Sometimes crowds aren't wise

I like Surowiecki's book, a lot, and I have experienced many instances where the collective judgment of a group was far better than even an informed individual. But the "wisdom of crowds" catchphrase is dangerous--oftentimes crowds are not wise at all.

We are experiencing right now an era in which crowds are really dumb. I'm referring to the financial markets and the related economic recession. The financial markets and news affecting the financial markets have merged into a massive echo chamber, wherein bad news begets pessimism which keeps prices down which begets another cycle of bad news.

We've seen this in reverse, of course. Do you remember 1998-1999, during which time everyone was watching CNBC or checking Yahoo Finance all day long, in real time assessing the value of their stock portfolios? Oversubscribed IPOs begat good news, which kept prices high, which begat more buying, etc., until it all came crashing down.

I thought it was clear to everyone that market groupthink, which afflicts us in good times and bad, obscured the true value of securities, and therefore paying close attention to news items in order to make sense of the markets and our economy was, at best, a waste of time.

But no. Felix Salmon, in his Portfolio Market Movers blog, points to a Financial Times article introducing us to a service from Reuters that collects news items and alerts traders when news trends indicate potential market movements.

In other words, lean into the echo chamber, and listen real hard for signals you can use to make decisions. Um, it's only January, but I will bet there's not a stupider product idea introduced for the rest of 2009.

For deep, narrow coverage, blogs are better than mainstream media

A few Philistines are still maintaining that blogging isn't a worthy medium for intelligent discussion, that it's somehow less valuable than the "professional media."

Yes, there are crappy blogs out there, just like there are crappy newspapers and magazines. The low barrier to entry of blogging means there is more crap--but, long-tail style, there is also content of tremendous value, erudition, power and influence.

I learned of one more example today. Tanta, who wrote for the Calculated Risk blog, died over the weekend.

She warranted an obituary in the New York Times and a mention from James Surowiecki (from that most professional media outlet, the New Yorker). Here's another tribute from Felix Salmon at Conde Nast Portfolio.

And it wasn't because she wrote about Britney Spears or LOLcats. According to the Times,

Thanks in large part to Tanta’s contributions, Calculated Risk became a crucial source of prescient analysis as the housing market at first faltered, then collapsed and finally spawned a full-blown credit crisis.

Blogs allow writers with deep, narrow expertise, like Tanta, to pass on their learning, share their opinions, and illuminate that which for most of us is unknown. For me, in particular, I still read general-interest media, like the Times, New Yorker, WSJ, HBR, etc. But for subjects I want to explore more deeply, blog content is far better and more valuable.

There's no way Tanta would have had a voice twenty or even ten years ago. That's a benefit to readers everywhere. Including, as her case makes clear, those from the "professional media."

Tags:
blogging, blogs, finance, obituaries, media

"Blocking and tackling"--the mother of all sports metaphors

From Merriam-Webster's Collegiate Dictionary:

block verb - 1e: to interfere usually legitimately with (as an opponent) in various games or sports

tackle verb - 2 a: to seize, take hold of, or grapple with especially with the intention of stopping or subduing b: to seize and throw down or stop (an opposing player with the ball) in football.

Long-time readers of this blog will recognize my affinity with sports analogies and metaphors. So, recently, during the summer lull, I embarked upon a non-scientific study of the frequency of certain sports metaphors in business writing. And one popped up far more often than any other: "blocking and tackling."

For those unacquainted with American football, blocking and tackling are two of the most basic skills of the game--necessary (but not sufficient) ingredients for winning. Teams that can't block or tackle are doomed. For executives, blocking and tackling represent work that's not glamorous but is important.

Here are some examples:

WSJ.com Marketbeat What’ll it take to fix Yahoo isn’t a mystery, and isn’t a magic bullet, Henry Blodget writes at Silicon Alley Insider. “It’s just blocking and tackling. And it will take time.”

Innosight blog Burberry has spent more than $100 million to improve its ability to ensure that the right products get to the right stores at the right time. These challenges of course require a fair amount of blocking and tackling, but there's also ample room for fresh, innovative thinking.

NeuStar Q2 2008 Earnings conference call (COO Lisa Hook speaking): However, I asked to be on this call as a six month check-in, to assure that I am focused on delivering the basic, blocking and tackling necessary to meet our targets for growth and profitability.

This phrase was a recurring theme in executives' earnings calls (here, here and here, for example). Of course, given the recent news in the financial markets, perhaps there was better blocking and tackling they could have done.

Other metaphors I looked for that were much rarer: "home run," "unforced error" (which was popular in political writing), "icing the puck," "letting off the hook."

Did I miss any? What favorite sports metaphors do you have?

Related post:
Welcome to Sports Analogy week

Tags:
finance, sports, metaphor, management, leadership

Once in a lifetime... more on the financial crisis

I'd love to write about innovation, growing new markets, etc., but for the moment I'm preoccupied, like many others, with the financial crisis, especially a feeling that I can only express in the words of David Byrne from "Once In A Lifetime":



How did we get here?

To that end, Harvard University held a panel discussion last week, nicely summarized at the Working Knowledge web site, that helps to illuminate the situation. Lots of wisdom and perspective here, including this sobering (but perhaps welcome) observation, from another summary of the conference by Andrew O'Connell of the HBR Editors' Blog (the post at Editors' blog also contains a link to a video of the entire event.):

As management professor Robert Kaplan pointed out early in the discussion, Americans' ability to tap into their home equity had for years masked a fundamental deterioration in their ability to pay for goods and services with their wages. And as we all can see too clearly now, what's under that mask isn't a pretty sight.

I imagine many bankers feel like the besieged, buffeted, sweating, stunned character Byrne plays in the video. Do they say to themselves, "My God, what have I done?"

finance, credit crisis, leverage, equity, banking, mortgages

A lucid description and debate on the current banking crisis and proposed intervention

You may be burned out reading about the banking crisis and the prolonged efforts at agreeing on a "rescue" or "bailout" package (depending on your viewpoint). But this post and the comments at A VC blog do a great job of looking at the plan from an investor's viewpoint.

And that, after all, is what all we taxpayers will be if the package goes through. We will be the proud owners of hundreds of billions of dollars of lousy mortgages. If we pay little enough, it could be a good investment. If we pay too much, it'll cost us big time.

HBR adds to business failure learning library with "7 Ways to Fail Big"

This article in the September 2008 issue of the Harvard Business Review, by Chunka Mui and Paul Carroll, discusses seven corporate worst practices and relates business stories that demonstrate them. The practices are:

1. The Synergy Mirage - companies justify acquisitions by touting synergies that just aren't there, or aren't there in enough volume to make the price worthwhile. (Quaker buys Snapple, Unum and Provident merge.)

2. Faulty Financial Engineering - companies borrowing from the future to make today's revenue look better. Enron, anyone? How about Green Tree Financial?

3. Stubbornly Staying The Course - Kodak, slow to react to digitization of photography, and Pillowtex, which failed to see the trend in outsourcing textile manufacture.

4. Pseudo-Adjacencies - the authors point to Oglebay, a company that thought it could deploy its expertise in shipping limestone to actually quarrying it. Result? Chapter 11.

5. Bets on the Wrong Technology - for example, FedEx ZapMail.

6. Rushing to Consolidate - too often mergers focus on the top-line increases but neglect "increased complexities [that] may lead to diseconomies of scale."

7. Roll-ups of Almost Any Kind - As with Loewen Group, a funeral-home aggregator, roll-ups can't withstand downturns and usually provide a short-term revenue bump at the expense of the long term (see #2).

Leaders, you have been warned. Avoid these at all costs!

Related Posts:
NASA learns to avoid its worst practices in safety
Worst practice learning means our favorite business bestsellers are all wrong

Tags:
worst practice, strategy, learning, mistakes, Harvard Business Review

Top 5 Harvard Business Review breakthrough ideas

In which we select the best of the annual Harvard Business Review list of twenty breakthrough ideas (free link) for the benefit of time-constrained executives everywhere. This service is provided at no extra charge.

1. "Here Comes the P2P Economy," by Stan Stalnaker. Web 2.0 is accelerating a shift to an economy with many, many small sellers.

2. "Task, not time: Profile of a Gen Y Job," by Tamara Erickson. Young workers are not tied to the clock, or the office. Give them specific tasks and let them do them when, and where, they see fit.

3. "A Doctor's Rx for CEO Decision Makers," by Jerome Groopman. A relatively new technique--intensive peer review of failures--allows physicians to detect and understand decision biases that contribute to misdiagnoses. Such a process can help business decisionmakers as well.

4. "The Gamer Disposition," by John Seely Brown and Douglas Thomas. People adept at multiplayer computer games have qualities (such as desire to improve, appreciation of diversity, and results-orientation) that businesses should be seeking in their employees.

5. "What Good Are Experts?" by Michael Mauboussin. Research and experience with decisionmaking tools such as prediction markets is showing that expertise has a more narrow application than previously thought. Good businesses will assess which tool works better for the problem at hand--prediction markets for probabilistic problems, computers for rules-based problems, and experts for the remainder--and act accordingly.

Bonus "I really didn't know that" item: "Islamic Finance: the New Global Player," by Aamir Rehman and Nazim Ali. Despite the seemingly-restrictive rules of Sharia, Muslim law, on investing and charging interest, a vibrant and growing Sharia-compliant financial marketplace has emerged in the Islamic world.

strategy, decisionmaking, finance, learning, mistakes, organizational behavior, Harvard Business Review

We may be running out of fossil fuels, but there's an inexhaustible supply of "strategic secrets" out there

I love the Harvard Business Review. But as the years pass I've grown less interested in the articles that offer me a secret sauce to easily grow my business, outwit my competitors or take advantage of new opportunities.

They begin to sound like the infomercial guy back in the 1980's showing me how to make millions by buying houses with cash advances on credit cards and selling the houses quickly for profit.

My question to him was: if your secret is really that great, why are you wasting time on TV telling me about it?

The latest effort is "The Strategic Secret of Private Equity" in the September HBR (free link). Apparently private equity companies have discovered a better way to run a company--buy it in order to fix it up and sell it. (It sounds suspiciously like the credit-card cash advance guy.)

Are many private equity companies doing well? Yes. Have they exploited inefficiencies in the market? Yes. Will these inefficiencies be around long enough to help anyone who reads "The Strategic Secret of Private Equity"?

No.

Markets are complex/chaotic systems (read this post from Gary Klein's guest blog on Cognitive Edge for insight on the financial markets as resistant to quantification). Past performance is no indicator of what will happen in the future, especially the near future. Factors that enabled the private equity boom, including initial reactions to Sarbanes-Oxley regulations, cheap and abundant bank financing, and, most recently, the pack mentality at work, will not and cannot persist. Complex systems adapt.

It's more likely we'll be reading something like "The Benefits of Lower Leverage" in HBR next year than people still extolling "The Strategic Secret of Private Equity." And the newer article will have as much long-term value. But that's the magazine business. There's always a readership for strategic secrets.

And if you think the supposed long-term advantages of private equity haven't been explored before, check out "The Eclipse of the Public Corporation" (link - $$) from HBR, published in 1989.

strategy private equity finance investment capital structure complexity Harvard Business Review

Don't kick the bucket: it's got your unused cellphone minutes in it

Finishing today's roundup with breaking news from the Wall Street Journal (link): the word bucket has become the business world's favorite metaphor. A delightful front-page article describes how bucket has supplanted other terms like silo (missile connotation = bad) and basket (too feminine) as a way to express organization or sorting of people, financial figures or other miscellany.

(The Journal seemed to run more of this type of story in the past. Am I the only one who thinks its recent makeover reduced its sense of humor as well as the size of the paper?)

One consultant is asked whether European cellphone companies will adopt the term to describe allotments of minutes included in a monthly plan, as American companies already do. “'They will adopt bucket,' he says. 'That is my strong feeling.'”

metaphor, idiom, wireless, finance, Wall Street Journal