I have been taking some interest in sports recently. This got triggered by the significant capital overlay for new shoes and rackets to support my sons’ style over substance pursuit of tennis coaching. I am indulging my children nevertheless, having seen the wisom levels of those who play sports in their childhood being far greater than the ones who did not. Like so facets of life I am late starter.
So I jumped up to notice when Boris Becker filed for bankruptcy. How could some one with significant wealth, talent and fame go bankrupt?
I turned to a concept from systems thinking – stock and flow – to make sense of this.
Stock is anything that is accumulated (water level, bank balance, inventory, good will) and flow either increments or decrements (monthly salary, expenses, sales). Any system can be understood as an interplay of stocks, flows and the feedback loops among those.
Most people gravitate towards measuring the stock levels (no wonder most startups over index on valuation). It is more tangible and easier to compare. It often dulls us to ignore the critical role played by flow (or even more so feedback loops and delays).
If I were to ask you how fill a water tub, you are more likely to say the tap should be turned up and not think about stopping the leakage. Even if flow is understood, most of us are biased towards overestimating impact of incoming flows and underestimating outgoing flows.
No one wonder anyone will understand their salaries much more precisely than expenses. There is a lot of truth in the age old wisdom of ‘it’s not how much u earn, but how much u save is what matters’.
Unless one understands and actively manages the flows, to in turn affect the stock levels, you are just clutching at an effect than the cause of a stock level.
Another trap related to flows is role of delay. Most of us tend to be very poor in estimating the time it takes replenish stock levels by not understanding the flow levels and the time to naturally modify them.
If your savings are off or health levels are down – do you understand that while temporary measures change the stock levels, sustainable solutions need to take into account how the flow levels are to be permanently improved.
So getting back to the sad story about Boris Becker. He didn’t become a world champion in a day nor did he go bankrupt.