## Pricing and Monte Carlo

Frank Knight, a great Chicago economists, developed the famous distinction between risk and uncertainty.  Risk is when you don’t know exactly what will happen but nonetheless have a sense of the possibilities and their relative likelihood. Uncertainty is when you’re so unsure about the future that you have no way of calculating how likely various outcomes are.

When in comes pricing products, there is a great deal of uncertainty in terms of adoption of our product and future costs.   In the parlance of Frank Knight, how do we convert that uncertainty into risk?  One possible solution:  Monte Carlo Methods.

Monte Carlo Methods provide a mechanism to simulate multiple possible scenarios that might unfold and quantify risk.    Think in terms of running virtual experiments on your computer.

In this post, I will provide some background and guidelines on how one can leverage Monte Carlo methods for product pricing.  Note,  I have attempted to stay away from complicated math and statistics in this article and try to simplify the process with the hope that a business manager can understand the concepts, process and value of this tool.  Please send me feedback on whether I was successful in that objective.

## Concept

When it comes to our product adoption, we know that certain scenarios might unfold in future, but we are unsure whether they will happen.   For instance, the outcome for adoption might range between been wildly successful to total failure.  And all of these outcomes are “probable”.   Which means we have to move from deterministic view of the world to probable view of the world.  And Monte Carlo will allow us to introduce probability into our analysis.

Monte Carlo methods allow us to simulate multiple scenarios between the range we specify.   From the data collected during simulation, we can visualize the probability distribution of our output and answer following sample questions  –

• What is the probability that our product will be profitable?
• Given 95% confidence level, what will be the range of my profits (confidence intervals)?
• Or, if I want the profits to be within a certain range, what is the probability (or confidence level) of that occurring?

## The Mechanics

Monte Carlo methods involves three steps:

1. For the uncertain variables in your model (for eg., proposed price, adoption estimates, etc.), choose the upper and lower bounds
2. Choose the number of scenarios and run the simulation
3. Plot the histogram for the output variable (for eg., profit) and that will give you the distribution of your output.
4.  Statistical analysis of the output (to answer our questions)

Let’s look at each step in detail using an example.

### Step 1:  The input variables

Figure 1: The input variables

In our example, we are trying to figure out what will be the right price to charge for Workgroup and Enterprise edition of our product to meet our profitability goals.  I started by making estimates of adoption of the two editions of my product for two key scenarios – the worst-case and the best-case – over fixed period of time.  Typically, you will use average product lifecycle as the timeframe for your estimates.   And for Enterprise Software,  four years is a good timeframe to choose, since the technology and market forces might make your current product less desirable after four years.

Estimate the best-case and worst-case scenario for your cost elements as well in the model.  Since compute, storage, etc. follow a general trend of getting less expensive with time.  And that leads us to the lower and upper bound for”uncertain” input variables as illustrated in Figure 1.

## Step 2:  Monte-Carlo Simulation

Our profits equal our revenues minus the cost.   We want to simulate a lot of different scenarios that might play out in terms of adoption of our product and the cost elements between the bounds that we estimate in step 1 and collect data on profit.

The assumption we make is that the input variables are “normally” distributed between the upper and lower bound.   Note, you can choose a different distribution as well based on your understanding of your domain.  However, it’s a safe bet to choose the normal distribution (to start with) for most variables.

Click here to download the excel that contains the example scenario.  It will be easier to follow rest of the article once you have that excel.

In my example, I have chosen to simulate 5000 different scenarios.   In other words, adoption by workgroup, enterprise users, cost, etc.  will get randomly assigned 5000 different values.    The use of RAND() function in excel will do this magic for you as shown in the snippet in Figure 2.

Figure2: The Monte-Carlo Simulation

### Step 3:  The Output Variable

As shown in Figure 2, we calculate Profit (= income – expense) for 5000 different scenarios.   Next step, is to create a histogram on  5000 data points of Profit as shown in Figure 3.

Figure 3: Histogram for Output (Profit)

The distribution of Profit  follows a normal distribution or popularly known as “Bell Curve”.

### Step 4: Statistical Analysis

This is the step where we get some real insights.   Now, we are ready to answer some questions using statistics.  For instance, few sample questions we can answer.

How much profit can we expect on average?

Figure 4: Summary Statistics

Figure 4 shows us that we can expect approximately \$115 mln in profit (±  \$17 mln – the standard deviation).

Another interesting question one might ask, given 90% (or 95%) confidence, what is the range of profit we can expect?

Figure 5: Confidence Intervals

From Figure 5, we can say with 95% confidence that we will generate profits between \$83 mln and \$142 mln.    And this is super insightful for a business/product owner.   First of all, you have moved from trying to be deterministic about future to probabilistic way of thinking about future.  Which I believe is the right way.  More importantly, you have the quantitive information to make a decision whether, given the chosen pricing, you will be able to meet your business goals.  Or, do we need to revisit the pricing.  Or, if you are looking at a portfolio of products, we can prioritize our investments.

## Conclusion

Monte Carlo Methods transform the uncertainty into risk and eliminate the bias in our decision-making by allowing us to peek into future by simulating multiple scenarios that might unfold.   I believe these methods are a key tool in getting rid of HiPPO ( Highest Paid Person’s Opinion) and empower a data-driven business professional to make a more informed decision.

## Prescriptive Pricing Guidelines

Recently,  I have been advising two start-up’s in SaaS space on one of their key decision – Pricing.  A decision that will have a significant impact on the growth of the company.

Based on these recent experiences and my prior experiences in Pricing & Packaging at world’s largest Enterprise Software companies, I have distilled all my experiences to a set of prescriptive guidelines.   Note, these guidelines are derived primarily from my learnings in Enterprise Software space and I believe they have applicability in the consumer space as well.

### Revenue Maximisation versus Market Penetration

On the onset, a fundamental question needs to be answered –

Are we pricing to gain rapid market adoption (land-and-expand) or are we trying to maximize our revenues?

And the answer to this question will set your strategy for pricing.

At a high level, the concept behind maximization strategy is to choose an optimal point on your price elasticity curve at which the total revenue can be maximized.  This strategy makes sense when we believe we have differentiated and innovative offering and there is not necessarily strong competitive pressure.   In most cases, this might be a good strategy to start with, since it’s easier to lower prices in future as opposed to the other way around.

However, if our goal is to gain rapid market adoption, we can price the product lower compared to the maximization strategy.  This strategy makes sense if we believe the Customer Lifetime Value (CLV) is significantly higher than Customer Acquistion Cost (CAC).   And also, if the switching cost for your customers is relatively high as well.  In other words, sign-up customers now at a lower price and later, you can cross-sell or up-sell or even hike the price.

Once we have answered this hard question and all stakeholders are aligned (not an easy task), next we need to determine what metric shall we use to charge our customers.

The Value Metric
To figure out the pricing metrics question, we have to answer this question –

How will our customers use our product and derive business value from it?

Often, I have seen companies price their solution on per user basis. Since a user will be using our product, they will somehow derive value out of it.  However,  what action is the user performing that is creating value for the business?  Is she monitoring a business process, working on sales opportunities,  analyzing data, running experiments, sending messages, etc?  And that “action” is creating value.  If the user performs that “action” more frequently, more business value is generated.

Essentially, we have to drill down and figure out that atomic unit that drives value for our customers.    Of course,  we have to make sure that particular unit is measurable for us to invoice the customer.    In some scenarios, it may not be one metric, but a compound metric that encapsulates the business value.

### Dollars Per Metric

Once we have a figured the right value metric (or metrics), next we need to answer this question –

How much shall we charge for each unit (value metric)?

There is a saying, “Price is what you pay, and value is what you get”.   The challenge here is to design the price in such way that “perceived” value that customers derive from your product is substantially larger than the cost.  The reason I say perceived since every customer will perceive value differently based on their industry, size, profitability, market knowledge, and several other factors.  The best course of action is here to ask your customers, “What are they willing to pay based on their perception of value?”.

When we design new products, we often work with “Design Partners” to provide outside-in perspective.  Similarly, we need to create “Pricing Partners” to provide us outside-in perspective on your pricing strategy.  Create a representative sample of prospective customers and ask them what are they willing to pay or what price-point do they find the product to be super-expensive?   Our goal should be to move the price a bit higher than the acceptable price for our customers to take into consideration discounting tactics.   In the process, you will also learn what price point customers might consider as expensive for your product.

Note, when we talk to “Pricing Partners” make sure we lead the discussion with the value that you think you provide, both qualitatively and quantitatively, and then let them build off from there based on their internal knowledge of their own company and industry.

I wouldn’t talk in detail about packaging, but potentially you can bundle the packaging discussion along with pricing discussion with your customers.  Briefly, packaging involves prioritizing the feature sets for specific persona’s that your product is designed for and using that information to create the bundles or tiers of your product (for instance,  lite, professional and enterprise).

### The Model

Now that we have good sense of what our customers are willing to pay for our product per value metric that we selected, next logical question we need to answer is –

Considering our cost and profitability goals, can we sustain our business based on what our customers are willing to pay?

And to answer this question, you will have to build a model that takes into account your cost model and more importantly, you have to forecast how your product will be adopted in future.   Future is uncertain and it makes this task challenging.  I have leveraged Monte Carlo methods to simulate multiple scenarios to arrive at the distribution of possible outcomes.   To reduce complexity,  you can also use simpler techniques like Fermi’s estimation to come up with reasonable estimates in perhaps, shorter period of time.

### Conclusion

Putting it all together,  the journey starts by setting clear goals for our pricing strategy.  Next, we have to determine the right value metric to use for our pricing.  Then, we have to go to our prospective customers for their notion of perceived value and willingness to pay for our product. You can also try to get customer validation of your chosen value metric. Finally, you develop a model to test the viability of your business by plugging the price inputs provided by your customer.

## Estimating when you don’t have a clue

Enrico Fermi, the Italian physicist,  was renowned for his estimates.  With little or no information at his disposal, he would often do back-of-the-envelope calculations to come up with a number that subsequent measurements revealed to be impressively accurate.  The Fermi estimation process is frequently used by scientists and engineers in their problem-solving efforts.   As a Product Manager, specifically early in the product life-cycle, one has to estimate the market size for their products to make sure pricing is optimal.  And Fermi’s estimation process can be an indispensable tool in such situations.

I have tried to simplify the Fermi’s estimation process below and I illustrate this process with an example.

The Process
Decompose the problem to as many sub-components (or factors) as possible.  Think of a multi-level tree structure.  Estimate each sub-component, and then recombine the results.  This will become clear when we go through an example.

Now, the question is how do we generate estimates if you have no clue about the topic in question.  This is where the art and science of estimation come into play.  It’s a two step process, first one is the art, and the second is the science.  And more well-read you are, better you will be with the “art” part.

Step 1:  Determine the lower bound & upper bound.  Since we may not have knowledge about this topic, we have to make some educated guesses by approximating with a concept that resembles the topic you are trying to estimate.  For example, if you know the population of Germany, you may make some educated estimates about the lower and upper bound about the population of France.  Note, it’s far easier to make a range estimate than a point estimate, hence the need to estimate the lower and upper bound.

Step 2:  This is the science (or math) part.  Don’t take the average of your lower and upper bound estimates, but Approximate Geometric Mean (AGM).   AGM can be calculated by averaging the coefficients and exponents of your estimates.   For instance, if we need to compute the AGM of 4 and 800. Then,

4 = 4 x 100    and  800 = 8 x 102
Average of coefficients = (4+8)/2 = 6 and Average of exponents = (0+2)/2 = 1
AGM = 6 x 101  = 60 ( versus average = 402)

Example
Given the demonetization efforts in India to root out black money if somebody where to ask you this question, ” How much black money is there in India?” .  Your first answer will be, “I have no clue”.  But wait, can we use the Fermi Estimation process to answer this question.  Probably, we can.

Let us start by decomposing the problem into factors or sub-components.   We could easily get confused and complicate things trying to figure out deposits made by Indian nationals to swiss bank accounts or estimate the percent of transactions that occur in cash or computing the income tax evading population, etc.   I think we can keep this simple by just breaking this into two sub-components –

1. The size of Indian Economy (GDP)
2. Percent of the Indian Economy that occurs in Black  (Shadow economy)

Note, we have an only one-level tree in this case, however, for more complex problems you can potentially break a sub-component further into sub-sub-components.

Next, let us try to estimate the lower and upper bounds for each component.

Size of Indian economy
I will make the assumption that one might know the size of US economy, which is \$18+ trillion dollars.  Given this information, we can make a range estimate.  Given that India is still an emerging country and much less developed compared to the US, my range estimate for Indian economy will be from \$1 trillion to \$4 trillion.   And if I follow the AGM formula above, the AGM comes to \$2.5 trillion.

Percent of the Indian economy that occurs in black
I don’t want to complicate things but based on my readings and intuition I could come up some “reasonable” range estimate of 10% to 40%.  Again, note it’s easier to estimate a range compared to point estimate. Computing AGM, it comes to 25%

Combining the two factors –

Amount of Black Money in India = Size of Economy x % of Economy that occurs in black =  \$2.5 trillion dollars x 25% =  \$625 billion

How close are we to reality?   Well, we estimate the size of Indian economy to be 2.5 trillion dollars and the actual value is \$2.25 trillion.  Not bad.

Regarding percent of GDP in black, a bit of googling lead me to this –
Source:  A 2012 paper on black money from Indian Ministry of Finance

Note, our estimate was 25% compared to the estimate of 19-21 % from 1984.  Since then, the Indian economy has increased rapidly, so has black money since tax-evasion and  corruption is still rampant in India.  So our estimate might not be far from reality.

In conclusion,  I believe this simple estimation tool is very powerful tool when dealing with complex and ambiguous estimation problems.

## Fostering Creative Culture

Having been deeply involved in conceptualising new products, leading execution and go-to-market efforts, I often have struggled on how to build a sustainable culture that promotes creativity at its core and at the same time balancing the commercial aspects of the business.

Ed Catmull in his book “Creativity Inc” lays out multiple principles and tools that he developed while leading Pixar.  Pixar, as you might know, is the ground-breaking company behind movies like “Toy Story”, “Finding Dory”, etc.

And before I dive into some of these principles and tools, I have to say  Ed’s book as been the most engaging business book I have read in a long time.  Ed is a great story-teller and there is infinite wisdom hidden in his stories.

## Principles

• Get the team right.  If you get the team right, they’ll get the ideas right.
• When hiring people, focus on potential not their current skills.  Personally, as a leader, I have taken a chance on few people with bad performance reviews in the past when I saw the potential. With the right support, I have seen them really achieve success in their careers.
• Absolutely avoid HiPPO (Highest Paid Persons Opinion) culture.   Inspiration & Ideas can, and do, come from anywhere. And you need to develop processes and frameworks to coax ideas out of your staff.
• Change and uncertainty are part of life.  Our job is not to resist them but to build the capability to recover when unexpected events occur.  If you don’t always try to uncover what is unseen and understand its nature, you will be ill prepared to lead
• Build a culture that enables risk-taking and it’s consequences: Failure.  Don’t measure the outcome without evaluating the process.   Failure should be considered natural and necessary consequence of doing something new.
• Show early and show often.  Don’t wait for it to be perfect.  This is common for people who work in Agile environments
• The org structure should have no bearing on communication structure.  Everybody should be able to communicate with anybody.
• Our job as managers is to protect new ideas from those who don’t understand that in order for greatness to emerge, there must be phases of non-so-greatness. Protect the future, not the past.

There are certainly more principles in the book, however, I believe the above list captures the gist of Ed’s message.

## Tools

### Braintrust

We desperately need unvarnished opinions from our collaborators, peers and managers for us to make sure we are on the right path and avoid costly mistakes. However, most people I have worked with in most organisations seem to shy away from communicating fully and openly, due to their own fears and instincts for self-preservation.

To address this, Ed and his team, created and institutionalised the concept of “Braintrust“.  What is Braintrust?

Braintrust is a collection of passionate  and skilled people who meet frequently to assess projects in progress, identify and solve problems.   However, the foundation of Braintrust is “candor”.  The expectation is that the people who are reviewing your work will deliver straight talk with no personal bias or criticism.  And the person who is presenting or his/her work is being reviewed expects nothing but straight talk.  No finger pointing or any kind of hidden agendas.  The goal is to identify and solve problems. Simple.  Imagine that in your organization.

In past, I have worked in an organization where we used to do company-wide two-release roadmap reviews which does come quite close to the concept of Braintrust.  However, during this process, the entire portfolio was reviewed, so each team got very limited time to get some deep feedback.  More importantly, HiPPO will creep in with only a few executives presenting their opinions and majority of participants primarily listening.   There was lack of candor to a large extent, fear was predominant emotion, unfortunately.

Below is the video of Ed explaining the Braintrust at Pixar –

### Notes Day

In film-making, often studio executives and other folks will review your work and provide you “notes” on your film.   However, Ed took the concept of notes and expanded it to so everyone from top-to-bottom in the company can actually review not a particular film, but the entire company operations and provide “notes”.

As a matter of fact, they devoted one full day to this process and during the “Notes Day” no normal work was conducted, the entire company from janitor to CEO sitting down to review and critique the company operations.  Imagine how empowering this could be for you and your employees.

In short, Notes Day involves a series of one-hour meetings, where groups of employees address the problems by discussing topics and ideas that interest them, and which have the potential to benefit the organisation. While the specifics of running a Notes Day will differ according to the size, nature and needs of an organisation, the structure offers an excellent method for collaborative problem-solving.

The process might look as follow –

• Invite suggestions for discussions topics
• Synthesize and distill into a manageable level of topics
• Invite people to sign-up for topics they might be interested in.  Everybody is free to join any topic, regardless of position or seniority.   Appoint facilitators.
• On the Notes day –
• Opening meeting with all company: reiterate the importance and aims of the day. Encourage candour, openness and honesty. Remind every one of the need for ‘thick skin’ – especially management, who are likely to hear some difficult upwards feedback as part of the process.
• Team/departmental meetings: to get everyone warmed up, the first hour should be people who work together discussing how they can work better/address the identified problem(s).
• Hourly discussion groups: the rest of the day is broken into hour-long discussion groups, covering the selected topics.
• End of the day: once it’s all over, hold a social event, like a barbeque, where people can unwind and continue discussions sparked throughout the day

After Notes Day make sure ideas are taken forward from Notes Day.  In my professional career, I am yet to work for an organization that had anything resembling a Notes Day.

In addition to above, Ed does talk about two other tools –

• The Dailies
• PostMortems

However, any organization that follows the Agile development process incorporates these concepts with Daily Scrum Stand-up meetings and Postmortems after every sprint.

## Empirical Lessons from Sports

In my earlier post, I talked about triggers that led me to pick up multiple sporting activities – Soccer, Yoga, Surfing, Poker, and Crossfit – fairly late in my adult life.   And it has been quite a rewarding journey in terms of life lessons that I have learnt from these sports.

## Soccer

There are very few moments in your life that provide raw, unadulterated, pure joy like listening to your kid call you Daddy the first time,  slogging day & night for an exam and getting an A+, working hard to get the attention of your first  crush and finally, she accepting your proposal.

Scoring a goal in soccer is one of those moments.   It’s incredibly difficult (for most), requires almost sublime efforts and most importantly, implicit and explicit collaboration with your teammates.  However, when it happens it’s a release of pure joy and excitement (“Pura Vida” as they say in Costa Rica).

Cliched as it might sound, the number one lesson I have learnt from Soccer is that you can never do it alone.  You need a team to deliver and you have to learn to carry the team and sometimes the team will carry you.   Even greats like Messi will be pale shadows of themselves without  their chemistry with the team.  Sometimes a single person, no matter where they are on the field, can lead to the downfall of the team with a poor attitude.

As Jim Collins articulates this in his Masterpiece “Good to Great” –

“Leaders of companies that go from good to great start not with “where” but with “who.” They start by getting the right people on the bus, the wrong people off the bus, and the right people in the right seats. And they stick with that discipline—first the people, then the direction—no matter how dire the circumstances.”

## Surfing

While waiting for a wave, your mind is wandering thinking about million things and then you start to paddle as the wave approaches, your mind starts focusing on few things and finally, you jump on the board and for a little while you are gliding on water and your mind is focused on only one thing – pure joy. Riding a wave is a metaphysical experience,  in those few moments, you feel connected to the universe around you.

Having said that, if you have not been surfing as a kid and are not in your top fitness shape, then Surfing could be an incredibly challenging sport.  I struggle with this sport on regular basis.  Well, “struggle” might be a gross understatement.   And surfing has taught me two lessons very forcefully,  how to be patient and persevere.

You might have heard this advice before “Be  very patient, learn to identify opportunities and when you feel the opportunity is right, just go all-in and grab it with all your might and you will be rewarded.  As a surfer, this lesson gets drilled into you in visceral fashion.   You wait patiently for the swell, identify which wave you want to ride and once identified, paddle like your life depends on it and enjoy the thrill of riding the wave.

The waves can be unforgiving sometimes.  The dreaded wipe-outs will suck the wind of most resolute person.   Not unlike, the failures/obstacles, we run into anything we try to do in life.  Surfing will make you a strong-willed person who refuses to bow down to such wipe-outs and comes back stronger and stronger every time.

## Yoga

I have been hooked to supposedly one of the extreme version of Yoga called “Bikram Yoga” where the room is heated to 105 degrees with 40% humidity.   In that environment, you have to perform 26 poses in 90 minutes.

If you want to get your heart pumping, in most sports, you have to run or some kind of extreme movement is involved.  However, with Bikram Yoga, while been on your mat, you can get your heart pumping to the max for the most part of the class.  And in that state, you have to follow specific instructions for every pose.  And that’s where you will learn how to stay in present, enter a zone and  become “mindful“.

Mindfulness is defined as a state when you are not thinking about future events (need to feed the dog when I get home) or analyzing the past events (wonder if I did the right job of declining Sally’s offer), but you are there, right in the moment, fully aware of what’s happening.  Your mind is totally engaged and you are experiencing the flow experience as defined by Mihály Csíkszentmihályi   Pronouncing Mihaly’s name is a flow experience in itself.

And if you can carry this mindful state to your work and daily life, I have empirically noticed improved productivity and elimination of stress to a large extent.  More scientifically, I have observed all my indicators like blood pressure, triglycerides, BMI,  etc. have entered the “ideal” range.  Note,  I was on a low-carb diet and practising yoga religiously on average 3 times a week when I observed this change.   I also dropped 32 pounds from my top weight.

Yoga has been a great learning tool for me when it comes to “mindfulness“, over and above all the health benefits that come with Yoga.

## Poker

I believe all human decisions, after we peel through all layers,  boil down to two emotions: Fear and Greed.  And Poker to me is good training ground for learning how to overcome your fear and control your greed.

Let’s talk about fear first.   It’s not uncommon to find yourself in a situation where  all the common cards have been laid down and you are going heads-up against a player and that player decides to go to all-in with his deep stack.  And first emotion, that will emerge inside your gut is fear.  Fear of calling that all-in bet and losing all your money.   And this is when you have to start using your higher-level logical reasoning to take into account all mathematical probabilities, your keen observation of the opponent – whether he is a conservative or aggressive player,  his past bluffing behaviour,  his visual tells (does he look worried or confident), etc.  More importantly, you have to overcome that deep-down knot in your stomach and think about the worst case scenario of losing all your money and what it means to you.   Maybe, sometimes it’s okay to  lose to learn a valuable lesson.  To climb the second (higher) mountain, you need to come down the first mountain.

More often, you will end up playing with strangers and that’s where the real training happens.   If you play in the casino, you will interact with people from all walks of life – blue-collar, lawyers, engineers, grandma’s, etc.   And playing with unknown people will further amplify the fear factor.  Poker teaches you, sometimes in a hard way, how to stay calm under extreme duress and reason through your decision-making.

Gordon Gekko articulated in the movie “Wall Street”  that “Greed is good.Greed is right, Greed works.”  I am not sure I agree with this statement, but your personal greed will get tested a lot in Poker.   When the flop is laid-out and you believe you have the stronger hand,  you will have two options – push out all remaining opponents by betting big and take a reasonable chunk of money (blinds, antes and some bets) with high-probability or let other stay in the game till river (the fifth card) and make more money.  And that greed to make more money can lead to your downfall since you might “drown” at the river card, if your opponent hits his flush, straight, set, quad or whatever that makes his hand stronger than yours.  You are screwed.  In your lust for more money, you gave up a reasonable sum of money.   Poker has taught me how to control my greed and keep accumulating chips at a slow rate with lower risk as opposed to lusting for winning a monster hand.   Side note, I am a big fan of index funds if you can see the parallel’s here.

## Crossfit

CrossFit is constantly varied functional movements performed at high intensity. All CrossFit workouts are based on functional movements, and these movements reflect the best aspects of gymnastics, weightlifting, running, rowing and more.Crossfit is full of acronyms.

I have got injured twice while pushing myself hard in Crossfit.  One hard lesson I have learnt from Crossfit is that focus on yourself and your limits.  Don’t look around and see young female athletes squatting 200 lbs, feel competitive and try to do the same.  If you compare, you despair.  Don’t compare yourself to others, compare yourself to yourself from yesterday, at the risk of sounding glib.  The progress in incremental and slow.

## Conclusion

In part one, I talked about why I started my journey to play multiple sports relatively late in my adult life.  And in part two, I laid out the rewards from this journey.   Soccer has taught me the power of the team. From Surfing, I have learnt to be patient and how to persevere after multiple wipeouts.  I am still going deep into intricacies of Poker, but it has definitely helped me to control my emotions under stress.   Yoga has been life-changing in terms of  health benefits and more importantly, the power of mindfulness.  Finally, multiple injuries in Crossfit have hammered the old lesson “stick to your knitting” into my being.

I wish you success in your journey.

## Why do you play so many sports?

Somebody recently asked me, “Why do you play so many sports?”.

This person was referring to the fact that over past several years I have been actively pursuing Soccer, Yoga, Surfing, Poker, and Crossfit as my main sporting activities.  Yes, I do consider Poker as a sport.  And at the same time, I indulge in Biking & Swimming, whenever I get a chance.  Well, the question got me thinking…

First of all, how did I get started in so many sporting activities so late in my adult life?  As a kid growing up India, the only sport I played, for the most part, was Cricket.  And I was not physically active by any means.    I believe following were the triggers that led me on this journey.

One of the triggers was spending four days in ICU with my Mom when she had by-pass surgery following a cardiac arrest.  I became friends with one of the ICU doctors attending to my Mom and he explained to me how with a healthy lifestyle, one can keep all kind of cardiac disease at bay.   Unfortunately, my Mom didn’t survive after the surgery and that had a lasting impact on me as an individual.

I am a father of a nine-year-old boy.   When he was 4-5, we enrolled him in Soccer.  I used to just sit outside while he played.  And I asked myself, “Why?”.   I had never played Soccer in my life and was 32 pounds heavier than today.  I resolved to lose weight, stay fit, learn Soccer or any other sport my son plays and try to keep up with him. And that’s how my journey started.

Growing up, I always watched my grandfather & father play different card games with their friends on daily basis.  In the case of my grandfather, I felt playing cards not only kept him happier since he could socialise with his friends on daily basis, but at the same time, I think the mental stimulation from card games helped him stay alert, use his brains, and avoid dementia and other diseases of the brain.  I can observe this in my Dad as well, who is mentally alert despite being retired for past 15 years or so.   Poker is that card game for me to provide me intellectual stimulation, help me increase my decision-making capabilities and manage my emotions.  More on this in my next post.

Those were the triggers, but what keeps me going is the reward.  Apart from good health, I have learnt some valuable life lessons by being active in these sports.  And that is the subject of my next post.

## Opportunity Cost

You have won a free ticket to Cold Play concert.  Beyoncé concert is on the same day and the ticket cost is \$150.  However, you were willing pay \$200 to go see Beyoncé.  If you chose to go to Cold Play concert, what is your Opportunity Cost?

1. \$0
2. \$200
3. \$150
4. \$50

Opportunity Cost is a fundamental concept in Microeconomics, however, often not everybody grasps the concept clearly when it comes to decision-making in real-world.  For instance, I put forward the question above to quite a few of my connections on social networks including my poker group.  I got only one positive response from a smart high-school student.

Well, the correct choice is \$5o (#4 option).  Wondering why?

Opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would have been had by taking the second best available choice.

In our case, assuming the best choice was going to Cold Play concert, the “cost” incurred by not enjoying the Beyonce concert was \$50, since we were willing to pay \$200, but the tickets for Beyonce concert were available for \$150.  In more colloquial terms, Opportunity Cost is value of what you sacrifice by not going to Beyonce concert.

Now apply this concept to a complex business issue.