What Are the Four Parts of Profound Knowledge?

Ever wondered what Dr. Deming really meant by "profound knowledge" — and how it can still transform your work today? In this conversation, Bill Scherkenbach shares with host Andrew Stotz lessons from Dr. W. Edwards Deming on profound knowledge, systems thinking, and why "knowledge without action is useless, and action without knowledge is dangerous." Tune in for wisdom, humor, and practical insights on learning, leadership, and finding joy in work.

TRANSCRIPT

0:00:02.2 Andrew Stotz: My name is Andrew Stotz, and I'll be your host as we dive deeper into the teachings of Dr. W. Edwards Deming. Today, I'm continuing my discussion with Bill Scherkenbach, a dedicated protege of Dr. Deming since 1972. Bill met with Dr. Deming more than a thousand times and later led statistical methods and process improvement at Ford and GM at Deming's recommendation. He authored the Deming Route to Quality and Productivity at Deming's behest, and at 79, still champions his mentor's message, learn, have fun, and make a difference. Bill, how are you doing?

0:00:36.3 Bill Scherkenbach: Doing great, Andrew. How about you?

0:00:38.6 Andrew Stotz: I'm good. It's been a while since we talked. I took a little holiday to Italy, which was. I was out for a bit, but I'm happy to be back in the saddle.

0:00:48.9 Bill Scherkenbach: Dove in Italia?

0:00:51.3 Andrew Stotz: Yes.

0:00:52.5 Bill Scherkenbach: Where in Italy?

0:00:53.6 Andrew Stotz: Well, I went to Milan for a trade show in the coffee industry, and then I went to Lake Como and relaxed and oh, what a paradise.

0:01:03.2 Bill Scherkenbach: Beautiful. Beautiful. Yep.

0:01:05.0 Andrew Stotz: And, of course, always great food.

0:01:09.4 Bill Scherkenbach: Yep, yep, yep. Well, you have a chance to use the PDSA on improving your mood there.

0:01:16.6 Andrew Stotz: Yeah, it was just... The resort I stayed at was a tiny little place on the side of a hill, and the food at this tiny little place was fantastic. We just didn't want to leave. Every single meal was great. So I love that. Who doesn't love that?

0:01:34.4 Bill Scherkenbach: They didn't have a food cart in the background.

0:01:38.0 Andrew Stotz: Yeah. In fact, they didn't really open for lunch.

0:01:39.8 Bill Scherkenbach: Like what they do over here.

0:01:41.3 Andrew Stotz: Yeah, they didn't open for lunch. They only served sandwiches at 2pm so we had to hold out. But we still, the sandwich was so good. We just thought yeah, just wait.

0:01:51.3 Bill Scherkenbach: Early lunch. Yep.

0:01:53.3 Andrew Stotz: Well, you've got some interesting stuff to talk about today, and I'm gonna share the screen, and then I think we can kick it off from there. So let me see if I can get that up straight here. One second in. All right, so hopefully, you see a white screen that says profound knowledge. You see that, Bill?

0:02:16.0 Bill Scherkenbach: Yes, I do.

0:02:17.2 Andrew Stotz: All right, well, let's... Yeah, let's. Let's get into it.

0:02:23.2 Bill Scherkenbach: Oh, okay. I'll go from the bullets that I've got, and we'll hear from Dr. Deming and how he couched it in a little bit, in a few minutes, but he recognized that leaders would say they had the knowledge. Oh, yeah, we do SPC. We follow Deming's philosophy, we do that. But they really only knew the buzzwords. And to an extent, and I don't know how he came up with the word profound, but I do know in speaking with him that he intended it to be a degree of expertise that was beyond the buzzwords. Now, he said you didn't have to be an expert in it, but you had to know enough to be able to understand it and in fact, use it, as we'll talk about in a little bit. And knowledge obviously includes, as he said, an appreciation for a system and variation and knowledge and psychology. And as we'll hear in the audio, he also didn't really limited to that when he said there was there... His point, main point was that there are a whole bunch of interrelated subject matters that are very, very useful in managing your business or managing any organization.

0:04:17.1 Andrew Stotz: You know, I was thinking about that word profound. It's oftentimes wondering exactly what is meant by that. This is helpful to help us understand. It's, number one, about expertise. And I think the thing that I've always also felt is like, when you understand appreciation for a system, knowledge about variation, theory of knowledge and psychology, it, like things click, like it comes together, it's a whole. And that's the way I've thought about it. But that's interesting about the expertise aspect.

0:04:51.8 Bill Scherkenbach: Yeah. And that's something Don Peterson at Ford spoke about. He gave a very good talk to our leaders with Dr. Deming in attendance. And he said that a lot of you have said, "Oh, yeah, we already do this at Ford, " but you have to come to grips with a lot of you have been promoted for perhaps the wrong reason throughout your career, and you're gonna have to change. The change starts with us. So that was very impactful for Dr. Deming to listen to that.

0:05:32.7 Andrew Stotz: Yeah. And I just thought about the idea of profound action. Like, once you get this knowledge, does that mean that you're going to also, you know, the way that you do things is going to change substantially.

0:05:47.3 Bill Scherkenbach: Yeah. I mean, that's been a philosophical question. In one of the slides, I quote Confucius. About 2500 years ago, essentially saying knowledge without action is useless and the action without knowledge is pretty dangerous. But that's been consistent with Eastern and Western. Aristotle did the same thing, and Mid Eastern folks did it as well. Philosophers dealing with, yeah, we've got knowledge, but everyone agrees, at least in the good thinker role, that, that you've got to take action, otherwise it's useless. Okay, so we've got, and the subject matters, as I said, are not new. And he coalesced on four, but the general thought was that. And you've got to remember Dr. Deming was a classically trained physicist in the 1920s. And because of that a lot of, although it had been a few years, but they were very aware that everything started in the both, the eastern philosophies and western philosophies. Everything started with philosophy. Science wasn't a separate subject matter. And so everything was connected on how people should live, on how the stars move, a whole bunch of stuff. It all was philosophy. And these various subject matters evolved over the years.

0:07:50.6 Bill Scherkenbach: So even though he stopped it for his general intent was that a whole bunch of things are interconnected. If you go study these various subject matters.

0:08:05.1 Andrew Stotz: It's interesting because I attended the seminars in 1990, 1992 and then I went to Thailand and then I did other things and I didn't really keep up with it because I was in the financial world and doing my thing. And then I got The New Economics years later and there was this discussion about System of Profound Knowledge. And then I think about also going back to your previous discussions of what it was like being in a classroom with Dr. Deming when you first met him and studied with him. You know, that these things were going on. Obviously he had a deep understanding of variation. He definitely understood about the theory of knowledge from his scientific background. But I'm just curious, as you... It's interesting what you said, these things are not new. It's the way he brought them together. I just find that, that fascinating. How do you see that journey for him going from when you first met him to a very full formed concept or theory of profound knowledge at his later years?

0:09:15.3 Bill Scherkenbach: Yeah, I think things just solidified or codified. I mean, when I first met him in '72 at New York University Graduate School of Business, he didn't have 14 Points. He didn't have the Deadly Diseases. So none of the stuff that were codified as he progressed. I mean the one thing that I've mentioned it a number of times, the most important thing I learned from him is that you never stop learning. And he epitomized that sense of continual learning in improving oneself. So he tried to learn from everyone. But, but yes, for instance, as I mentioned, he was a degreed physicist and ended up doing a whole bunch of. And that transitioned into statistics which was a relatively. Well, I'm going to say everything is relative. But new in operationalizing the use of statistics besides counting people and the experiments at Rothamstead for agriculture. I mean, that really was some of the... But the earlier stuff, yeah. Was helping their patrons gamble better.

0:11:02.0 Andrew Stotz: And so I often take comfort in your descriptions in the first episodes about how he hadn't put all of these things in place at the age of 72. And I think there's still hope for me, Bill, to figure it out and put together my grand thinking.

0:11:22.7 Bill Scherkenbach: Yeah. Oh, no, I understand. I mean, I'll be 80 in less than six months. But he really, he started out getting his foot in the water here anyway when he was 79 also. So there's a chance. There's a chance.

0:11:46.4 Andrew Stotz: There's a chance. All right, well, the next slide, you're talking about the connections.

0:11:51.6 Bill Scherkenbach: Yeah. Again, all the subject matters are, again, evolve from philosophy and they all are interconnected in many, many ways. So, yeah, if you could play what Dr. Deming's introducing, that might set the stage.

0:12:14.0 Andrew Stotz: Okay, let me play this audio. Hopefully it comes across. Okay.

[video playback] Dr. Deming: Let us begin our study of Profound Knowledge. Profound Knowledge. Provides a roadmap to transformation, not just change, but a roadmap to transformation. Nothing else will satisfy our needs. Not just change, a roadmap to transformation into a new state. The System of Profound Knowledge, appears here in four parts, all related to each other: first, Appreciation for a System. Which we shall study, we shall study a system, and soon, I won't keep you waiting. And Theory of variation and theory of knowledge and knowledge of psychology and add anything you please, sociology, anthropology, whatever you please. I present these four parts to Profound Knowledge. They are interdependent, they cannot be separated. One need not be imminent in any part of Profound Knowledge in order to make it, in order to understand it and apply it.

0:13:30.9 Andrew Stotz: That's quite a mouthful.

0:13:33.1 Bill Scherkenbach: Yes, it is. Yes, it is. What I've got to do is go back to the tapes and get the lead in and follow on to that. But yeah, that's how he introduced profound knowledge in his later seminars.

0:13:56.2 Andrew Stotz: So what would this have been? What, 1990, 1991, 1992?

0:14:03.8 Bill Scherkenbach: Well, probably, I would say, yeah, maybe '89.

0:14:10.6 Andrew Stotz: Okay.

0:14:11.9 Bill Scherkenbach: In there. Yeah.

0:14:13.8 Andrew Stotz: So I took out a little transcript of that and I want to just go through a couple quick points, if you don't mind. He starts off by talking about it's a roadmap to transformation, not just change. Why would he say transformation rather than just change?

0:14:38.6 Bill Scherkenbach: Well, he changed really, transformation. And he thought a metamorphosis would be better. There's a butterfly in there somewhere, but it needs change. And it's not just, I know he mentioned the western style of management, but in my travels, Eastern style of management is just as bad. And again, knowledge is, is literally encompasses space and time. Looking at the past, projecting or predicting the future, little space, great space. And when you look at Western philosophies or western style management, we have emphasized the individual. So restricted space and short term. And the eastern philosophy of management took a longer term viewpoint of things. And they said it's not the individual, it's the team, the family. In my opinion, you have to, everyone, no matter where you live in the world has to balance those two, being able to take joy in your work as an individual. To be able to take joy in your work as a member of the team. And, I mean, I've been asked years ago, how long would it take? And I would say, "Well, Deming says it'll take 30 years." So over here in the US it's going to take a long time, but it's not going to take a long time in Asia, it's only going to take them 30 years. So time is relative, so is space.

0:16:53.2 Andrew Stotz: And there's something else he said in here that if you could try to help me understand and help the listener understand it. He talks about, you know, he gives a summary, theory of variation, theory of knowledge, knowledge of psychology. And then he adds in this line, "add anything you please, sociology, anthropology, whatever you please." What does he mean by that?

0:17:16.6 Bill Scherkenbach: That's what I said before he came from the the school that everything started with philosophy and things broke off science and all of these various disciplines. What he's saying is he's gone to, his theory of profound knowledge is included these four. But the general message is any discipline is interconnected with each other. So you don't have to be restricted to these four. And you're going back to how knowledge was developed in the first place. And perhaps it could be full circle, although I'm not going to get bogged down with the potential of AI contributions. But you need to, you need to recognize that many, many subject matter are interrelated because they were spawned from the original Eastern philosophy and Western philosophy.

0:18:37.5 Andrew Stotz: And one last thing on this, he wraps it up with this statement that also, you know, particularly given his depth of knowledge of the subject, he said, "One need not be imminent in any part of profound knowledge in order to make it, nor to understand it and to apply it." Why do you think he had this need to explain that you don't really have to know this in super deep detail?

0:19:02.7 Bill Scherkenbach: Well, I think he was being off a little bit. The word profound scares a lot of people. And so there's again a balance. You need to go far beyond the buzzwords, but you don't need to be an expert in any of those fields in order to grasp and be able to in some cases, I think, contribute to them. So he's saying that he's trying to better explain or define the word profound.

0:19:48.8 Andrew Stotz: Yep. Okay, now the next slide is incredible. A lot of different things on here that you're showing. Maybe you can explain what you're getting across in this one.

0:19:57.9 Bill Scherkenbach: Yeah, this is a MEGO chart. My Eyes Glaze Over. What I tried and I'm. I'm continually updating it. The different colors are from the fields of statistics, the fields of epistemology, psychology and systems thinking. And I'm linking a whole bunch of them together to show that there are similar thoughts in all four of these fields that contribute to a better understanding and use of all of them. Now the next slide, hopefully is more visible. It should be. I'm focusing on a stable process, which is statistical concept. Stable process means you've got by definition of Shewhart. There's a... Deming would call them common causes. When common causes are... When a process is stable, you're able to do design of experiments. Some of the enumerative methods work very, very well or with some degree of belief with a stable process. The red bead experiment was stable. Rule one and two of The Funnel. Stable process. Common causes in theory of knowledge. There's comment, well, I've seen that before or no, jeepers, I've never seen that that hooks up to some other special causes and statistics. There's a concept in theory of knowledge where you're talking about general providence or specific providence that the storm just, it hit everyone and pick out anyone in systems thinking you can only have a stable process if you have negative feedback loops and negative feedback.

0:22:40.0 Bill Scherkenbach: Again, I think I had mentioned in a previous discussion with you, negative doesn't mean it's bad. It just means it closes the loop and it seeks a stasis so, and that's the only way you're going to get. I'll simplify just about the only way you're going to get a stable process. There's a negative feedback loop in there somewhere. Stable process leads to long term thinking versus short term thinking, the theory of knowledge, empirical knowledge is never complete. Knowledge is theory applied over time. Stable process over and over and over again. The theory matches the data or what you predict, you then have knowledge. So the point is that, that there are a number of specific learnings. Well, for instance, let me see here, what's on. I have to adjust this. Okay. From psychology you've got what the psychologists call a fundamental attribution error. And that is mistaking who, as Dr. Deming says, who, who did it, who did it, did the people do it? Or did the system do it? Did the process do it? And in psychology, although it's in a different place, you've got following Rule 3 of The Funnel is a psychological term called complementary schismogenesis.

0:24:42.3 Bill Scherkenbach: And that's easy for me to say, going back to the Greek schism of split in genesis of a birth of a split. What that means is in psychology it's two people trying to one-up another. I've got this example. Well, I can do it. I mean, who, yeah, and the move or the musical Annie Oakley. Anything you can do, I can do better. So, psychology has observations and subject matters that they didn't have a clue. That was rule 3 of The Funnel. So my point in looking at all of these is that as you dig into things, they are interrelated. Now I haven't dug through anthropology or started. I've just restricted it to the four things Dr. Deming spoke about. But that would be a challenge to our listeners. If you really know some of these sciences, some of these bodies of knowledge, how are they connected? Okay. The aim of profound knowledge, he says, has to have an aim. Confucius in the East, Aristotle in the West, and in the Mid east, someone essentially said knowledge without action is useless and action without knowledge is dangerous.

0:26:51.0 Bill Scherkenbach: And Deming said the aim of a system, of his System of Profound Knowledge is action. And as we discussed previously, it's a transformation of Western, I think it's a transformation of Eastern and Western style of management. And he, the way he pronounced it was metamorphosis. And I will have to check the OED, Oxford English Dictionary. I haven't done that yet. But he has been 100% right in his pronunciation and usage of the English language. So as I said, there's got to be a butterfly in there somewhere. But he's talking about a major, major shift, major rebirth if you will, management. Systems theory. A lot of this is obvious and these are what he mentioned in his, not Out of the Crisis, but The New Economics. A network of interdependent components that work together to try and accomplish its aim. And, and he, and this I had mentioned earlier, I think that in his work. Well, I've got... Going back to some things, this is a 1954 speech he gave in Rome and this is a 1940 speech he gave. And because he was a Renaissance scholar, they were talking about a Systems View before it was popular.

0:29:06.5 Bill Scherkenbach: Everyone knows that he introduced the improvement on the old: design it or spec it, make it, try to sell it. And he introduced his expertise, sampling theory to be able to check on the customers and see what they think about stuff and be able to create a system of production instead of just one way through. Now. And I'm sure anyone who has read any of his books knows he spoke about the interdependence. He said in the example he gave was bowling. You just add up the scores. In the orchestra, you don't use a bunch of soloists, but they have to work together to be able to make sure that the result is what the composer, well, we don't know, I don't think what modes are intended.

0:30:28.9 Andrew Stotz: One of the things that's interesting about that orchestra concept is even, you know, it's a relatively complex system, but there's a score, there's a rule book, there's a play guide, here's what we're going to play. But sometimes with business there is no guide particularly, you know, you're running your own business relative, you know, you're focused on your own development of your own business. And it's not like you wake up every morning and there's a manual that says, "Here's what you do, here's what you play today." Which makes it that interdependence even more difficult and the need for communication and cooperation even more challenging. I have a client of mine that they've struggled to get the team to work together. But what I've also found is that they never sat down as a team and really had honest discussions consistently to try to break down the barriers and figure out how we're going to work together for this aim. So I'm curious about how do you look at business compared to, let's say, that orchestra example?

0:31:36.9 Bill Scherkenbach: Well, yeah, and Deming made that exact same point, at the far end of complexity or just about is business. They are far more complex and require far more interaction than the orchestra. Now, in trying to operationalize Dr. Deming's philosophy, I've tried to emphasize. And we've got a process to be able to create a vision and it obviously is followed by mission, values and question. We covered the physical, logical, emotional a few talks ago. But, but you have to... Top management has to have that vision that will include everyone in its and all sorts of voices in its creation. And then you have to have a way to be able to master that vision or make sure that that vision is operationalized. And that requires a whole bunch of feedback loops, if you will, systems thinking, a whole bunch of being able to work with people. And so it literally needs the application of profound knowledge from the management's perspective. You need to be able to operationalize your vision, not just come up with the vision and put it on the bookshelf.

0:33:34.5 Andrew Stotz: And the final bullet, says "the obligation of any component is to contribute its best to the system, not to maximize its own production, profit or sales, nor any other competitive measure." Oftentimes in the world of finance where I teach and I work, a lot of stuff, people think that the objective is to maximize profit, but the reality is the objective is to maximize value. And so when we look at, for instance, the value of a business, it's two components. Number one, the profit, which you could consider is kind of in the numerator. And then we reduce the profit by the denominator, which is risk. So think about it. If you were to invest money in two projects. One, you invest $100 in two projects, and one is very proven and you're very confident that this is going to work, and the other one is brand new, very possible it doesn't work. We would reduce the second cash flow and say, "Well, yeah, the amount we're investing is $100, but the reality is the cash flows may or may not hit." So we would reduce the value by the risk. And I try to help my young students particularly understand that it's an intricate balance of profit and risk. And if you overemphasize profit, you could be increasing the risk, which actually doesn't increase the value of the company.

0:35:07.0 Bill Scherkenbach: Yeah. And Dr. Deming had a similar statement saying that the cost of something doesn't mean anything. It's the value of what you get for the cost and value is determined by the quality. My look at systems theory, especially the obligation this last one is to contribute its best to the system. What many people forget is as I mentioned in the beginning, everything is defined as in space and time. And Bill Ouchi who wrote the book Theory Z stated that... And this is an eastern management concept that you have to have, I guess, corporate knowledge because in order for someone to say, "Okay, this department, I'm going to..." Well, for instance, lunches, the corporate lunch room will lose money so that the corporation can make. So the people would stay on site and be able to contribute more work. But that's in the longer term. And so if someone steps aside today to let someone else get the kudos or the credit, the corporation needs to remember that. He called it societal knowledge or memory. And if you ended up being saying, "Screw you, I'm taking what's owed to me, " that also will be remembered. So you have to introduce the dimension of time to any systems theory view. Time and space.

0:37:36.3 Andrew Stotz: You mentioned about... Oh, go ahead.

0:37:40.5 Bill Scherkenbach: No, it's a statistician's attempt at humor before Einstein. Yeah.

0:37:49.6 Andrew Stotz: You mentioned about metamorphosis and you mentioned about transformation and I was just looking it up and let me maybe if I'll read out what I found. "Metamorphosis is a biological stage based change. Like a caterpillar turning into a butterfly. It implies a natural structured process. Transformation is a broad change in form, character or condition. It can be physical, emotional or organizational. In short, every metamorphosis is a transformation. But not every transformation is a metamorphosis."

0:38:26.2 Bill Scherkenbach: Good point. Understand.

0:38:30.7 Andrew Stotz: So let's continue.

0:38:35.0 Bill Scherkenbach: Okay. Variation. I think the first noble truth of Buddhism is "life is suffering." And Deming equated variation with suffering. So when I presented similar slides to my friends in Asia, I... Life is variation.

0:39:02.2 Andrew Stotz: That's great.

0:39:03.0 Bill Scherkenbach: Now there are two extremes in taking action on variation. Well, in taking action, I know this is in front of us, but Dr. Deming spoke about Shewhart's contribution. And that is the two mistakes that people can make with variation, while in taking appropriate action on variation. And one is mistaking common cause for special causes or special causes for common causes. And that's really the primary view. But Deming seminars showed that if you're going to take action, there also are two extremes in taking action. And one was every action taken tends to make things worse, which he used The Funnel experiment. And the other extreme is every action taken has no effect on the variation. And that's obviously the red bead experiment. And so he, those were the two extremes that he wanted to show and demonstrate to people in order to solidify the folks learning. Theory of knowledge. Okay, Management is prediction, temporal spread, space and time absolutely required, knowledge is built on theory.

0:40:50.5 Bill Scherkenbach: He got that from Shewhart and indirectly through C.I. Lewis and on knowledge being built on theory. And with that, that jogged my mind as far as coming up with my theory-question-data-action cycle, which is a bit different than the Plan-Do-Study-Act cycle. But in knowledge development knowledge is built on theory. So anytime any data that you see you and he asked, he told people, by what method did these data get to me? If you see data you have to ask that. If you see data you have to say what was the question that was asked? If you're a question asker, questions come from theory. They're connections of concepts in your mind. And so theory could be a guess or it could be as proven as scientific law, but everything, and that scares people away, but everything really starts with theory. Given a theory you can ask a question. You can tell people when you ask the question what I'm going to do with the data so they have a better idea of how to collect the data and what data to collect. And then you take the action and go back and revisit the theory. So theory, question, data, action over time generates knowledge. And with some other emotional and physical constraints and consistencies, you're going to gain wisdom.

0:42:58.8 Andrew Stotz: There's something...

0:43:00.4 Bill Scherkenbach: Go ahead.

0:43:01.5 Andrew Stotz: There's something that I always, I've questioned, I think you can probably clear it up in this part of our discussion is that Dr. Deming used to say something along the lines of without prediction or without theory there is no knowledge. Something along that line as I recall. And sometimes I understood that clearly and other times I question that. What would you say about that? How should I understand that?

0:43:33.1 Bill Scherkenbach: Well, it's something that he and Shewhart spoke about a lot. And let's see, in his 1939 book The Statistical Methods from the Viewpoint of Quality Control by Shewhart and edited and commented on by Dr. Deming, they speak about that, as far as. And again Shewhart was influenced by C.I. Lewis. And as an aside, when, when I was at Ford and we had a speaker who had studied under CI Lewis. I had to get Dr. Deming to speak with them. And I've put part of a video of their conversation on LinkedIn, YouTube, I guess. But knowledge is built on theory. Now can you explain it again? I might be able to...

0:45:03.0 Andrew Stotz: So let me get a quote from New Economics. He said "experience by itself teaches nothing. Without theory, experience has no meaning. Without theory, one has no question to ask. Hence without theory there is no learning."

0:45:19.0 Bill Scherkenbach: Yeah. Yeah, okay. He was getting to, and he had all sorts of examples on the, on the first statement that experience teaches nothing. If you're, you might have an experience that perhaps you were, you, you were picked on. And what are you going to do about it? Well, your theory could have been: well, they don't like me. It could have been that: well, that person was a bully. Could be a whole bunch of things. But without the theory, what are you going to do in the future to make that experience more to your liking? And so you have to go beyond the experience and look at what is the thoughts and motivations behind that, which is theory. And now I don't know why I mentioned that, but I mean a number of the way... Well, I'll leave it at that.

0:47:02.8 Andrew Stotz: Yeah.

0:47:04.3 Bill Scherkenbach: As the left and right dukes it out based on their own theories. Okay. Psychology, it's incomplete without knowledge of variation. You mention that if you know the red beads, you won't make the fundamental attribution error. I had mentioned schismagenesis earlier, which is rule three of The Funnel. It invites, it says helps us understand people as different individuals. In, again, my take on this part of psychology. And again Dr. Deming saying everyone is entitled to take joy in their work. And he spoke about extrinsic and intrinsic motivation. Well, I have looked at it for many years as each one of us has an internal voice of the customer. We are the customer. And what makes me take joy would make another person perhaps take despair. And so it's management's responsibility who manages the people, materials, methods, equipment, environment to know me as a customer and be able to, if this works for me, then the management would try to arrange things that would help me take joy because it's more congruent with my internal voice of the customer. Deming used a number of examples that I gather some psychologists call it overjustification. But it in fact says the description was he tried to tip someone and it was an insult.

0:49:30.8 Bill Scherkenbach: And so instead of a thank you. He talked, he talked about the letter he sent to a surgeon of his, meant more than adding $500 to the bill. And the surgeon would carry the letter from Dr. Deming because he was, Deming was thankful for it. But it takes an astute manager to be able to understand all of the individual voices of the customers, their employees, and be able to construct a system that is going to be more congruent with each of them. And if you know that money doesn't influence or isn't congruent with someone, maybe it's retirement point, maybe it's a day off, maybe it's a variety of things managers would know that works for one person pisses off another. So that's where I stand on that, on the overjustification. And the obvious: fear invites wrong figures. Yeah. Although I think I had mentioned that in my work over in Asia, in China. So we don't have fear. It's called respect. So.

0:51:09.0 Andrew Stotz: I've just been reading a book about the Gaokao, the exam that students have to take in China to get into the elite university system. And it really makes you, it definitely gives you all kinds of both sides of the thinking on that. It really has got me thinking about this, one measure, everybody's ranked and they go through the pros and cons of it, which is challenging, it's good to go through that and think about that. So, fascinating. Well, that's been a great discussion for me, the idea of transformation, the concept of metamorphosis was interesting to me also the stuff related to having, you know, that how do we acquire knowledge? I think sometimes when in research, let's say in financial research that I've done all my life, I come up with a vague hypothesis and then I just start playing with numbers to see what I find. And so I'm kind of fiddling around. I wouldn't say that I have...

0:52:18.7 Bill Scherkenbach: What's the vague hypothesis? Give an example of...

0:52:22.7 Andrew Stotz: So, one observation that I've been able to make is that a particular ratio has fallen consistently across the world for the last 30 years, and that is the amount of revenue that assets generate out of companies. And I looked at 10,000 companies across the world. So the first thing I thought, okay, well, maybe it's a particular sector that's causing this. And I broke down that those 10,000 companies into 10 different sectors, and I saw they all had almost the same pattern. So that kind of showed me yeah, it's probably not that. And then I went through. I came up with kind of five different ideas of what it could be. And I could test that because I had a lot of data to be able to test it, but I couldn't find an answer to it. Now, I guess what you could say is that my fiddling around was based on some type of theory or guess or prediction. It wasn't until I came up to one final one, which was, could interest rates have a relationship with this? We have been through a period of time of very, very low interest rates.

0:53:39.7 Andrew Stotz: So could that decline have been caused by or related to interest rates? So I looked at the average interest rate that these 10,000 companies were paying over the past 30 years, and I saw it was going down, down, down, down, down, down very low. And I would say that that was the most plausible explanation I could find was that low interest rates incentivize companies to invest in projects that generated less revenue than previous projects.

0:54:13.2 Bill Scherkenbach: Okay. Yeah. I would think that the system. Well, you have to take into account the lag in response to lower and lower. Okay, am I going to wait for the next one? Whatever. And what's the lag in decision-making on the thing? But you need to codify, what's your theory? Okay, if X, then Y, then collect, ask the questions, make sure you understand how you got the data. And then try to take action there. But, yeah, everything starts with theory. Yeah. So it'll be good to be specific about it. What do you think it is?

0:55:09.8 Andrew Stotz: Yeah, that's, that's helpful. Well, let's wrap this up. How would you, if you were to, to bring this into a very condensed takeaway of what you want people to get from this discussion, what would you say is the core takeaway you want them to remember.

0:55:25.7 Bill Scherkenbach: Space and time. And I have done my best. Dr. Deming ended all of his lectures.

0:55:38.9 Andrew Stotz: I have done my best. Well, I love that. And let me wrap it up, Bill, by saying, on behalf of everybody at the Deming Institute, I want to thank you again for this discussion, another one that I've enjoyed immensely and for listeners remember to go to deming.org to continue your journey. And of course, you can find bill on LinkedIn in particular, where he's posting a lot of these cool discussions and thoughts and all of that. So this is your host, Andrew Stotz, and I'll leave you with one of my favorite quotes from Dr. Deming, and it relates to what we were just talking about. And that is "people are entitled to joy in work."