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What Lenders Can Learn From Engineers
There's a whole world of ideas out there that we can learn from in our daily lives and that includes how we do P2P lending. A great place to start is to look into the biggest ideas in psychology, accounting, maths, physics, ecology and other disciplines.
Although I mention maths and physics, we really don't have to understand complicated maths problems to benefit from an overview of the key principles.
I'm going to take engineering as an example of a profession we can learn from. Good engineers are practical people. There's a lot that we can learn from them.
Measure, learn, improve. Repeat.
There have been three key innovations in management methods.
The man who invented the management methods used throughout most of the 20th century was not an accountant, but an engineer. These methods involve such things as creating financial forecasts, business plans and so on.
The first major update to management methods didn't occur till the 80s. It happened at Toyota when it created just-in-time production. And it was another engineer who developed that.
The second and final major update to management methods was developed about ten years ago. The latest management methods now involve focusing businesses on making a small change or small addition to a company's products or services, measuring customer responses, and then learning from the results, before using those results to decide on the next rapid, small change.
Again, it was an engineer who came up with this method, largely by combining a number of techniques that had come about in recent years. (The engineer is called Eric Ries, the method is called “Lean” – as in “Lean Enterprise” or “Lean Start-Up”, and this methodology is now taught at dozens of business schools, including Harvard Business School.)
Why is it that engineers have succeeded where leaders and accountants haven't? Engineers look for ways to measure what they were doing, come up with viable targets and make improvements. Whether the target was cutting waste, cutting costs, cutting risks or cutting income, there is no way to create a plan, move forwards, and be sure that you're moving forwards, if you don't set up your measurements in advance.
Like engineers, we lenders need measures to base our decisions on. Measures of risk that can be applied across all P2P lending companies. And a strategy which measures all the other aspects we need, whether that's an early exit option or automated lending.
Always have a plan B
Engineers are also big on backstops and safety nets. Engineering is about reliability and that's why engineers focus on fundamental mathematics and ideas that ensure the highest reliability.
Here's how the legendary investor Charlie Munger puts it: “the engineering idea of a backup system is a very powerful idea.”
Engineers need to have back-up systems in case of critical failure to add to the margin of safety. P2P lenders should too.
With P2P lending, the stakes are not as high crashing to your death, but it would still be very painful for most of us to make a large, permanent loss.
This probably all sounds obvious and simple to you. Well, it sort of is. But without spending a moment to think about it, you probably won't do anything about it. The best ideas in investing – and now P2P lending – are the simple ones. A lot less can go wrong.
This can mean something as simple as aiming for P2P lending opportunities that are even less risky than you were going to choose, so that there is a margin for error.
Or it's choosing P2P lending companies that have several of their own backstops, such as secured lending and a bad-debt provision fund.