Category: Culture and Finance

Steven Covey and the Guru Industry

The Economist trashed Steven Covey last week for his self-promoting, platitudinous approach to management.  It accused him of essentially of “presenting stale ideas as breathtaking breakthroughs.” (See, “The Three Habits of Highly Irritating Management Gurus,” The Economist, May 22, 2009.)  Noting that his books have sold in the millions worldwide, and that his consulting firm, “FranklinCovey claims 75% of Fortune 500 companies as clients, the article highlights the widespread appetite for the cliches of self-help in business.

But why is management so hooked on this approach?  How did self-improvement become such a pillar of contemporary management theory?

The attractive but hidden promise is that it reduces the problems of management to seemingly managable proportions:  it’s all about you. Forget about the complexities of dynamic systems, overlapping groups, and multiple relationships.  Don’t worry about rapidly changing markets or the obsolence of key strategies.  All that managers are required to deal with on a constant basis are problems of self-understanding.  The only person you really have to worry about is yourself.  The span of control is always one.

Moreover, the lists of core compentencies are easy to remember.  Numbered “habits” with catchy names provide a quick diagnostic guide to answers for whatever problem you are up against.

The inspirational veneer that repelled The Economist masks a shallow set of principles, but the companies that sign up for this “help” may well understand that these principles are useful primarily for personal motivation, not serious management. Almost surely, they do not put all their eggs in the self-help basket.  If so many companies are doing it, they wouldn’t want to create the impression that they don’t care about their employees’ attitudes.

But the really cruel trick in this is that self-help is extraordinarily difficult to achieve.  Habits are deeply ingrained, extraordinarily hard to change.  Sometimes they are also hard to see.  Because they are usually grounded in adaptations to past realities, they linger in our minds with strong emotional residues.  We often experience them as ways we need to act.

As a result, people who try to improve themselves often end up failing.  They feel frustrated at their lack of success, and, of course, they blame themselves, not the guru who inspired them or the misguided program they keep trying to implement.

Meanwhile the business of self help goes on and on.  Who dares to say the emperor has no clothes?

OTHER BAD IDEAS

A number of other economists are speaking up about the ideologically driven economic theories that allowed our financial institutions to accept ballooning risk — and stave off the “danger” of regulation.

In Saturday’s New York Times, Joe Nocera cites Jeremy Grantham, “a respected market strategist with GMO, an institutional asset management company,” (Poking Holes in a Theory of Markets) who lays they blame on the efficient market hypothesis.

I think there is a lot more of this coming, and no shortage of bad ideas to blame. But the key is why was so much faith placed in such flimsy ideas?   How were the minds of financial managers, economic gurus, investors, regulators,  and the rest of us so easily swayed.  How did we allow it to get out of hand?

Here I think we have to look at a host of unconscious motives that powerfully shaped behavior without being available for critical scrutiny.  In my previous post I pointed to how the competitive race among financial firms seemed to pose a greater risk for them than the risk of default.  Eying each other so intently, they could not keep their eyes on the ball. But then, of course, there was also the pressure we all put on the system for greater and greater returns. And our government’s ideological commitment to “free markets” and deregulation,  and so on.

I think that instead of blaming specific ideas, it might be more useful to  look at how we use them and how we think?  Clearly we need regulation of markets more than we allowed ourselves to be persuaded we did, but we also need some intellectial and emotional self-regulation as well.  We have to pay more attention to the unconscious processes that drive collusive behavior.

AND REAL DANGER

It is becoming increasingly clear that a major contributor to our economic meltdown was the cavilier way in which our financial institutions managed to get risk off their books — and out of their minds as well.  How did that happen?

Paul Wilmott has emerged as a vocal and active critic of the abstract economic models that lay behind this way of thinking — and  Nassim Taleb,  author of the bestseller The Black Swan, calls him the smartest quant in the world. “He’s the only one who truly understands what’s going on … the only quant who uses his own head and has any sense of ethics.”

Wilmott notes in Newsweek, Revenge of the Nerd:  “They built these things on false assumptions without testing them, and stuffed them full of trillions of dollars. How could anyone have thought that was a good idea?”  He adds, “We need to get back to testing models rather than revering them,” he says. “That’s hard work, but this idea that there are these great principles governing finance and that correlations can just be plucked out of the air is totally false.”

But what may be even more significant is Wilmott’s pessimism about change: “What I think is going to happen is that people will forget and we’ll just keep going on the way we have been with nothing really changing,” he says. Wilmott is encouraged by President Obama’s proposals to tighten regulation of derivatives; he thinks it’ll keep quants on a shorter leash. But he’s also stunned by the lack of outrage over the financial mess. The violence that erupted at this year’s G20 summit wasn’t anywhere near what he thought it should’ve been. “Where the hell was everybody? If people aren’t angry now, they’ll never be.”

So what explains the quants blindness to risk?  More importantly: why do the firms that employ them fail to learn from experience?  And, as Wilmott asks, “Where is the outrage?”  You might think that the battled scarred veterans of finance would be more skeptical about their clever quants, more tough-minded.  Why is it so hard to face  the reality of such risk?  What don’t they know they know?

I suspect it is about the immense competitive pressures that financial institutions feel to come up with investments yielding greater and greater returns.  In a society where all have become invested — through our  pensions, endowments, college funds, 401Ks, and savings —  finance has come to play the key role.   Financial returns from investments have become more important than productivity — or virtually anything else apart from national security.  The result is that the pressure within and between financial firms mounts.  Their competitive advantage  in the moment matters more than long range success, and risk of long term failure is downplayed.

To be sure, in the end the danger of financial collapse will spoil every other advantage, but the risk that the financial firms pay more attention to are the risks of failing to compete successfully with other firms to gain investments.  That risk casts all others into the shadows  — and makes it all too easy for investment managers to be seduced by the abstract reassurances of the quants.

And that is why Wilmott’s pessimism is justified.  People will forget because they will be intensely concentrated on the promise of gain and the competition with others.  In that situation, risk becomes a nuisance — and then it fades out of mind.

Can We Believe It?

I am far from alone in my skepticism about the “optimism” being expressed about recent economic statistics.  Bob Herbert in his New York Times column today noted how shallow and misleading the evidence for a recovery is, and even the lead article on the front page, subtitled “Some Economists Say Worst May Be Over,” quotes Dean Baker, co-director of the Center for Economic and Policy Research in Washington, saying, “This isn’t recovery. It’s a slowing recession.”

Clearly many, including the administration, would like us to be optimistic about a recovery because optimism (or “confidence” as it used to be called) encourages consumers and investors to reenter the market and that, in itself, contributes to a recovery.  But this “optimism” seems to be done with mirrors.  A slowing of the pace of decline hardly indicates a turnaround, as we have little idea how long this new slower rate will last.  We could just as easily say that the recession itself is a harbinger of recovery as once we enter a recession will will have to come out of it.  Right?

But people are  not optimistic just because the administration or Wall Street wants them to be.  We desperately want to be optimistic too — or many of us.  That’s where we have to watch ourselves:  believing what we want to believe.

Apart from deluding ourselves and making bad decisions, we have to watch ourselves because it introduces further divisions into out already badly divided society.  We are all affected by this economic catastrophe but we are not all affected the same.

Remember that the sub-prime mortgage debacle came about because of the millions of poor Americans lured into fulfilling their dreams of home ownership or getting quick and easy cash from home equity loans.  To be sure it was the reckless repackaging of those loans that touched off the crisis, and many rich or merely comfortable investors lost a lot of money when those securitized “assets” vanished. But then there were those who actually lost their homes.  And those who lost their jobs and who are still unemployed — even though the rate of increasing joblessness is not increasing as fast as it was.

What we sometimes don’t know we know is how selective memory is, and how easily our wishes shape our perceptions.