Market-Based Management®

Hit the Open Field... The Power of Stories.

Dateline Mendenhall PA:  It was death-by-powerpoint… Heads cranked back over the tops of chairs, mouths open, eyes rolled back…  We were listening to John Ryan from the Center for Creative Leadership lecture about transferring knowledge from conceptual learning to effective application in achieving results.

 

And then something miraculous happened:  he paused suddenly, as if at a loss for words.  A few snorts and coughs as all of us detected that maybe the talk was over and it was time to clap. (Okay – you get that I am exaggerating, right?  Ryan's actually a very good speaker.)

 

Then he started:

“When I was a kid learning how to fly jets in the Navy, to earn your wings you had to be able to land on an aircraft carrier…  Now, we started learning how to fly, conceptually, in a classroom – physics, equations - but almost daily we were up in those jets applying what we learned with an instructor in the back.”

He told us a story of getting the call to scramble his squadron for their first-ever aircraft carrier landing…  it was riveting – we were all sitting up, alert, leaning forward.  We heard about the postage stamp they called a 'ship' at 10,000 feet.  He told about the fear he felt -- and about one of the pilots who, unable to muster the courage, bugged back to base and eventually became a very successful commander… of a submarine.

 

Ryan finished his story with, “You know, I don’t know why I even told that story...” which is a testimony to Polanyi’s Personal Knowledge.  Then he drifted back to the slide clicker and more blah-blah-blah.  I don’t recall what he said before the story, or after – but I’ll never forget that story.

 

Later that evening in the Delaware countryside some friends and I were talking over dinner about the experience.  Roy said, “there’s only one speech I have ever really remembered – and it was because the guy told a story…”

 

It was at Harvey Mudd College and Douglas Adams was scheduled to speak at the commencement – but he died suddenly and they’d recruited at the last minute an alum who was a successful entrepreneur in the aircraft safety industry.  If I recall Roy’s retelling, the guy said something like this:

“Most of the time when a small plane crashes, it turns out that the pilot had available a large, safe landing area.  This used to drive us crazy – why all the crashes when there was usually a safe landing area nearby?  After years of research and investigation, we now think we know...’”

 

“When a pilot runs into trouble, he immediate looks for a safe landing spot, and he almost always finds one – typically a nice open field.  Now... somewhere in that field there’s usually a tree.  As the pilot approaches the field he starts telling himself, ‘don’t hit the tree… don’t hit the tree… don’t hit the’ – and BAM! – he hits the tree.”

 

“This is so common we have a term in the industry for it – we call it ‘Negative Target Fixation.’  And I want to leave you with this metaphor: as you get ready to go out there and find your way in the world,  you’re going to find lots and lots of opportunities – big open fields of opportunities.  And yes, there will be some scary risks that stick up like trees in those fields.  Don’t think about the trees.  Focus your attention on hitting the open field.”

 

What a memorable lesson – mainly because it’s told in the form of a story.  To emphasize the point, a friend from South Africa – Lesedi – saw us lively bantering and came over to visit.  He sat down with a big smile and said, “what are you talking about that is so interesting?”

 

Roy said, “It’s this really neat idea – Negative Target Fixation… you know, where you…”

 

Lesedi’s body language immediately morphed into, “oh no! – how can I extract myself gracefully and find an interesting table?”

 

The rest of us laughed and cut Roy off with, “No Roy!  Tell the story!!”

 

So he did.

 

And Lesedi loved it.

Markets Fail When You Make Them

Ok, I made a bad prediction in my previous post about gasoline coming to Georgia in the wake of Hurricane Ike. I know it was a bad prediction, because I drove to Atlanta Airport on Sunday and did not see a single gas station with petrol (although news reports say about half do). So why was I wrong, and why has the market appeared to fail? First of all, my prediction was based on the premise that the market would be allowed to work. Gas can be found in the Southeast—just not in Atlanta. Why did every station I saw in rural Mississippi and Alabama earlier this week have gas, while those in Atlanta did not? The answer is that it would be illegal to sell the gas available in the country or suburbs in Atlanta proper. The American gasoline market is not a single unified market, but a deeply fragmented patchwork of markets where federal clean air mandates dictate what types of gasoline (called boutique fuels) can be sold where. Because of its air pollution problems, only a special boutique fuel can be sold in Atlanta. After hurricanes Katrina and Rita, the federal government wisely suspended these fuel mandates and momentarily recreated a national market for gasoline. While this measure did have a temporary effect on air quality, it prevented many of the shortages that we now see today. Unfortunately, the feds did not follow this policy after Ike, but kept the mandates in place, which is the reason that Atlantans wanting to fill up either have to wait for scant fuel deliveries or dive to the suburbs or country.

Another curious going on is that when there is gas in Atlanta, prices do not appear elevated and are roughly on par with those before the hurricane. So why with all this scarcity, are gas stations charging prices close to pre-hurricane levels? The answer probably lies in the overt threats from state and federal officials that they will go after price “gougers” for selling gasoline at high prices. As I mentioned in the previous post, the Georgia price “gouging” law is fairly toothless and not even currently applicable (the governor has to declare a state of emergency for the statute to come into force). I erroneously believed that the benign nature of this law would not impede rises in Georgia gas prices and subsequently encourage conservation and supply. However, most gas station owners are either only vaguely aware of this or think the feds will get them instead. The effect has been a de facto price ceiling on gas prices in the Atlanta area, which gives motorists the incentive to snap up gas when it is available, rather than weighing much higher prices (say $8 a gallon) and buying only a few gallons at a time. This is exactly what I—and everyone else ay my neighborhood station—did when a gasoline shipment arrived. As a result, folks who would otherwise drive around with half or quarter tanks fill them up (and top them off) whenever possible. I am running with a full tank right now but would have left more for my fellow Atlantans had the price been higher. Unfortunately, the situation has unleashed my (and apparently everyone else’s) inner speculator.

Why there will be Gas in Georgia

With the approach of Hurricane Ike, I started to wonder if I should fill my gas tank prior to the inevitable disruption in the nation’s refining network. However, a quick google search revealed that Georgia (where I am) has a very tame anti-price “gouging” statute, which only comes into force when the governor declares a state of emergency (unlikely considering the state of emergency is in Texas). At the same time I noticed that those states neighboring Georgia (primarily Tennessee, South Carolina, and Florida) have more strongly worded statutes, and their public officials have been making noises about enforcing them come the inevitable spike in prices. In a market economy, prices provide the knowledge governing production, distribution, and consumption. If you monkey with this system by implementing a de facto price control in the form of an “anti-gouging” law, then you recreate the foolishness of the price controls of the early and late 70s. Of course, the full impact depends on Ike, but even if some shortages occur in Georgia; we will certainly fair better than our neighbors to the north and south.

Not from the Onion but it belongs there

At first I thought Don Boudreaux over at Café Hayek had a hold of my leg with this post about the Onion Futures Act of 1958—until I noticed that he had linked to this Wall Street Journal article and a quick Google search turned up that there really is an Onion Futures Act of 1958. The Onion Futures Act bans futures trading in onions, and came into effect after onion farmers blamed “moneyed interest” and “speculators” for volatile onion prices. The act still remains on the books, and (as far as I know) no other bans on commidity futures exist. So with folks blaming oil prices on “moneyed interests” and “speculators,” what would a ban on oil futures do to the price? Of course onions ain’t oil, but since no other commodity has suffered the same ban, it remains the only example we have.

Despite the ban, onion prices continued to remain volatile. Actually, they became even more volatile after the prohibition of futures trading. Contrary to what had been believed, onion futures trading had actually helped to stabilize prices. Futures are an excellent hedge on risk and a valuable knowledge process. They encourage traders to do their homework and collect and vet mounds of information on what might be the future price. This allows consumers and producers to plan on these prices and respond accordingly. Hopefully, decision makers will come to understand the valuable knowledge provided by futures market and not repeat the onion mistake.

The Importance of Vetting Knowledge

MBM talks a lot about collecting and sharing knowledge. However, we sometimes don’t stress the need to understand exactly what that knowledge means. Often what appears a clear connection is really quite meaningless. I was reminded of this by an article in today’s Arizona Republic (HT: Coyoteblog). The article complains that consumers are being “gouged” by faulty gas pumps. Apparently, about 9 percent of Arizona’s inspected gas pumps failed tests by the State’s Department of Weights and Measures. The article is full of innuendo and numbers implying there is something rotten in the state of Denmark (or at least Arizona). Despite the tone of the article, the fourth sentence begs some curiosity:

Half of those [pumps] were malfunctioning to the detriment of customers.

Faulty pumps are not good, and people getting ripped off is not good; but if half of the malfunctions cause detriment to customers, then what about the other half? Are some of the good people of Arizona getting a little free gasoline? Of course, I do not doubt the need for governments to standardize and inspect weights and measures (the practice dates to the Magna Carta (clause 35) in the Anglo-American tradition), but the little nugget on the impact of these inaccuracies tells us that this situation is probably happenstance or, at worst, neglect on the part of the pump owners. Interestingly, the article also mentions that it can cost up to $800 to recalibrate a pump, which considering the thinness of margins in retailing gasoline (only a few pennies on the gallon), is probably incentive enough to recalibrate infrequently—as opposed to deliberately fiddling the pumps. Furthermore, as the fine for a first time offense is only $300, it makes perfect sense for the gas station owners to have the state come out and do the inspections for them (paying the fine and fixing the affected pumps should be much cheaper than constantly re-calibrating of all of them). So, while malfunctions of 1 out of 11 inspected pumps causes us to quickly jump to conclusions, a little vetting of information reveals nothing more than perhaps the nature of pumps, happenstance, poor incentives, or the combination of all three—meaning only a few lines tell the whole story, and they don’t match the rest of it.

Do You Have a Bad Job?

Of course, whether you have a bad job or not is not something I can answer, but luckily some folks think they have figured out as to what a “bad” job really is. This article in the Arizona Republic (HT: Coyoteblog and apologies as I basically parrot his post), cites an unnamed study, which classifies 35% of Arizona jobs as “bad,” because they pay less than $17 an hour and offer no benefits. On the other hand, 22% of Arizonans apparently have “good” jobs, which the study defines as making more than $17 an hour with health insurance, retirement plans, and various other unnamed benefits. Unfortunately, as there is no link or naming of this study, I have no way of determining the “goodness” or “badness” of the remaining 43% of Arizona jobs, which exceed $17 an hour but fail to include all the “good” job basket of mystery benefits (however, considering the percentages of insured/uninsured most of these “limbo” jobs presumably come with the big benefit—health insurance). The 43% would also include entrepreneurs and the self-employed who cannot technically offer themselves any benefits. This also begs the question as to whether any of those in "bad" or "limbo" jobs happened to fall under the benefits of parents or spouses with "good" jobs.

Confusion over percentages aside, the whole idea of measuring “good” or “bad” jobs is pointless. For starters, a person’s evaluation of his or her job is their own. I know lots of folks who make great money with fantastic benefits and positively despise their jobs. I know others, who make little and get by without health insurance (usually because they are young and healthy), who are overjoyed by their work and overall existence. Furthermore, as Coyote points out, retirees (and there are a few of them in Arizona) who work part time in leisurely, but relatively low-paying jobs, would still hold “bad” jobs despite possessing insurance coverage through Medicare and probably already well stocked in the retirement plan department. The same goes for teenagers or college students who may work part time while remaining covered under their parents’ health insurance with no real need for a 401(k) or employer subsidized life insurance. The best (see “bad”) job I ever had was in grad school, when I also happened to be flat broke—but living fairly well in my statistical poverty and misery.

There also remains the “compared to what” issue. Ten bucks an hour ain’t a bad racket if you have no skills and may not even speak the language. Had this study been conducted in China, it would have found nothing but “bad,” jobs even though Chinese factory workers may earn wages thirty times better than their previously “bad” job of starving peasant. The lesson here is the power of subjective value. Whether it is compensation, working conditions, music, movies, or dinner, different folks value different things differently, at different times, places, and situations; making defining “good” or “bad” jobs from the standpoint of a third party a waste of time and effort in addition to communicating little useful knowledge.

Physician, Heal Thyself

Or at least heal me on the day I get sick, not a week later.  Marina Krakovsky has a thought-provoking piece over at Slate.com.  The big question it tackles: why can I get a reservation at a fine restaurant the day I want to eat there, but I have to wait two weeks to spend 15 minutes with the pediatrician?  The answer: because medical practices are antiquated.

(I took on a lesser Slate.com article here.)

Anchors Away

Cognitive biases (i.e., widespread deviations from logical thinking) are always fascinating to me.  You can imagine my surprise when I stumbled upon one I was previously unaware of in my three-year-old son. 

Before parenthood, I assumed that you could tell your child anything and expect even your wildest assertions to be met with unbridled credulity.  After all, it's not as though the little tot has a built-in fact checker in his oversized melon.  If you want him to believe that Phyllis Diller spends her evenings hunting for the souls of disobedient children, just tell him so.  He's not going to launch an investigation.

To my surprise (and disappointment) I found that there are strict limits to my powers to mold young minds at will.  About six months ago I noticed my son disagreeing with me adamantly when I would try to pull the wool over his eyes.  I would, for instance, change the lyrics of a song I had taught him, or tell him that a green traffic light indicates that one needs to stop.  He would explain loudly that I was singing the song wrong, and that one stops at red lights, not green.  This seemed odd to me.  After all, I was the one who gave him the information on these things in the first place, and at the time he had accepted my wisdom unquestioningly.  I was his source of knowledge.  And now, as his source of knowledge, I was changing his reality (or futilly attempting to do so).  Why the resistance?

Then it hit me.  My son will believe whatever I tell him on a given topic as long as I am providing him his first bit of information on that topic.  Once he has absorbed that initial fact, it becomes his reality, and I am no longer in control of that part of his knowledge.  In other words, if he gets two pieces of information, each with the same probability of being true (in that they come from the same source) he will believe the first piece of information he happened to hear.

After a little digging I found that this is not a phenomenon unique to my son.  It's a cognitive bias known as "Anchoring," and it affects us all to a greater or lesser extent.  When we have no information on a topic, we are very malleable in our opinions on it.  But once we get some information on the topic, our mind uses that information as an anchoring point, and it is difficult to accept contrary information as true.  Unfortunately, this is still the case even if the contrary information is of higher quality than the initial information  (this helps explain, to some extent, why people tend to hold religious and political beliefs similar to those of their parents).

The application to business is obvious.  Firms that have a faulty vision of reality are at serious risk of financial trouble, and an unfortunate (but widespread) human weakness is to base your vision of reality on early information rather than good information.  Knowing that we have this weakness, we would do well to make a conscious effort to overcome it.  If you find it difficult to change your mind after forming an initial opinion (especially with regards to your firm), do a reality check.  There's a good chance you're in error even if you're not in doubt.

The Five Percent Solution

I had always thought that the Dilbert cartoon strip was created from the beginning to make fun of the "cubicle culture" - the modern dysfunctional workplace.  Not according to Scott Adams:

When Dilbert launched in newspapers, the response was underwhelming. In the early years, it wasn’t a workplace strip. It was about Dilbert’s life in general. He just happened to have a job. I was surprised to learn, via my e-mail, that readers loved the relatively rare comics featuring Dilbert in the office. Personally, I didn’t think those were my best work. My ego told me to do it my way. My readers told me I was wrong.

Receiving negative feedback - from the market, customers, bosses, co-workers, employees - is never fun.  But we ignore it at our peril.  Ego can get us into a lot of trouble if we don't manage it.    We can feel threatened when we receive feedback telling us we're not doing as well as we could be... and that causes us to get defensive.

What the hell do readers know? After all, they aren’t syndicated cartoonists, and I was, albeit in only a few dozen newspapers. But this time, fortunately, I ignored my ego, changed the focus of the strip to workplace humor, and it took off.

My grandfather once told me, "if someone calls you a donkey, laugh at them... but if everyone is calling you a donkey, buy a saddle and start selling rides."  In other words - think about what people are telling you and don't ignore reality. 

A colleague once told me that when listening to feedback he assumes 5% of it is true.  This allows him to avoid getting defensive and to start getting curious about which 5% - so he has to consider all of the feedback.  It is good advice that might lead to some rather spectacular breakthroughs in your performance. 

Give it a shot - it worked for Dilbert.

A Challenge Lesson from the Jury Room

The jury is arguably the cornerstone of our legal system, and few rights are more ancient or precious than the right to have one’s guilt or innocence decided by one’s peers. A soon to be released study of 290 non-capital criminal cases claims that U.S. juries get the verdict wrong in one out of six cases. However, buried in this news article on the supposedly shocking study is the revelation that judges are even more fallible than juries. According to the study, juries mistakenly convicted innocent people 25 percent of the time, while judges did so 37 percent of the time. The difference is not so quite extreme when we consider acquitting the guilty. Juries acquitted the guilty at a rate of only 10 percent, compared to 13 percent for judges.*

Studies like this always strike me as a little suspect, and are inevitably ripped to pieces after publication; but let’s assume its conclusions are true. Ok, so juries are not perfect, but they have to go on what they are told, so we have no idea if these mistaken convictions and acquittals may have been due to prosecutorial misconduct, withheld evidence, or incompetent defense counsel. However, if you consider that judges are well-educated, experienced professionals, see additional evidence that juries do not, and manage to make more mistakes, then the jury still appears a preferable proposition. Of course, mistakes will be made, but that is why we have appeals, pardons, DNA testing, and Bill Kurtis (we found out about all these mistakes somehow).

So why do we entrust juries with such important decisions, when most countries place their faith in judges? My guess is that long ago our ancestors figured out that a jury of peers made an excellent platform for challenge processes. A challenge process is an MBM model by which employees are free to challenge the status quo, ideas, superiors, subordinates, and peers. While it is important to remain respectful, challenges are crucial to discovery and improvement. Effective challenge allows the firm to make more profitable decisions and avoid costly mistakes. The jury makes for a good challenge environment because it is a black box where words and ideas are expected to fly freely among peers and prying eyes are not allowed. Sure, there are likely to be instances of groupthink (where a group makes a hasty consensus decision without careful—or even any—analysis), but the fact that juries are drawn from all walks of life and ideological backgrounds, combined with a lack of strong leadership (the foreman is pretty much just a spokesman) makes groupthink in a jury much less likely than ,say in any President’s cabinet. Compare this to judges who, despite their greater experience and knowledge, are unlikely to challenge themselves in their decisions.

Employees are often both reluctant to give and receive challenge, but this is usually because they work in an environment that is not conducive to the challenge process. So if you are reluctant to challenge or feel your work environment is not open to challenge just think that some of the most important decisions in our society—whether to deprive someone of life or liberty—are only made after a rigorous challenge process, which is why it is so important for employees to safeguard their livelihoods, and those of their coworkers, with adequate challenge.

*The article first says that judges were only wrong 12 percent of the time, while juries were wrong 17 percent of the time. However, data are then presented showing that judges convict the innocent and release the guilty at higher rates than juries. Without the study I cannot explain this contradiction, but since, according to the article, juries appear to have a higher accuracy rate at convicting the guilty and sparing the innocent than judges; then I can only assume a jury trial is arguably preferable to a bench trial.