Mastering Business Without Business School

J:
Welcome to the BiggerPockets Business Podcast show number 71.

Josh:
Businesses are run by and for people. And particularly as entrepreneurs or as investors, we are the instrument that we use to get everything done. If we’re not operating in an efficient, effective way, the business doesn’t have much of a chance. Because we are the driving force behind it.

J:
Welcome to a real world MBA from the school of hard knocks, where entrepreneurs reveal what it really takes to make it. Whether you’re already in business or you’re on your way there, this show is for you. This is BiggerPockets Business.
Hey everybody. I am J Scott. I’m your cohost for the BiggerPockets Business Podcast. And this week, I guess I’m also your host because Carol Scott is taking the week off. And yes, I know what you’re thinking. It can’t be nearly as good a show without Carol. And I agree, but I did my best, and we do have an amazing guest. So hopefully between him and myself, we’ve made up for what we’re losing with Carol Scott.
So this week on the BiggerPockets Business Podcast, we have a bestselling author Josh Kaufman. And he is author of one of the classic business books called The Personal MBA: Master the Art of Business. And today, September 1st, 2020, he is releasing the 10th anniversary edition of that book. So The Personal MBA: Master the Art of Business, the 10th anniversary edition is available today. And Josh is with us to share his wisdom on business, on being an entrepreneur starting in business, and what it takes to become a successful entrepreneur.
In this episode, we touch on a lot of different topics. We’re kind of all over the place. And that’s good because I wanted to get as much information out of Josh as I could in the short time that we had them. But we start with the discussion of the big misnomer that business has to be difficult, that it’s rocket science. It’s not. And as Josh puts it, business is simple, but it’s not necessarily simplistic. So we talk a bit about that concept of business not being as hard as a lot of people make it seem, and what we can do to kind of make inroads as entrepreneurs in this world where everybody seems to think that business is really, really difficult.
Then we get all the way towards the end where we talk about this concept of Akrasia. And you’ve probably never heard this term before. I had never heard this term before. But it’s this idea of this struggle that we all have to bring ourselves to do the things that we know we should be doing, but for some reason, we just can’t bring ourselves to do. Or we do the opposite, even though we know it’s not good for us. And Josh talks to us about what this term means, how it manifests in our life. And most importantly, how we can overcome and power through this idea of not doing those things that we know we should be doing in our business and our personal lives.
And just the wisdom that comes out of Josh’s mouth throughout this entire episode is amazing. Make sure you listen to the end where Josh gives us his best tips for getting started in business now, and also gives us his warnings on things that we should be avoiding as new business owners so that we don’t make those mistakes that a lot of new business owners make. It’s just a great episode. And make sure you pick up your copy of The Personal MBA: Master the Art of Business today. For more information about Josh, the book, and everything we talk about in this episode, check out our show notes at biggerpockets.com/bizshow71. Again, that’s biggerpockets.com/bizshow71. Okay. Now, without any further ado, let’s welcome Josh Kaufman to the show. How are you doing today Josh?

Josh:
J I’m great. Thanks for having me here.

J:
Absolutely. I am thrilled to have you here. So we’ve been doing the show for about a year now. And it’s funny, your book has been sitting on my bookshelf for about eight years now. And we were just talking that I guess I have probably the second edition. The first edition was released in 2010. And you have the, I guess this is the third edition. So first, congratulations on the release of your 10th anniversary edition of The Personal MBA. And thanks for being here.

Josh:
Thanks. It’s an honor. And thank you for picking up one of the early additions of the book. That means a lot to me.

J:
Absolutely. So I love the way you’ve laid out this book. It’s very thorough. It’s very linear. Everything’s laid out in bite sized chunks. I absolutely love it. And I love the fact that I think of this book kind of as a litmus test for those who are going into business and maybe thinking about going to business school. I can’t tell you the number of people that have said to me, “I’m getting ready to go to business school,” and I’ll recommend this book. And I’ll basically say, read this book. And if you get halfway through it and you think this isn’t for me, well business school’s probably not for you. But if you get halfway through this book and you say this is what I want to be doing, then it’s a great litmus test for deciding okay, maybe business school is the right way to go. I always talk about the fact that business school is kind of two things. It’s the academics and it’s the networking. And the academic side of things, we can learn ourselves. We can learn from Google. We can learn from your book. We can learn from other sources. It’s the networking side of things that business school is kind of good for. So I like to tell people, and I’m sorry, I’m being long winded about this, but I always tell people-

Josh:
You can just talk this whole time. This is fantastic. Thank you.

J:
So I guess long story short, is anybody out there that kind of is looking to, kind of wants to know what does a business school curriculum look like? What does a two or three year syllabus for business school look like? Start with this book, because this is going to give you pretty much everything you’re going to learn in business school. And as we’re going to talk about on the show, it actually talks about things that we don’t discuss in business school that much. So I love that as well. So now that I’ve talked for a half hour, I’m going to give you an opportunity to kind of break the boredom. So talk to us about what is your backstory, how did you get to the point of writing this book? What was your goal with the book, and basically how’d this book come about?

Josh:
Yeah. So first it’s always wonderful to hear when you’re a person who has created something with certain intentions or with wanting to have the person on the other end have a certain experience in mind, it’s always really gratifying to hear someone who you don’t know and have never met have the experience that you want them to have. So I’m thrilled that you have found the book useful and you found the book useful enough to share it with other people. That really truly means a lot.

J:
Excellent.

Josh:
The Personal MBA as a project has been around for a long time. I’ve been working on this for 15 years now. And the genesis of the project was I was in university and I was in internship program working for a big company, consumer goods company called Procter & Gamble.
So I was doing technology first and then product development and marketing and sales for big consumer brands. Tide, Crest. My specialty was in home care goods. So the brands that I worked on were Mr. Clean, Swiffer, Dawn, Cascade, and Febreze. And funny story related to that is I knew I had gotten the job. I didn’t know where I was going to be placed yet. And about two weeks before I was set to start work, that’s when I shaved my head. And then low and behold, the first brand I was assigned to was Mr. Clean, which it doesn’t really hit unless we’re doing video and we’re doing video. So this is great. People thought I was really excited about that.

J:
For any of our listeners that aren’t watching this, safe to say that Josh is a reasonable facsimile of Mr. Clean with the shaved head.

Josh:
I could use some help on the muscles part, but the shaved head I’ve got down pretty well. So yeah, I was going into this internship. Again, undergrad in business technology. And I was going to be working with people who had just graduated from the top 15 MBA programs in the world. I mean, that’s the general feeder process into the job that I was holding.
So for me, I wanted to make sure that I understood what I was doing. That when people were using concepts or language, I wanted to make sure I understood what they were saying. I wanted to be able to be an equal at the table where decisions were being made. So I thought about for a few days should I take some time off? Should I go through an MBA program? Should I have this experience that all of my peers have had?
And after doing some research, it didn’t make sense. It didn’t make sense for me for a bunch of different reasons. The first was that I already had the job that people go to business school to get. Quitting that job and then coming back, that just doesn’t make any sense at all. The other is that from a cost standpoint and both in terms of monetary costs and opportunity costs, the two years that a full time program typically takes. That’s a big ask. That’s expensive. So I wanted to figure it out for me. If the goal is to learn these things, to learn these essential, useful ideas that you can apply to any business, that’s something that you can do on your own. Learning is something that happens in your head. It’s not necessarily something that happens at a university, or in a classroom, or in a formal environment.
So The Personal MBA as a project started as me reading a whole bunch of books and resources and trying to do research on my own to figure out in the grand deep sense, what are businesses? How do they work? How do you analyze an existing business, how do you make it better? And how do you improve a business in a way that A, gets the result you’re looking for? And B, doesn’t provoke, all sorts of unanticipated consequences or second or third order effects down the line.
So I started reading and researching. A summer of reading and research turned into a year, turned into two years, turned into five years. Because I found this subject fascinating and rewarding. Business is one of those topics that is everywhere in our society and culture. It touches all of us in some way, shape, or form. And it is one of the most complex multidisciplinary areas of human experience. Bringing in knowledge and skills from all sorts of different aspects of society. But then using that in a way that does something really unique. Because when you have a business that works, you’ve created something that benefits other people. And you figure out how to do that in a way that provides value and benefit to them as the purchaser. But then by purchasing it, they are supporting you in helping you do this more or in a way that is rewarding in the long term, and is a way that is sustainable longterm. It’s really unique and fascinating.
So the first edition of The Personal MBA book was really the culmination of about five solid years of research and a year and a half of writing. And the two subsequent additions were opportunities to go back to revisit the manuscript in its entirety and say, “Okay, are there things that should have been in the first edition or the last edition that I missed or should be in there? Or is there a way to explain some of these ideas in a more clear or comprehensive or concise way?” And so yeah, the 10th anniversary edition is a full revision. I did the full 500 page book, went through every bit of it, and improved it to be the best that I can make it at this point in time.

J:
That’s awesome. Well, congratulations on the release. Actually, it’s out today. So I’m going to start with the most difficult question I could probably ask of you or anybody on this show. But for all of our wannabe entrepreneurs out there, for everybody, all of our listeners that want to start a business, get into business, what do we do? Do we pick up your book and read it from page one to page 367 I think it is, and then go out and start a business? Do we start a business? What’s the process of getting from zero to having a successful business? And where does the learning, the academics, the stuff that you lay out in your book, how does that fit into the process?

Josh:
Sure. Okay. So the shortest version of this, yes, please pick up the book. Skip the introduction because the introduction is a lot about business school. You may or may not care about that at this point. Go to chapter one. And it’s the very first concepts in chapter one is how to understand business in a clear, systematic way. So the section you’re looking for, just go straight to the table of contents. It’s called the five parts of every business. And I know you mentioned earlier that you had a business school background. I did a undergrad business honors program. So basically undergrad plus a little bit of the business school stuff. I don’t know about you, but one thing that struck me as really odd is there was never an attempt to define what a business is or what a business does. Just like businesses are things that make money. And if you’re doing that, then you’re running a good business, good job.

J:
And that’s actually one of the reasons why I liked the way the book is laid out. Because in business school, it’s basically you get in there, you pick your classes, and they start teaching you something. And you don’t get a larger context. You don’t get to see what does this look like in a linear fashion? It’s just here’s a topic. Here’s a topic, here’s a topic. There’s no transition between the topics. There’s no context of how these topics fit together. And yeah. So you talk about in the book, and I’ll quote from the book, a business is, and you mentioned the five things. It creates and delivers something of value that other people want or need at a price they’re willing to pay, in a way that satisfies customers’ needs and expectations so that the business brings in enough profit to make it worthwhile for the owners to continue operation. Yes, I was reading that. I did not memorize that.
But I love that because it really is, it is the definition of why we are doing all of this. And you get into business school and you walk into that first class and they start talking about, “Okay, this is what a cashflow statement looks like, or this is how we do marketing, or this is,” whatever. And they don’t from this is why we’re here. This is why we’re doing this. This is what a business is. So yeah, just cut you off. I apologize for that. But I love the fact that you kind of start at the beginning.

Josh:
Yeah. And the background in terms of this is before I launched into this research project, I was looking for a book like this. I was looking for help me understand business at the 50, 100,000 foot level first. So we’re covering all the bases, and then you can go deeper into additional topics as we need to.
So there are two kind of organizing frameworks for the book. The first is the five parts of every business. So when we look at what a business is and what it does, it’s exactly that. It has five parts. Value creation, marketing, sales, value, delivery, and finance. And if you understand what those five things are, why they’re important, and how they fit together, it doesn’t matter if you’re looking at one of the largest corporations in the world, or the smallest of the small garage venture that’s just getting started. They all work according to that framework, those principles. So if you start there, if you understand that stuff in a deep level, you understand how businesses work.
But because business is complex and multidisciplinary, you can’t stop there. Because businesses are created by people for the benefit of other people. So if you don’t know how people work, you’re going to have a really hard time. Both in terms of working with yourself, doing all the business things that need to be done in order to make the business successful. But also working with clients, and contractors, and customers, and operating in society in a way that helps the business be successful longterm.
And then the third part, which I think most business schools, at least the curricula that I’ve seen skip almost entirely is complex systems. So businesses are complex systems that operate within other complex systems like societies, and markets, and governments, and the largest scale systems we can think of. So understanding that these things are systems and there are principles and techniques and concepts that can help us understand what systems are and how they work. That can help us when it comes time to okay, I’m stepping into a job. I have certain responsibilities. I report to certain people, or I have certain customers or constituencies. What are the things that I can do right now to understand the environment that I’m operating in and the constraints that I’m operating under? And then apply effort or attention to points of leverage. Places where you can make an enormous impact very quickly by operating not just doing the right thing, but doing it in the right way at the right time. That sort of knowledge is very, very beneficial. So, yeah, that’s how the book is structured. Part one is business, part two is people, part three is systems. And when we talk about business, the first five chapters of the book are value creation, marketing, sales, value delivery, and finance.

J:
I love that. And I want to delve into some of those in more detail. But I just want to point out that when I talk about business school, I loved business school, but there are parts of business school that I really hated. And one of the things that I look back on and I think about with business school is it felt very elitist. Not necessarily in a bad way, but basically the attitude that we’re special for being here. We’re special if we can learn this stuff in a university setting. It means we’re going to somehow have more chance of being successful entrepreneurs and start big businesses. And that in some way, shape, or form, we’re better than people that don’t go to business school. And yet the longer I actually do business, start business, run businesses. The more I’m starting to realize that it really, and I’m going to use your words from chapter one, it’s not rocket science. In fact, to quote the book, you say anyone who tries to make business sound more complicated than it is, is either trying to impress you or trying to sell you something you don’t need.
So I think it’s really important. I want to give you an opportunity to address this. It’s really important for our listeners to recognize and to constantly remember that it’s not rocket science and you don’t need an MBA to be a successful business owner. You don’t need business experience. You don’t need to run a large business. People from all walks of life wake up every day with an idea and figure it out and become successful.

Josh:
Yeah. The way I like to think about business in general is that it’s simple, but not simplistic. So the things that we do on a daily basis, yeah. They’re not rocket science. You’re making something people want. You’re getting their attention and hopefully provoking their interest in this thing. You’re selling it to them, you’re delivering it to them so they’re happy, and in a way that makes them hopefully want to do business with you again. And then you are trying to figure out okay, where’s money flowing out, where’s money flowing in? Is more money flowing in than flowing out? And is it enough to make all of this worth it? That’s it, really. But the actual implementation of that in a functioning business can be quite detailed and quite complex.
So the approach that I prefer to use to understand business in general is if you’re familiar with the investor Charlie Munger and Munger’s mental models, this is an idea that there are a handful of concepts in each of these areas that provide most of the value or pull most of the weight in terms of conceptual understanding of what’s important and what to focus on. So really, the place to start in understanding business in general is take one of these topics like value creation, or like marketing, or like sales, or value delivery, finance. There are probably 20 or so ideas that are really important and universally applicable.
So start with understanding those first. If you understand them, the benefit is not being able to sit in a meeting and say the right buzzwords in a way that impresses the people around you. That doesn’t matter. The value of this is when you are in a live business environment. Whether you’re working for somebody else, or you’re starting your own business, or you’re investing in a property, or whatever, is recognizing a situation that’s happening in front of you in the real world. And being able to say this reminds me of this idea that’s really important right now. Or you come across a challenge and you’re stuck on something. And because of past exposure and education, you have the background to say okay, what are the best questions I can ask right now? Who can I talk to? What can I read? What can I try in these specific ways to get through this block that I’m experiencing?
So the primary benefit of business education is not necessarily the I’ve gone to business school. I have a paper that says I should theoretically be a great manager anywhere in the world, in any industry, in any market. Whatever. There is a certain amount of hubris in that. The value is knowing what this area of life consists of at a deep, fundamental level. And then whatever particular problem you’re working on right now, being able to say all right, here are the ideas, or here are the questions that are going to help me get from point A to point B in the most efficient, effective way that I can muster.

J:
Yeah, I love that. And I mean, there’s a way to keep score in this game. And you can look at any business owner and you can easily calculate that business owner’s score. And it has nothing to do with where they went to business school. It has nothing to do with all the conceptual ideas they have in their head. It doesn’t matter who they know or what they know. At the end of the day, you can look at their financial statements and you can say who’s winning and who’s losing. Who’s doing this correctly, who’s not doing this correctly. And at the end of the day, whether they went to business school or not, and who they know or what they know. Really, it doesn’t matter.

Josh:
Yeah. I think it kind of goes beyond that too. One of the things that I talk about very early in the chapter on finance is the idea of sufficiency. So in terms of defining what is a successful business versus a not successful business. Going back to the five parts of every business framework, finance is so the business brings in sufficient profit to make it worthwhile for the owners to continue operation. So there’s one way of looking at business of saying like, all right, Jeff Bezos is the best because the number is the highest. And there’s also a way of looking at it saying if you have enough for you, if you’re enjoying what you’re doing, if you’re bringing in enough money, if the venture is sustainable, if your stress levels are manageable, if your personal relationships are healthy and strong. And everything that you’re doing you like the way it’s structured and you want to keep it working that way, that’s a conception of success that is very real and very valuable.
So I really try, particularly for business owners. And you kind of see a lot with this with the rise of early stage venture capital over the past decade and a half ish. I think venture accelerators like Y Combinator just got started around the time where I started the research for this. With early stage business owners, there’s very often a mentality of well, I need to make something huge. I need to go to Y Combinator, get investment, raise $100 million, have a staff of 500, an IPO someday. And if I run that gauntlet all the way through to the end, and I have a big payday in my bank account, that’s what being a successful business owner is. That’s the standard. And I don’t think that’s true. I think what a successful business looks like for each individual can be very idiosyncratic. And I think that’s a wonderful thing.

J:
Yeah. And thank you for correcting me on that because oftentimes we do, we boil it down to numbers, and balance sheets, and income statements. And that’s a really good point. I mean, we had a guest on a few weeks ago who went through Y Combinator, has raised $70 million. And we spent a lot of the episode talking about the venture capital treadmill. Where basically once you start taking money, everything you’re doing is geared towards growth, growth, growth, because you’re no longer working for yourself, you’re working for your investors. So again, we talk a lot on the show about lifestyle businesses, and freedom of time, and starting a business that’s right for you. So I do, I appreciate your correction there because even I sometimes fall into that trap of it’s all about the bottom line. And as you pointed out, it’s not.

Josh:
There’s actually a concept in The Personal MBA if you go to the section on finance called the hierarchy of funding. And it talks about all of the ways that you can go about financing a business. All the way from the bootstrapper’s personal cash and personal credit. And that’s where things top out. All the way up to venture capital, it’s a ladder. So essentially you start at the bottom with personal cash and personal credit. And as soon as there are needs, business needs or personal needs that go beyond that, you start climbing the ladder, but the higher the climb, the more money you get usually, but the more control over the business you give up in exchange. That’s the fundamental trade off.
So yeah, for all of this, particularly real estate investing. You’re very rarely unless you have been a successful estate investor for a while, you’re very rarely pulling out the checkbook and saying yes, here’s a check for cash for this thing. There’s some level of financing. So I think it’s really interesting and useful to understand that there’s that fundamental trade off that is to be made in certain forms of financing. And thinking through for yourself, what is the scope and scale of this business? What does it need to be in order to be rewarding as a business and rewarding for me? And that’s where I think a lot of folks play the venture game and are very good at it, and are very successful. And there are some personal trade offs there in terms of responsibility and stress that are very real and are worth thinking through before you go through the process instead of saying, “Man, I really wish I would have thought this through more before [inaudible 00:27:34].”

J:
So let’s go back a little bit. Both of us talked a little bit about financials and financial statements, and understanding measurement in the business of how well or successful the business is going. Efficiency metrics, things like that. How important are those to being a successful entrepreneur?

Josh:
Yeah, so it’s kind of a hybrid. I think for particularly beginning entrepreneurs, learning or having a familiarity with the terminology is useful. And as we were talking earlier, these are pretty simple concepts. There’s not a whole lot of rocket science to it. So it;s helpful to understand what these statements are. In general, how they’re calculated and why they’re calculated. And be able to understand when a certain statement might be beneficial.
So if you could go to the chapter on finance in The Personal MBA, I’m looking at it right now. There’s probably 25 to 30 ideas in there. You can read it in an hour or so, and have a working familiarity of what these are and why they’re important. The actual nuts and bolts, I would say that accounting at the beginning is more important than finance. Because if you’re not collecting the numbers, there’s nothing to apply financial analysis to.

J:
So what’s the difference between accounting and finance? Because a lot of people will say, well, those are kind of the same thing, aren’t they?

Josh:
Yeah. So they’re not the same thing. So you can think of accounting as essentially the data collection portion. Making sure you are tracking the flow of money coming in and the flow of money coming out in as much detail and with as much accuracy as possible. When you have that information, finance is the process of applying analysis to that information. So using the data that you’ve collected in accounting to make decisions. Is this working or no? Are there changes we need to make? How are we going to allocate money to the projects, the work we have going on right now? That sort of thing.
So for beginning entrepreneurs, what I would say is that accounting is something, particularly when you’re busy creating something new, you have a lot on your plate. Accounting is something that is relatively easy to outsource, because there are these wonderful people called CPAs who have way more experience doing this stuff than you ever will. So let them handle the data collection and structuring format. And then your job as a business owner is finance, to look at where’s your money going. Is it going into the right places? What are our future priorities in terms of projects, trade offs, things like that. And your job as the entrepreneur is to figure out all right, if we have a certain amount of money to invest, or we have a certain budget in different areas, what’s the best way to invest these funds? That’s the important part.
I would recommend, there are a few new, wonderful in the age of technology that we have new resources to help us. A few years ago, I started using an outsourced service called Bench, which has been phenomenal in terms of the accounting side of the finance equation. You basically get a bookkeeper who you forward receipts to, and they sync up your bank statements. And every month, you get all of the major financial statements that you need. Cash flow statement, income sheet, balance sheet. And you are having the benefit of a real live human being who knows what they’re doing, taking a look at this every month. So I would say keeping good books is the first part. If you have that, the financial analysis becomes much, much easier.

J:
That makes a lot of sense. Okay. So you have a chapter in the book, and I love this because this is something we didn’t talk about much in business school. And we don’t talk about enough in general. The chapter is called Working with Yourself. And it’s a lot about mindset. It’s a lot about, in fact, you have a whole chapter on the human mind also and mindset, but then you have a chapter on working with yourself and kind of knowing yourself. So between those two chapters, there’s a lot of discussion about more or less, I guess less hard topics. They’re not equations. It’s more again, it’s about mindset. It’s about understanding how people work, how their minds work. Both your customers and your own. So can you talk to us a little bit about the importance of that topic and maybe why isn’t that covered more in business school and other places?

Josh:
I have no idea because it’s so important. Businesses are run by and for people. And particularly as entrepreneurs or as investors, we are the instrument that we use to get everything done. If we’re not operating in an efficient, effective way, the business doesn’t have much of a chance. Because we are the driving force behind it. So in the broader sense, psychology, and communication, and cognitive bias, the ways that our brains tend to systematically malfunction in certain predictable ways. All of those things are really important in helping you make good decisions, avoid making dumb mistakes or preventable mistakes, communicate with other people, persuade and convince other people be they customers or investors to see the world the way that we see it or to value the things that we value. All of those things are fundamentally cognitive psychology, both on the applied and the behavioral sense. If we don’t understand how humans operate, we’re at a distinct disadvantage when it comes to people who do.
This was something that I really, really internalized in my CPG career, particularly on the product development side. I would go to people’s houses and watch them mopping their floors. And it sounds weird. Why would this big company send a highly paid individual to do something as mundane as that? And it’s because watching people do what they do gives you insights about how they are approaching this particular problem that you wouldn’t get any other way. You have to watch them.
There’s a famous story in the company. One of the defining moments of the company in many respects. So Procter & Gamble makes tide laundry detergent. And there was somebody several decades prior who was doing the same thing that my job was at the time. They were in somebody’s house. And they were watching a middle aged woman do her laundry. And at that time, laundry detergent was in the big box of powder. You got a big scoop and you scooped it out, put it in the washing machine. This was before liquid detergent.
So the researcher who was trained as an anthropologist was watching this lady cause she turned on the washing machine to let the water run. She would scoop the detergent in, and then she would sit there for a little bit. Like 30, 45 seconds. And she’s just waiting. She’s not doing anything. And then she would swish her hand around in the bottom of the laundry machine. And the researcher was like, “Well, let me stop you for a moment. What are you doing?” She was like, “Well you have to swish it around or it doesn’t dissolve.”
Now the scientists at Procter & Gamble make really darn sure that that laundry detergent resolves. That is not a functional issue. It was a psychological issue of this person not necessarily trusting a process that she can’t see. So it was that insight, watching somebody actually doing the thing that they’re trying to do, that led to the development of liquid laundry detergent, which is now a multi-billion dollar a year category.
So it’s that kind of thing, understanding how people are perceiving the world, understanding how they are orienting themselves to the problems that they are facing. And then using that insight to say okay, I think there’s a psychological need here. There’s something that might be beneficial or worthwhile. Those become the opportunities that exist in the world that other people don’t see yet because they’re not paying attention to how people are thinking and how people are behaving.

J:
Wow. I love that. And I think that right there was, if people are only listening to that one clip, it’s so powerful. People always talk about, “Well, I can’t think of a business idea. I don’t know what an opportunity is.” And it really is as simple as paying attention.

Josh:
Yeah. There’s a new concept in the 10th anniversary edition. Kind of falls into the category of one of the things that I wish I would have put in there from the beginning, because it’s essential. There’s this idea, it’s called exploration and exploitation. And it’s a problem that comes from decision making theory in computer science. There’s huge research literature on this. And say in advance, I do not condone gambling in any way, shape, or form. However, the research literature usually frames the problem in terms of this.
Imagine you walk into a casino, and there’s a row of slot machines. Your job is to play those slot machines. And there’s one of them that is going to pay out way better than all of the rest of them are. You just don’t know which one. And for the sake of the experiment, let’s just say that the cost of playing the machines is your time. You don’t have to put money into the system.
So the research literature asks the question alright, presented with the circumstance, how do you go about figuring out which machine is best? And the approach or the algorithm is, this is called, if you’re interested in looking this up, it’s fascinating. It’s called the multi-armed bandit problem, because slot machines are one-armed bandits and you have many of them. So multi-armed bandit problem.
The approach that researchers recommend for many very good technical reasons is a two phase approach. So the first phase is exploration. And exploration is basically just trying a bunch of different things to see what works. And every time you try something, you collect a little bit more information about that particular option. And when you’re walking into a situation where you don’t have any information, information is valuable. So you should just spend most of your time trying a bunch of different things to see what works.
After a period of time, you’re going to have a lot more information about what you believe to be the state of the world, right? Which machine seemed to be doing very well, which machine seemed to be not doing very well. And you can start to shift your choices in where you are focusing your time and attention to the things that work and you ignore the things that don’t. So that’s called the exploitation phase. You’re just picking the best machine, and you’re hitting that lever over and over and over again, because you think that’s where the highest reward is. That seems pretty straightforward.
The wrinkle, which is to me, the entire value of this way of thinking is that the exploration phase never stops. It’s just a lower and lower percentage of your time. Because we are not omniscient beings. We do not and will not ever have perfect information about the state of the world or the very best thing that we can do at any point in time. So because that information about the world is valuable, the best approach is to yeah, after a certain point, do the thing that’s working, keep doing the thing that’s working. But always focus a percentage of your time on experimental things that you do to collect information about the world around you. Because you never know if that’s going to end up being more valuable in the long run. And you won’t know until you test it.

J:
I love that. And I mean, we talk a lot these days about confirmation bias. We come up with the conclusion first, either based on exploration or based on whatever criteria. And then we just look for reinforcement of that idea as opposed to continuing to explore and continuing to question. So that’s a great reminder of as entrepreneurs, we can’t fall, or we have to do our best not to fall prey to that confirmation bias of assuming that what we think we know about our products, our customers, our vendors, our employees, our business in general is necessarily true. And we should always go in with that attitude of well, what if this isn’t true?

Josh:
Yeah, totally.

J:
So I love that. Awesome. Okay. So switch gears a little bit. And actually, no. I want to go back. Instead of switching gears, what we were just talking about, exploration, exploitation, that actually feeds into another concept that you talk about in the book. And this is a concept that we talk a lot about on the show. So I don’t want to skip over it. And that’s shadow testing. So I don’t think I’ve ever used the term shadow testing on the show. So I’m going to let you define it. And I think it will be a concept that’s familiar to a lot of our listeners. And maybe you could talk to us a little bit about how we should be going about doing it and why it’s so important for us as business owners.

Josh:
Yeah. So shadow testing is the idea of testing a offer. So I use the word offer for the grand set of things that you can present to a customer. So not everything in the world is a product or a service. So it’s kind of the general language. But let’s say because it’s easy to visualize, we’re developing a product. Developing products is expensive. So both from a development, and a personnel, and a research, and a production, there’s a lot that goes into that.
So one of the big risks when you’re developing anything is that you go through all of this time and effort and expense, and you come to the point where you’re offering it to a customer. And the customer say, “Yeah, that doesn’t really work for me,” and they don’t buy it. So worst possible situation all around.
So shadow testing is a way of trying to prevent this very bad situation from happening. And as an approach, it’s quite straight forward. You come up with something to show the customer, and that’s usually a prototype of some sort. Maybe it’s a diagram. Maybe it’s a sketch, a rendering, an explanation, some text, but something for a potential customer to respond to. And you presented to them in a sales context. Like I am trying to convince you that this is something that you’re going to want to buy. You do two things. You’re watching them during this presentation. Are they excited about this? Is this interesting? But you also ask them to buy before this thing exists. So the best piece of data that you can get from a prospective customer is them pulling out their wallet, checkbook, or credit card and saying, “Yes, please I’ll take one.” If you don’t get to that point, this is something that happens a lot particularly with beginning entrepreneurs who will do something like develop an idea, and then they’ll tell their friends and family about it. And their friends and family, “I’m so excited for you. This is going to be real good. This looks like a great idea.” And they’re being wonderful, supportive friends and family. And they’re not giving you actual useful data. Because they’re not the target market for this thing.
So shadow testing is a way of putting something in front of somebody who would be a real potential customer, and getting early feedback on that yes, I will buy it. Yes, I will pre-order this. Please take my money right now so I can have one of the first ones that rolls off the line kind of data.
And the better the prototype you can give them, and the more data you get back from customers saying, “Yeah, I want to buy this. This is awesome.” And the pre-orders roll up, you can do a bunch of different things with that. First, it substantially reduces your risk because you know that the worst thing that could happen, this is an idea called the Iron Law of The Market. If the market doesn’t want it, you have no hope. It’s just not going to work. So if you have pre-orders, you already know you’re on the right side of the Iron Law of The Market. If they’re giving you pre-orders in terms of cash, so Kickstarter is a great example of that, right? You put up a prototype on Kickstarter. A bunch of people say, “Yeah, if enough other people want this, I will give you money in advance to make this real.” And then when the campaign closes, you have a whole lot of cash sitting in your bank account to make the thing real. It’s a form of shadow testing.
The other thing it helps you do is go out. If this is something that requires funding, you can take this proof that people are already giving you money for this. And you can go to investors and say, “Look at all these people who have already signed up for this wonderful thing. This is a sure bet you can invest with confidence that there is an actual business opportunity here.” So yeah, as a generalizable technique, the cool part about this is you’re doing 1/100 of the work and a very tiny fraction of the expense that it would take to build up the whole shebang. But you’re getting the critical data that you’re going to need to figure out if this thing is going to fly or not.

J:
I love that. And I love the mention of Kickstarter, because it also brings in to clarity that idea, a lot of times, how are we going to pay for this? And you talk about well, if you can prove the value and that you have customers to an investor, the investor’s going to potentially invest, or maybe a bank will loan you money if you prove you have the orders. But by the same token, if you can get people to actually spend the money in anticipation of getting the product at a later date, you can have your customers fund the development of that product.

Josh:
Absolutely. Yeah. And this is more and more common. The internet and the ease of charging credit cards on the internet is making this a lot more available and widespread than it typically has. In the olden days, it used to basically just be pre-order bonuses. So there was some direct incentive for people if they really were excited about this, to get on-board in advance. But yeah, platforms like Kickstarter are making things that wouldn’t otherwise exist because of lack of funding or because of lack of a customer base exists, because they’re able to put essentially a page of text and a few renderings and maybe a video up in front of people. And then people are willing to vote with their dollars, whether or not that is something that works for them.

J:
Awesome. Love it. Okay. So I want to talk about another concept in the book, and it’s in the chapter called Working with Yourself. And it’s a term I’d never heard before, but obviously it’s a concept that I very much relate to. You use the term Akrasia, I think I’m pronouncing that correctly.

Josh:
Akrasia yeah. It’s pronounced both ways. I think Akrasia is the technical one.

J:
Okay. I have a feeling when you explain what this means, everybody’s going to go, “Yeah, I know what that is.” So can you tell us what does that term mean and what can we as entrepreneurs and people, I guess in general do to overcome it?

Josh:
Yeah. Okay. So Akrasia is one of these ideas. It actually comes from ancient Greek philosophy. Hence the weird term. Akrasia basically is the term for what you should be doing. You know what is theoretically best for you, and you just can’t get yourself to do it. There’s just some barrier of, “I really should exercise every day. I really should clean up my diet. I really should stop drinking so much. I really should,” times a million. This concept goes all the way back to the days of Plato, and Socrates, and Aristotle. And it’s not exactly procrastination. But it’s a very closely related cousin to it. So procrastination is I know exactly what I need to do, and I have the time to do it, and I have the capacity to do it. But man, I’d really prefer to be doing something else right now. Let’s go read Reddit for the next five hours or scroll Wikipedia until it’s 3:00 in the morning.
Akrasia is just this very deep I know what I need to be doing. I just can’t get myself to do it. And the tricky part about Akrasia is that it’s not a straightforward problem because it comes from all sorts of different directions. So sometimes you have Akrasia because you can’t define what you want. I have ideas of things that might be nice. But in terms of defining or deciding exactly what I want, what that looks like, no idea.
Sometimes, you think that what you’re doing will bring you closer to something you don’t want. Right? So it’s like if I want to work really hard in my career and get that promotion. But if I get that promotion, then I’m going to have to spend more time at work and I’m going to spend less time with my family. And then I’m going to be a bad father or mother. So you see the inner conflict start to build of I want to do that, but I don’t want this to happen. And if I do this, that’s where the knot starts to tangle. Sometimes you just can’t figure out how you’re going to get from where you are right now to where you want to be. It’s just kind of this big, weird mystery box of okay, I want to be a real estate investor. I have no idea how to do that. It still sounds great. And I know it would probably help me, but I just don’t know.
And then sometimes, you just kind of idealize what the end result looks like to the point where once you start digging into it, it’s like oh man, that’s probably unattainable. I want to be the richest person in the world. So I’m going to start a business. But now that I’m starting a business, I don’t think I’m going to be the richest person in the world, because it’s a really hard thing. And you idealize the end point almost to the point where it’s like by actually working on it, you’re proving to yourself that that thing that you want isn’t going to happen, which is very, very psychologically painful. And the best way to avoid that psychological pain is to just not. So yeah, Akrasia, it’s the way that we tie ourselves in psychological knots with all of the conflicts or things that we need to pay attention to and places to put our attention in order to actually make progress on anything.

J:
Any strategies that we can use to kind of force ourselves past it and through it or through it?

Josh:
Yeah. So I think there’s one particular concept that I use all the time. So the general concept is self-solicitation, which is a fancy way of saying asking yourself questions. So this applies to everything from defining what you want. There’s another technique that I talk about in the book called the five fold Y. So it starts with a very straightforward goal setting exercise of you just write down a whole bunch of things that you want. And then it’s similar to from the business side root cause analysis where you’re looking at something that happened, you’re like, “Well, why did that happen? And then why did that happen? And then why did that happen?” You try to get back to the thing. It’s like no, this is the thing that happened that set off this chain of events. You can do the same thing with your goals. So I want this. Well, why do I want this? Let’s take a step back, and then take a step back and take a step back until you get to the closest thing to a root desire you can identify.
And if can do that, you can start working on the root cause goals instead of the things that you superficially want without thinking it through. So a good classic example in this territory is a lot of people want to have a million dollars, or $10 million, or $100 million. And when you track the root cause of that back, very often, it is an emotional experience. I want to feel free and in control of my life, I want to have a lack of stress. It’s all of these psychological, emotional benefits. It’s not necessarily the utility of having $10 million in your bank account.
So if that’s the case, understanding that there are these core, emotional, psychological desires. That’s what the real prize is. You can start looking for other ways to get that. Maybe it’s starting your own business. Maybe it’s paying off your mortgage. There are 500 ways that you can get to feeling more free and in control of my life that don’t have anything to do with money. So tracking the root cause of these things that we decide that we want for ourselves gives us a lot more latitude in terms of how we go about trying to get what we think we want.

J:
I love that. And yeah, so often we start with the I want to make a lot of money. But we ask ourselves well, why is that? And you keep drilling down and you realize that at the end of the day, that’s not at all what you want. You just haven’t asked yourself the right question. So I love that idea of self-solicitation. I’m going to start using that term. Thank you.
Okay. So I’m going to ask two very general questions here towards the end. First, for the listeners out there that are looking to get started that they’re ready to make the leap, but they just haven’t gotten over that hump. What are some suggestions you have that we haven’t already talked about today? Some of your just best suggestions for our listeners who are really looking to get into business, but just haven’t made that leap yet. Give us some motivation.

Josh:
Yeah. Okay. So I think we’ll do a couple things aside from the obvious reading or listening through The Personal MBA is going to give you a lot of how to think about this particular area of life.
I think the two things that I can recommend upfront. Your early job, and this is kind of ties into what we were talking about in terms of product development. Think of yourself less of an entrepreneur at first and more of an anthropologist. Your job is to go through the world with your eyes wide open paying, very, very close attention to what people do, what they talk about, what they’re frustrated with, and what they complain about. So that particular orientation to the world is you’re looking for problems. You’re looking for hassles. You’re looking for things that could be better and should be better, but for whatever odd reason they aren’t better yet.
So personal example of this for me. When I started this whole project, I was looking for a book like The Personal MBA. And I figured business has been studied in a formal way for many, many decades now. Some business professor somewhere had to have just written the introductory this is what businesses are and how they work. And it took me a long time of searching for it to realize that it didn’t exist. So I was like okay, there’s an opportunity here. There’s a need here. Throw it out in the market, test it. Yeah. This is something that works. This is something that benefits people. So your first job is to notice.
Your second job once you’ve noticed a problem that appears that it should have a solution, but you can’t find one yet, is to start experimenting and to start testing. And that’s where ideas like shadow testing, like a minimum viable offer or a minimum viable product. What is the smallest, cheapest, quickest way that you can start trying to test providing value around this thing to other people? It doesn’t have to be dramatic. It doesn’t have to be expensive. You don’t have to quit your day job. You don’t have to do any of these things. It’s just starting to test ideas around this specific need that you’ve identified. And the more you’re able to do that, the faster you’ll find something that appears to A, actually help people. And B, do it in a way that is valuable enough for other people to pay for it. And if you have those two things, you have the start of a viable business.

J:
Love it. Love it. Okay. I’m going to flip the question and I’m going to say for those of us that are getting started, what’s the biggest mistake you see new entrepreneurs, new business owners make? And what should we be doing to avoid those mistakes?

Josh:
Okay. Biggest mistake. There’s a cluster. And there’s an idea in the psychology section of the book. I think it’s working with ourselves that I call status malfunction. And this is the general idea that all things being equal, people will tend to choose options that they believe enhance their status in some way. The best way to visualize this is just pay attention to what people will post on Facebook, or Instagram, or Twitter. The way that we represent ourselves in the world. Or think of, here’s a classic example on the consumer psychology standpoint. A Rolex does not tell time any better than a cheap Timex or Casio watch. That’s not the point. The point is the Rolex is a status signal that tells us something of how you want to portray yourself to the rest of the world, to other people who notice the Rolex.
One of the really big traps that I see early entrepreneurs fall into is making early business decisions or setting certain priorities all around signaling status as an entrepreneur, instead of doing the things that an entrepreneur does. You don’t need fancy business cards. You don’t need a fancy office. You don’t need to raise $100 million in venture capital. You don’t need all of the accoutrements or signaling of entrepreneurship. You need to do what an entrepreneur does, which is make something valuable, and market, and sell it, and deliver it.
So as much as possible, focusing your effort and attention around the five parts of every business and specifically not focusing your time and attention and money on all of the things that are not that.

J:
That’s great. That is fantastic advice. Okay. Normally, we’d be asking the four more at this point, the same four questions that we ask all of our guests. But because Carol’s not here, I’m going to forgo the four more today. But I do want to ask one of the four more questions because this is the question I like. I assume that because you are an avid writer of business books, you’re probably also an avid reader of business books. Besides The Personal MBA: Master the Art of Business, are there any other great books out there that you would recommend that our listeners should be reading?

Josh:
There are so many great business books. It’s great. If you go to personalmba.com, one of the early incarnations of The Personal MBA as a project was essentially a list of the business books that I found most useful in doing this research. So if you go to personalmba.com, click on the recommended reading list link. I have a list of 99 excellent books about all of the topics that we’ve discussed. So you can think of The Personal MBA as kind of the 50, 100,000 foot view of business. And if there’s something particularly interesting, or valuable, or relevant to your particular problems, you can just go to the recommended reading list and pick up any of those books, and you will find something illuminating, and useful, and productive there.

J:
That’s awesome. Awesome. Thank you. Okay. So the book is The Personal MBA: Master the Art of Business, the 10th anniversary edition. And it is out today, September 1st, 2020. Josh, this has been awesome. I want to give you an opportunity here at the very end to tell our listeners where they can find out more about you, where they can purchase the book, and anything else you want to talk about before we go.

Josh:
J, this has been such an awesome conversation. Thanks for having me on. It’s been really fun. I think if you find this information useful and valuable, two best ways to find me. Already mentioned personalmba.com is the website for the book. You can find the reading list that I just mentioned, an essay that kicked off the whole Personal MBA project. As well as an index of all of the terms that are in the book. You can find that all at personalmba.com.
If you’re interested in my further research in writing. So business is one of my primary topics, but it’s not my only topic. I write a lot about skill acquisition and learning, as well as some of the psychological, philosophical parts of dealing with things like large ambitious projects, and uncertainty, and change. So if you’re interested in exploring some of my other writing, the best place to go is joshkaufman.net. And you can find all of my other books, and essays, and research there.

J:
Fantastic. And we will make sure that that is in the show notes for anybody that wants those links. Josh, this is fantastic. We really appreciate you being here. Congratulations on the third edition of the book. And I would love to have you back and hear about your new projects in a year or two.

Josh:
I’m happy to hang out anytime. This has been great fun. Thank you.

J:
Fantastic. Thanks so much, Josh.
Okay. I’m not going to lie, that wasn’t nearly as much fun as it would have been with Carol Scott across the screen from me. But that was still an awesome, awesome episode. So many things we discussed here that were just absolute gold. Exploration and exploitation. Basically this idea of constantly testing, constantly checking to see how we can do things better, how we can iterate and improve our business, and our systems, and our processes every single day. The idea of shadow testing and the ability to test an idea quickly and inexpensively so that you’re not wasting a whole lot of time and a whole lot of money before launching a business. The whole discussion of Akrasia. So I know I have this problem of so many things I know I should be doing in my personal my business life, but for some reason I find myself doing just the opposite. So I love Joshua’s takeaway of self-solicitation and just asking ourselves why are we doing things and why are we not doing things, and just getting to know ourselves so that we can constantly be improving. Just so many great takeaways.
I hope you enjoyed this episode. And I hope you’ll pick up a copy of the 10th anniversary edition of The Personal MBA. For any additional information about Josh and the stuff we talked about, don’t forget, check out our show notes. And I guess that’s all I have. So I’m J and I’m J, and I guess I’ll be seeing you next week. Wow. That was a really, really bad ending, but it’s just not as good without Carol Scott. So everybody have an amazing week. Stay happy, stay healthy, and we will see you next week on the BiggerPockets Business Podcast. Thanks so much.