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Solve the Problem: Eight Degrees of Analysis

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Cracked it!

Abstract

Problem structuring results in a list of elementary issues to crack or elementary hypotheses to test. You will address them one by one through various types of analyses. Start with an analysis plan, in which you identify the analyses and sources you need to address each elementary item. You must give priority to the analyses that can radically change the overall solution. Contrary to popular belief, not all analyses are quantitative, or even entirely fact based: many require assumptions and judgments. When you perform analyses, beware the most common mistakes: (1) biased data selection; (2) assumptions that are unrealistic, inconsistent, untested, or—worst of all—unstated; (3) numerical errors; and (4) data interpretation errors, especially with correlations.

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Notes

  1. 1.

    Alternatively, such “givens” could be included in the problem statement and wouldn’t need to be repeated in the hypothesis pyramid (or issue tree). In practice, however, hypothesis pyramids often include “given” components that are necessary for the logic to hold, and that have not been expressly formulated in the problem statement.

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    Notwithstanding the dividends paid by GE during that period, which, as mentioned above, are part of the return to shareholders.

  8. 8.

    Survivor bias is also frequent in quantitative analysis, for instance, when analyzing a sample of “surviving” companies and neglecting the ones that disappeared over the period of study.

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    Here’s why: if sales are down 10 percent from, say, $1 million the previous year, then current year sales are $900,000. Increasing this amount by 10 percent (i.e., 2 × 5 percent) results in sales of $990,000 ($10,000 short of the goal). While this may seem a trivial difference, the case interviewer will not be inviting you back for the next round.

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  16. 16.

    Spurious Correlations. Retrieved from http://tylervigen.com/view_correlation?id=1703.

  17. 17.

    A statistical association, but not a bivariate, linear correlation. Conventional correlations are linear, while many causal relationships are non-linear. Trying to fit a straight line between two non-linearly related variables will often result in zero correlation. Additionally, a causal relationship may exist between two variables, but detecting it may depend on knowledge of a third variable. This is a confounding effect like the cause of spurious correlations, but works in the opposite way: by explicitly controlling for the influence of the third variable, the partial correlation between the two other variables can be detected.

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Garrette, B., Phelps, C., Sibony, O. (2018). Solve the Problem: Eight Degrees of Analysis. In: Cracked it!. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-89375-4_7

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