Market-Based Management®

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.

Conceiving Wealth—Past and Present

A common charge leveled at the modern economy is that “we don’t make anything anymore.” True, while services have accounted for a greater share of GDP since around 1911, our natural inclination is to think of wealth as the creation of goods, rather than the provision of services, trade, banking, or other financial services. Of course, wealth really has not so much to do with what is produced (good, service, or the completely intangible), but is more or less a reflection of the values people place on these whats. All that being said, we often have difficulty identifying new forms of wealth as being valuable. Consider this quotation from the great 18th century economist Francois Quesnay regarding the creation of wealth or value in what was then an economy slowly shifting from agriculture to manufacturing and commerce.

“Those who make manufactured commodities do not produce wealth, because their labour increases the value of commodities only by an amount equal to the wages which are paid to them and which are drawn from the product of landed property. The manufacturer who makes cloth, the tailor who makes clothes, the cobbler who makes shoes do not produce any more wealth than do the cook who makes his master’s dinner, the worker who saws wood, or the musicians who give a concert. They are all paid out of one and the same fund, in proportion to the rate of reward fixed for their work, and they spend their receipts in order to obtain their subsistence. Thus they consume as much as they produce; the product of their labour is equal to the cost of their labour, and no surplus wealth results from it. Thus it is only those who cause to be generated from landed property products whose value exceeds their costs who produce wealth or annual revenue.”

It would appear that before complaining that “we don’t make anything anymore” people floated concerns about workers not growing things anymore. One can only imagine what we will hear form the pundits of the future, “we just don’t consult anymore?”

P.S. I have not drawn this quote in order to bash Quesnay. He was one of the finest economists of his time and exerted incredible influence on Adam Smith. However, the quote both illustrates the fallacy that only tangible things have value, and testifies that great thinkers past and present still don’t quite get everything right.

And Now for Some Astronomically Stupid Rules

I remember when I was a kid getting a special tour of the Houses of Parliament, but if I had dropped dead during the tour, I would have been in very big trouble as it is apparently illegal to die in the Houses of Parliament. It is also illegal to enter the chambers in a suit of armor. Liverpool’s ban on walking around topless seems pretty run of the mill—until you notice the exception chiseled for women working in tropical fish stores. If you are ever in need of a restroom in Scotland, simply knock on the door of a resident, for denying someone the use of your home convenience is against the law.

These laws are extremely silly, and we are left wondering, “why on Earth would they do that?” However, economist F.A. Hayek hypothesized that society doesn’t often know why it adopts certain rules, they have just found that they are better off with them, often assuming that the rules managed to solve some sort of long-forgotten problem. Perhaps dying, or plague ridden members of Parliament had been making proceedings difficult .

However, we should not mock all silly rules too much. Sometimes when we remove the seemingly superfluous rules, the long-forgotten problem pops up again. If the underlying problem has gone away for good, then the old rule may inhibit better rules or conditions. Caution is necessary, however, as the making of new rules often leads to unintended consequences that prove worse than the underlying problem.

All three problems manifest themselves in business and society. Legislators or managers mock “the old ways,” and cause disaster when they believe they know better. The starvation of millions of people in the 20th century certainly reminded humanity that property rights were probably “a keeper.” As for good intentions but unintended consequences, Congress quietly dropped a proposed law requiring airplane passengers to buy seats for babies, after calculations showed that the law would result in the deaths of more children in car accidents. Despite rapid changes in technology, rules governing the “natural telephone monopoly” lasted for decades. Over the years, these outdated rules and regulations cost American consumers billions of dollars in unrealized savings and access to new technologies.

Three things to think about before changing, adopting, or throwing out any old or new rules in your city, county, state, country, or workplace. Oh, and since the article on silly rules picks on the British, one of my students dug up this gem (HT: Kasey Jolly) from my adopted hometown of Wichita.

"In Wichita, at the intersection of Douglas and Broadway, all motorists are required to stop at the intersection, exit their vehicles, and fire three shotgun rounds, before continuing on their way.”

So that explains all the gun racks—time I became a law-abiding citizen.

Another Plug for an Underrated Book

A few months ago (in celebration of the Fourth of July), I blogged about how the introduction of property rights in the first American colonies saved early America from starvation. However, property rights are about much more than averting death; they are the key to a prosperous society and, more importantly, instrumental in promoting peace and cooperation amongst people. Market-Based Management emulates the productive and peaceful institution of property rights through decision rights, which are employees’ ownership and accountability over their roles, responsibilities, and expectations.

Traditionally, societies adopted property rights because they worked, while experiments at communal ownership ended in conflict and often starvation. While the effects were manifest, however, no one was quite sure why property rights proved reliably effective. People took property rights as a given—at least, until someone was dumb (or arrogant) enough to think he knew better.

Although the value of property rights can be thought of as a "given,” we should still be curious about them. So, while I steadfastly recommend against opening a property law book (mine is purposely glued shut), I can offer Tom Bethel’s excellent book The Noblest Triumph: Property and Prosperity through the Ages. The book is remarkably intelligent and clear. The New York Times went as far as to label it “amusing.” In fact, it is the kind of book that you will annoy those around you with continuous statements of “did you know….?” I can almost guarantee that The Noblest Triumph will not only provide valuable insight into a typically difficult subject, but it is one of those rare books that the reader can feel making him or her smarter.

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.

A Self-Decieved Traveler

Self-deception is not necessarily a negative buzz word around most offices. Inefficiency, distraction, lack of motivation, alarmingly loud phone conversations—maybe. But “Well Jane is just so self-deceived” hardly makes the cut for the top-ten most common accusations whispered in the coffee break room.

It’s amazing how books can lodge vocabulary in your head, however, because those two words now bring to mind a myriad of connotations. During a recent trip, the national bestselling book Leadership and Self-Deception: Getting out of the Box written by The Arbinger Institute was open on my tray table for the majority of my longer-than-I-would-have-liked journey. Those two events—the extension of my flight plans and my reading of this book—coincided in an ironic way.

The trip was supposed to be an easy “out one day, back the next” sort of deal. But when I turned the corner towards the airline check-in counters on my return leg only to run into a line stretching what seemed miles from the counter, I re-examined my expectations.  My flight had been canceled and every other flight out until the next day was overbooked.

What I did next would be labeled by our friends at Arbinger as “getting in the box.”  I decided I was the victim and decided the computer-clicking, uniform-wearing employees behind the desk were single-handedly responsible for my wallowing state of frustration and self-pity.

The theory of self-deception starts with the premise that people deceive themselves daily. Instead of looking at situations rationally, Arbinger says our natural instinct is to “1) Inflate other’s faults, 2) Inflate our own virtue, 3) Inflate the value of things that justify our self-betrayal, 4) Blame” (79).  This distortion in our views of others inhibits everything from healthy work environments to loving family situations.  It is a continuous cycle of justification and blame that can only be broken by facing the truth of self-deception, or in Arbinger-lingo, by “getting out of the box.”

If I were “out of the box,” I would have realized that the four people behind the counter were not actually responsible for the thunder storms over Chicago, for the inconvenient airline policy of overbooking, or for the technical difficulty that left me unaware of my flight cancellation.

However, the next “box exiting” step is the harder one.  It is deciding to leave your box even if others stay in theirs.  No questions asked, those airline attendants were huddled in their boxes. They slowly called people to the desk one-by-one with annoyed looks on their faces and made no efforts to communicate with the rest of us in line. However the point stands: if everyone stays in their boxes and justifies it because “they are in theirs,” no one will ever escape and frustration and inefficiency will rule. The line would have moved twice as fast if both parties had been more willing to take some responsibility and engage the situation head on.

It is easy to see how the theory of self-deception explained in Arbinger’s book underlies many of the MBM guiding principles. When we are stuck in our boxes we inhibit value creation, take the focus off of the customer, obstruct the exchange of knowledge, fail to respect others, and limit both our own and our co-worker’s fulfillment.  When the theory of MBM meets the reality of MBM in daily work, an effort to look at the world through MBM glasses will fail if a box limits our vision to two inches in front of our faces.

So although self-deception may not buzz around the coffee room, I have personally discovered, regrettably a few hours too late, that self-deception’s lack of jargon popularity no more discounts its tragic effects as it discounts its need to be remembered.

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 Halo Effect

As you may know, last night was Game 1 of the Eastern Conference Finals, pitting the Cleveland Cavaliers against the Detroit Pistons. I watched both the game and the coverage afterward, noting the musings of one particular sportscaster on SportsCenter who said something along the lines of the following,

If the Cavaliers had won last night, LeBron James would have been celebrated for pulling off a triple-double and leading his team to victory.  Alas, in the closing seconds of the game, James passed the ball to Donyell Marshall who attempted a three-point shot that would have put the Cavs up by one.  But Marshall missed.  Instead discussion of James’s performance will be about how he only had ten points and zero free throws.

A quick disclaimer, this isn’t a perfect quote, but you can see where it’s going. 

I recently read a book entitled The Halo Effect…and Eight Other Business Delusions that Deceive Managers by Phil Rosenzweig, which highlights the phenomenon to which this sportscaster was alluding.  The book discusses how we are fundamentally unable to separate evaluations of performance from the apparent results of those efforts.  In this case, Dr. Rosenzweig talks about the Halo Effect in the context of management writing.  He highlights how, in almost all research into the subject—and certainly in the case of top-selling management books—the methodology is to take a group of successful firms and ask their managers what led to the success.  Because the sample is contingent upon the results, the answers are shaded by the Halo Effect. 

In essence, it’s not so much that successful firms necessarily have great culture, inspirational teamwork, and transparency—characteristics that are often attributed to them through this “research” process.  It’s that in hindsight, managers of successful teams or firms tend to say that such is the case.

While reading the book, I couldn’t help but think about the application of this phenomenon to sports.  Rosenzweig spends considerable time talking about how there is no formula for success, but even more that success is relative.  An organization can adopt all the newest technology and break their own revenue records, but they're only going to get ahead by outperforming their competitors.  Relative performance matters.  The same clearly holds true in sports, which is inevitably what brings a dynasty back down to earth after a few years on top.  Despite relatively stable knowledge and a pretty limited number of variables (at least compared to say, the tech industry), the three-peat remains ever elusive for most teams.

Rosenzweig is wise to warn us to be careful of the Halo Effect in analyzing success in the firm.   He points out that “[s]trategy always involves risk because we don’t know for sure how our choices will turn out.” (p 145)  A certain amount of failure is the predictable result of taking risks, no matter how calculated.  Rosenzweig contends that the trick is navigating risk such that failure will not be detrimental to your operations.  This is indeed what LeBron James attempted to do last night in evading a double-team by passing the ball to a wide open teammate with a stellar three-point record.  He took a risk, and it didn’t work out.  He defended his decision by saying, "The winning play when two guys come at you and a teammate is open is to give it up. It's as simple as that. You're going to make some, and you're going to miss some. Unfortunately, that one was to win the game."

Much like those journalists who cover business news, sports writers have been unable to separate their knowledge of the game’s result from their analysis of James’s decision to pass the ball.  "[T]he only thing anyone is going to remember about Game 1 of the Eastern Conference finals, won by Detroit 79-76, is this: With the game on the line, LeBron James didn't take the biggest shot. He let Marshall take it instead." (ESPN)

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.

Comparative Advantage

Russell Roberts has a gift for explaining the principles of economic thinking. In his essays, books, blogs, podcasts and radio interviews he engages with interesting anecdotes, parables and allegories that spark curiousity and instill the desire to learn more.

His most recent essay over at the Library of Eonomics and Liberty is about comparative advantage.

Comparative advantage is an essential mental model in MBM. Within the Decision Rights dimension, for example, we use it to guide discovery of those roles and responsibilities that allow us to create the most value.

You won't find a more capable guide as you explore this useful concept than Russ Roberts. I hope you enjoy the essay - leave a comment and let us know what you thought. (By the way - the essay promises to be part one of two.)