Market-Based Management®

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.

The Rule of Law and the Cafeteria

One of the hallmarks of a free and prosperous society is the rule of law, and more importantly that those rules apply to everyone. All should be equal before the law, which should not award different legal status or rights to various “classes” of people. Such was the triumph of English law, which applied to King, noble, and commoner alike (at least de jure but not necessarily de facto—however the latter seldom ended up in writing). If the laws apply to the governors as well as the governed, then society will likely benefit from better rules, as the governors will feel the same pain or benefits they impose on everyone else. People will also feel more secure in their persons and possessions and thus create more value for society if they know they can rely on rules, like “thou shall not steal” applying to those who rule over them.

The same should be true inside the firm. Although different rules may apply for different job descriptions, the same core rules should apply to everyone, so that those making the rules can personally experience feedback on their burdens or blessings. The result should be good rules for the firm that promote a healthy work environment.

A good example can be found in the in the cafeteria at Koch Industries (Café Koch). A few months ago, Koch changed food vendors. The food had always been pretty good, and many employees speculated that the company was trying to save money and that they were about to lose what had been a benefit. That was until someone said, “Hey, Charles Koch (the CEO) eats down here too, so it’s not like he’s not going to know if the food goes bad.” All of a sudden people stopped worrying about the impending switch in food vendors. If employees know that changes affecting them will also affect those making them, then they are less likely to worry and more likely to “buy in” to the changes made.

Incidentally, more people are eating in Café Koch, which is undoubtedly improving morale and productivity. And if the food ever slips, Charles Koch won’t need a memo, just his lunch. 

What Can You Learn from a Jar of Spaghetti Sauce?

Who is Howard Moscowitz, what did he have to do with the Spaghetti Sauce revolution, what insights might it provide about subjective value, profitably anticipating and satisfying customer needs, and appreciating the value of diversity? Watch this 20 minute talk by Malcolm Gladwell and see for yourself.

Know Thy Knowledge Processes: The Confessions of a Negative Saver

I was home with a migraine yesterday afternoon and happened to have the TV on, which was tuned to one of those mindless daytime money shows which are a handy way of taking your mind off of the temporary belief that you are dying. Anyway, someone was bemoaning the fact that Americans are negative savers, which, despite continued strong economic and job growth, is apparently one of the signs of the apocalypse or something.

I was about to pride myself on my own saving and engage in a round of self congratulation and smarmy sense of being “different,” when I realized that I too was a negative saver. I think I save a lot – every month, money goes into the house, Roth IRA, 403(b), and my online brokerage account. In case of emergencies, there is my “Armageddon Fund” of gold Krugerrand and cartons of Lucky Strikes (cigarettes are historically good money substitutes). However, despite all this apparent “saving,” none of it actually counts as saving (according to the government), and even though I pay off my credit cards in full every month (and “save” some additional airline miles); the fact that my credit card balance exceeds the amount in my checking account for half of the month makes me a negative saver.  

The savings rate is supposed to be a knowledge process – that is it should tell us something about how much people are actually saving. However, since people “save” differently than they used to, the government’s measure of savings is no longer terribly accurate. The same can be true for the different knowledge processes used in business, which can just as easily stray from what they are really supposed to be measuring. For example, speedy throughput is a lousy measure of success if it is just building up inventory. Indeed, even sacrosanct measures such as cost or P&L may still be misleading if they fail to account for benefits that are measured elsewhere. An obviously unprofitable division of a large conglomerate only narrowly avoided shutdown a few years ago after business leaders realized that it served as one of the only buyers of products from one of the business’s other most profitable divisions. The seemingly hapless business was actually creating plenty value for the company, but the measurement showed up elsewhere.

You can’t make good decisions without good information, but we sometimes don’t bother to look how this supposedly “good” information is gathered. Like with savings, knowledge systems are notorious for failing to quickly add new variables, while slow to discard irrelevant or fading old ones. So the next time you look at the measurements you use or hear someone throw around a number that reportedly “means” something, it might be worth thinking about the content and usefulness of these knowledge processes – you might be saving more than you think.

Who Will Create the Jobs?

The reading for my Sustainable Economic Development course this week includes an article assessing the effects of economic development programs for the states. Written for Economic Review in 1990 by two veteran economists then working for the Federal Reserve Bank of Kansas City, the article wisely points out that, despite a few high-profile successes, states’ efforts to attract or poach manufacturers from other states with subsidies and other incentives are probably not worth the effort. Rather, the authors, Tim R. Smith and William F. Fox, suggest that if states are really serious about “creating” jobs, then it is far better to concentrate on fostering a good climate for entrepreneurship – one that allows people and businesses already in the state to startup and expand.

The article is clear, well-written, and, of course, right on target, so it pains me to pick on the authors a little. However, near the end the authors predict, “Although high technology businesses will create a relatively small share of new jobs over the next decade …” Remember the article was written in 1990, but anyone who lived through the 90s observed that the economy created a lot of high technology jobs during the decade and continues to do so. Working from the best information available, even professionals, such as Smith and Fox, had no way of predicting the impending tech boom. Therefore, the article serves as a double-edged indictment of the folly of state economic planning, as the authors first (correctly) point out the shortcomings of past state economic planning and then proceed to discount the looming job creation in high technology.

Anyway, the lesson is that the next best thing or the instigator of the next decade of job growth is not going to come from the legislature, the Federal Reserve, or the boardroom. It will come from somewhere out there – in the great entrepreneurial ether made up of millions of minds and almost as many converted garages. Yet again, we are reminded that the firm must encourage the entreprenuers within or perish at the hands of the innovators from without. 

The Bracketology of Crowds, Part V: Final Four and Championship Results

You will recall from my last post that so far the Crowd has done no worse than 75% in a given round of the tournament.  For the Final Four and Championship game, the Crowd made a clean sweep, 100% in each round (not so astounding when you're only talking about 3 games, but still).

The Crowd successfully picked 49 of the 63 games, an impressive 77.8%.  That put my bracket well out in the lead (in terms of accuracy) in my own pool of 5 contestants (my closest competitor had 40 correct picks).  Due to the vagaries of our scoring system, though, I finished 4 points out of first place.  Go figure.

Like any good economist I was a little skeptical of comparing myself to so small a pool, since small sample sizes are notorious for giving spurious results.  So I checked myself against a larger pool that a coworker had joined, one with 45 participants.  The competition is fiercer, but the Crowd still performs astoundingly well.  The most accurate brackets in this larger pool picked 49 games correctly, which leaves the Crowd tied for first place and ahead of almost 98% of the participants.  The highest score was 298 points, which edged out the Crowd by a single point!  Apparently it's my fate to finish second despite the highest level of accuracy.  Still, the Crowd's score beat out about 95.5% of the participants.

I'll spend another post reviewing some of the weaknesses of my approach to 2007 March Madness, but it's pretty clear that the Wisdom of Crowds performed quite well in this context:  finding a good system to aggregate everyone's knowledge outperformed the majority of intelligent individuals. 

The Bracketology of Crowds, Part IV: Sweet 16 and Elite 8 Results

Four rounds into March Madness and the Crowd is continuing to prove a robust predictor of the tournament outcome.  Here's the low-down:

Sweet 16

The Crowd picked 6 of 8 correctly (75%), missing only Texas A & M going down to Memphis and Wisconsin's loss to Oregon.  The latter of these mis-calls was bittersweet for me.  Oregon was my favorite team of the tournament, but their loss sealed my spot as #2 in the office pool.

Elite 8

In a repeat on a smaller scale, the Crowd correctly picked 3 of 4 (75% again).  Georgetown over UNC was doubly rewarding: the Crowd picked the only Elite 8 upset and my boss is a UNC alum.  Oregon broke my heart a second time, though.  The least they could do after busting my brackets was to win the tourney.  Instead, they stayed in just long enough to stick it to me.  Love-hating those Ducks has never been easier.

Overall

So far, the Crowd has maintained its impressive record: 46 of 60 games.  That beats my nearest competition by 7 games, (and my weakest rival by 13).  Unfortunately, given my pool's scoring rules those numbers haven't been enough to give me the highest number of points (I'm down by 11 and can only make up 7 of them in the next two rounds).  Next year I'll know a little more about properly weighting the point value of later games.

One of the most impressive characteristics about the Crowd's performance is how consistent it has been.  It's percentage accuracy in the first four rounds have not deviated by more than 3 percentage points: 78% (Round 1),    75% (Round 2), 75% (Sweet 16), 75% (Elite 8).

I'll provide the next update after the finals.  In a subsequent post I'll consider some of the weaknesses of my approach this go around, and examine some ways of improving (ex ante) on the Crowd's performance this year.