waiter rude is may cause us to distrust them. We have a tendency to see people as dishonest when their description differs from our own perceptions?

Clearly this is a trivial example but the point is; every interaction is mentally recorded based on our perceptions and those perceptions differ from person to person. It’s true of a dining experience and it’s true of a business meeting. When we trust others it is usually because we have had experiences in which our perceptions coincidently turned out to be the same.

So really, all definition 1 says is we subjectively interpret situations the same way as the person we “trust”.

Pretty straightforward. I think the more difficult question is definition 2.

A working definition of integrity is that a person will do what they said they’d do, or what we expect them to do, unless circumstance arise which preclude it. But here again there is a perception problem. Not in interpreting what happened, but in our expectations of what will happen.

Do we trust they will do what we think they should do or what they think they should do? Put another way, do we think they will act according to our principles or their own?

Most instances of mistrust concerning behavior are due to assuming the other person would act according to our principles and when they don’t we think they can’t be trusted. In reality, if we understood their values we would see they were being true to their own moral compass.

If we look at these two values, honesty and integrity, we can say the following:

1. a person’s apparent honesty increases with their predisposition to perceive things the same way we do, and,

2. a person’s apparent integrity increases with their natural ability to live up to our expectations.

This leads me to conclude we will generally have more trust in people with similar cultural, social and religious backgrounds or people whose perceptions and values are similar to our own.

We can probably all think of examples that defy this rather pedestrian observation; a person from a dissimilar culture with whom we shared a close bond of trust perhaps, or a person we initially distrusted who later gained our trust. I would argue this is the exception rather than the norm and most likely to happen after a period of shared experiences revealed a similarity of perception and revealed similar moral values.

Generally we trust strangers on a situational basis, that is, we evaluate others as being trustworthy or not on a case by case basis. Our initial paradigm can be influenced by many factors including their proximity to our social circles, their profession and our own preconceived notions about others.

Based on these criteria we will come to an initial assessment of their trustworthiness. This will be different for each of us and for each of us different for each person we interact with. Once the relationship has some history however we will begin to adjust their level of trustworthiness based on our interpretation of their behavior.

Still, it will be the coincidental convergence of perceptions and values that determine our level of trust. So in the end the term trust is simply a proxy for understanding. It is in understanding others we feel comfortable with them.

If we don’t understand someone we can’t trust them.

We trust others when their behavior is consistent, both with their past actions and with their professed beliefs. This consistency allows us to understand where they are coming from and to predict how they will likely interpret things in the future and how they will behave. When their actions meet our expectations our trust is validated.

Why Bad Writing Really Works

When I was in college I took writing good seriously. Writing good essays, good reports, good research papers. I read a lot of academic journals and tried to write in a scholarly tone. When I discovered MS Word’s grammar check feature could give readability statistics I thought I’d struck gold. I would strive for a Flesch Reading Ease score of 30 or less.

I thought rules were important and tried to remember to never start a sentence with a conjunction and to never end with a preposition. Don’t write like you speak was common advice from English teachers, so I tried not to.

The problem is; people don’t like reading academic material. Yes, it gets published so you would think people want to read it but in reality they don’t. People skim, scan and browse journal articles because they often contain important material, but they don’t read them for enjoyment.

If you really want to write so people will enjoy it you need to forget about all the academic writing rules you learned in college. People are happy when you write something interesting that’s pleasurable to read. Even academics.

I learned this by accident one day while I was enjoying a leisurely bowl of vegetable soup. I was sitting in the Student Union wondering if it was going to snow again and my mind, quite by accident, began thinking about my afternoon classes. I suddenly realized I had a paper due that day in just a couple hours.

Panicked, I stopped eating and immediately began typing.

My fingers flew across the keyboard as I poured out everything I knew about the subject but I began to realize I was going to be woefully short of the 2500 word minimum. (Really just over 2000 as long as I could make it stretch onto a fifth page.)

With no time to do additional research I had to come up with some way to bolster my word count. I started writing a flow of consciousness, logorrheaesque, cliché laden ramble I was sure would be returned with a lot of red ink. But at that point I didn’t care, I just wanted to get five pages complete and turn it in.

I was dumbfounded the following week when my paper was returned with an A. The professor approached me after class and said I should consider a career in writing, bolstering his argument with praise from his wife who had also read the paper and just loved it. His degree was in engineering so he qualified his praise with the fact his wife was an English major.

I realized at that moment just how much bunk all the writing advice I’d received to that point had been. Following all the rules was not as important as writing compelling content.

Follow these 3 simple rules instead

1. Be passionate

If the story is gripping people will read it and when people read it, and it's persuasive, they will love it. This is obviously true of fiction bestsellers but it is equally true of non-fiction writing. The story you tell is more important than the formal rules prevalent in academia.

If you're doing cutting edge research you can afford to be dull on the page; people are reading for the information not for enjoyment. But for the rest of the writing world, remember you're a conduit for all that data. The value you add is the ability to synthesize information and present it in a new and more palatable way.

2. Consider ease of reading

I remember a teacher telling me to use a paragraph for each idea. If it’s the same thought, she said, it’s the same paragraph. That leads to some pretty long winded and yawn-inducing writing.

Instead of following rules about topic sentences and supporting evidence written in half-page long paragraphs, try listening to how it sounds in your head. Writing is about flow, rhythm and pacing.

If you feel like taking a breath, put in a period. Use your eyes too. Writing is about using words to communicate ideas, but reading is about whitespace. Your mind goes numb when it looks at a page full of text. It looks hard. Plus, you’re more likely to lose your place and have to backtrack making it take even longer to read.

Long paragraphs are intimidating to look at and exhausting to read. So trust your gut aesthetic, give your reader's eyes a visual break by allowing ideas to transcend paragraphs.

Don’t be afraid to have a paragraph of one sentence; it’s all about visual space.

3. Connect with readers' expectations

Writing should be about the reader. Communicating ideas only works when people read what you’ve written. So make it attractive to the reader. Be aware of people’s expectations. When you give people less than they expect they are disappointed. When you give them too much they are overwhelmed.

The bottom line: know your audience and what they’re after, then cater your writing style to them. Use this as your guide for style, content and finally, length. Blogs readers generally expect a couple pages (maybe 1000 words). Respect that.

The 4 Essential Principles of Macroeconomic Success

Drawing on the work of Daniel Dennett, Eric Beinhocker, in his book The Origin of Wealth, paints a magnificent picture of the evolutionary process which remains vividly emblazoned on my mind. The visual image is of a three dimensional landscape comprising all possible outcomes. The outcomes are represented by vertical rods of varying height. These rods, placed closely together, create a contoured surface like a pin art toy which is illustrative of all possible outcomes. This concept, staggering in its enormity, is surprisingly easy to understand.

In this landscape every possible manifestation of an idea is represented by height. Some ideas are better than others and there are, generally speaking, vast differences between good ideas and bad ones. But in the landscape of all possible ideas every ideas is surrounded by other ideas only slightly varying from itself.

So each good idea is similar to the one next to it, which will be in most cases be either marginally better or marginally worse. Though in some cases, where a critical factor has been changed, a drastic difference in acceptability would result. The landscape is therefore full of hills and valleys representing good ideas and bad ideas.

On this landscape of the possible we are trying to find the highest ground, the outcomes which produce results closest to our goals. Where few people are allowed to explore (as in the case of a tightly controlled economic system) the chances of finding the higher ground will be limited. In the case of the U.S. economy we generally want experimentation and exploration—as much of it as possible.

Where we employ more explorers we can expect to find more peaks but also more valleys. It’s impossible to know the ratio of good ideas to bad ones so let’s assume a normal distribution. The trick then is to maximize the effect of the good decisions and minimize the effect of bad ones.

The economic exploration process therefore is most effective when we employ the following principles:

1. Employ more explorers

When we reduce barriers to entry we allow individuals to explore their ideas in the public forum and to receive immediate feedback about what’s working and what isn’t. It’s easy to imagine a person, with what he thinks is a great idea, who doesn’t have the resources to bring it to the marketplace. The idea may never get realized and more importantly may never get rigorously analyzed. When people are exposed to a new idea they go through a process of analysis to determine if it’s needed, to what extent it’s needed and how much it’s worth.

When an idea is put into the marketplace it’s like harnessing the computing power of millions of underutilized PCs to create a supercomputer. When an idea is exposed to public scrutiny hundreds of thousands of people will contribute a small amount of their brain power to work on the problem. In this way bad ideas can be quickly rejected and good ideas refined into even better ones. Great ideas are rarely developed in isolation and always built on the good ideas that preceded it. By encouraging more exploration we gain a better chance of developing some really outstanding ones.

2. Stop chasing the ball

I’ll admit up front I don’t know much about soccer but I remember playing it in elementary school and the thing I remember most vividly is the coach trying to convince us not to all run after the ball in a group. She tried to explain a zone defense and demonstrate how clustering around the ball left us open for a defeat once the ball came loose. At the same time we could not just stand in one spot either. It was important to be ready to attack the ball and to pay attention to where the ball was but also to maintain the ability to protect our zone.

When we send out economic explorers we need to be ready to follow them but not in such a hurry we all run after a good idea just as it’s turning into a bad one. We need the right mix of eagerness and caution. This is difficult to gauge in the economy and even more difficult to control. To get the right mix we need to create a system which allows people to decide for themselves how fast to chase after the ball but also encourages them to hang back.

3. Share success

I have long been a proponent of rewarding success. If you are the explorer who discovers Cloud Computing Land or Camera-in-a-Phone Land, congratulations. Take a bow, have a rest, make some money from the idea. You deserve it and we all benefit from it. Profits, as I like to remind people, are a manifestation of improved lives. If I don’t think your product or service is beneficial at the price you’re offering it I won’t buy it. The fact that people do buy a product or service is de facto evidence they’re benefiting from it.

So in a very real way we do already share success. But I would suggest successful people often take too much credit for the success of their ideas and therefore have too keen a sense of entitlement to the rewards. Societies are successful not only because of the successful explorers but because there were so many willing to explore. Though many do not succeed, their contributions are nevertheless important for the economy as a whole.

4. Share the risk

By allowing successful explorers to benefit from their discoveries and inventions we encourage more explorers to succeed. By creating a system which allows people to fail without being ruined we encourage more people to explore. We need to encourage people to take risks but not inappropriate ones—we need intrepid explorers not foolhardy ones. But achieving that is a delicate balancing act.

As a society we have to entice people to act by both rewarding success and punishing failure (though punishment can be simply experiencing the natural consequences of your actions, not necessarily pilling on additional hardship). A deficit in either area would result in a sub-optimal utilization of resources. Unfortunately, each individual responds to a unique set of stimuli. One principle which has been effective however is to ensure explorers are able to share the risk of failure with others. All the stakeholders need to have skin in the game in order for the system to work.

How to Ace Your Exams This Semester (Hint: Work Smarter Not Harder)

For most students anxiety about exams starts early and lasts until the final paper has been turned in and the last test taken. Then the next semester begins. In the next 5 minutes I will teach you a powerful technique to put all that stress behind you forever and never worry about an exam again.

The key is in the following five steps:

1. Scan material before reading it
2. Read in small sections
3. Think about what you’re learning
4. Teach it to a friend
5. Don’t take notes in class

You won’t worry about exams because you will actually know the material as well as the instructor. And you don’t have to be a genius to do it; you just have to know a little about how the brain works.

You should know before we get started, studies have shown the desire of students to remember information has no measurable effect on their ability to recall the information later. No matter how much you want to learn your brain works the same as everyone else’s.

Merely telling yourself to remember something doesn’t work.

Think of all the information your brain processes every day from details about the cars you see to advertisements in store windows, in the newspaper and online. If you had to remember all of it your brain would quickly be overwhelmed, you have to forget most of it but what gets kept and what gets thrown out?

Your brain retains the things it thinks will be important later and forgets the rest.

How does your brain know what will be important later? It doesn’t so it keeps everything for a short time to see if it gets used. This is your short term memory. (This is why cramming, or studying right before an exam, will help you do better on that test but you won’t remember the information later.) If information gets used while it is in short term memory your brain will keep it a little longer and if it gets used again longer still.

The more information gets used, the longer it gets retained.

When your brain is given new information it tries to relate it to something it already knows. Giving your brain an idea how information is connected before too much detail is introduced allows it to create an efficient filing structure. That’s why teachers encourage their students to read the material before class; it gives students an idea how to mentally file information given during the class.

When you read, briefly skim the material first to get an idea of the content and structure.

Absorbing new information is hard work. When you study for a long time your brain tries to take a break by thinking about other, more familiar things. When your mind wanders it becomes inefficient at filing the information you’re reading and will try to relate it to whatever distractions you’re thinking about.

It’s important to take a break whenever your mind starts to wander while studying.

As we noted earlier, the brain retains what gets used. It’s imperative therefore to use the information you’re trying to retain. Studying for five hours one day is not as effective as studying for one hour a day for five days. Your brain recognizes repeated exposure as an indicator of importance and retains the information longer.

Think deeply about course material every day.

The more in depth our thinking is, the stronger our mental connections between that information become. The best way to think in detail about a subject is to teach it to someone else. When you are teaching you can’t gloss over things, you have to explain how things are connected and why they’re significant.

Teaching material to someone else creates strong mental connections in your brain.

The last piece of advice may seem odd and slightly counterintuitive but if you are using the first four techniques you will appreciate this admonition. One caveat: taking notes is essential if you don’t know what the instructor is talking about. Hopefully when you look over them later you can make sense of it.

But if you have read the course material and have a habit of thinking about the information you are studying, the teacher’s lectures will be easy to relate to information you have already stored. You will simply be adding detail to the structure you’ve already created.

By focusing on what the teacher is saying instead of writing you will learn more.

Now that you know a little more about the brain you can use your time more efficiently and enjoy the more important aspects of university: your social life. Try these five techniques for a semester. You can thank me later.

How To Compete With Dominant Firms

I think Seth Godin makes a good point in this recent post on poaching customers from dominant providers. He advises not to take on dominant firms by attempting to do what they do better than they can. They are the industry leader precisely because they have an advantage in whatever their core competency is. Rather than try to outdo the best, find a way to appeal to customers in a way the dominant player can’t.

This point dovetails nicely with Michael Porter’s view of cooperative competition. By each firm focusing on one specific sector of the market, each can concentrate on being the best in that area. This has the effect of expanding the pie rather than just carving up the pie. Some obvious areas of differentiation are price and quality of service.

When two large firms compete for dominance in a market one will generally come out on top as the low cost provider, the other will claim the ground of higher quality service provider. While these areas are the most obvious they are by no means the only areas of differentiation.

Every customer has a unique set of selection preferences. It is unlikely the dominant firm is meeting all of them.

Besides service and price quality is the most common differentiator. Some others might be uniqueness, customization, authenticity of customer experience, and environmental friendliness. And there are many more. Consumers always have more than one criterion when shopping and they will select the provider whose product or service best matches their criteria.

Often the low cost provider wins not because cost was the most important criterion but because the customer perceived all firms as being equally capable of meeting their other selection criteria. And when all other things are equal, low cost wins. When you focus on any one area of specialization you can appeal to the customers who see that area as more important than price.

You will lose customers who have other priorities as well as those who shop on price alone, but the customers you connect with will feel an authentic affinity for your firm and will often spread the word about their experience. The key is not to focus on getting all customers, as Seth pointed out in an earlier post, but getting the right customers.

This is the strategy behind niche marketing; finding a small group of customers underserved by the industry leader and meeting their needs. As technology lowers the cost of small production runs and the overhead for service companies, it has become more profitable to reach out to such market niches.