Tag: Incentives

The Tension Created By Stretch Goals

Charlie Munger

It’s one thing to set big stretch goals and it’s another to acknowledge the tension and incentives that creates within an organization.

Charlie Munger, speaking at the 2000 annual meeting for Wesco Financial, explains:

There are two lines of thought …. A whole bunch of management gurus say you need B-HAGs — bold, hairy, audacious goals. That’s a technique of management — to give the troops a goal that looks unattainable and flog them heavily. And according to that line of thought, you will do better chasing a B-HAG than you will a reasonable objective.

And there’s some logic in that — because if you tell your kid A-minuses are fine and he likes partying around the beer keg and can easily get A-minuses, you may well get a lower result than you would if you gave him a different goal.

Then there’s another group that says that if you make the goals unreasonable enough, human nature being what it is, people will cheat. And you see that in the public schools — where they say you’ve got to have the reading scores better so we’re going to pay the teachers based on the reading scores getting better. So the teachers start helping students cheat to pass the reading tests. So human nature being what it is, if the goals are unreasonable enough, you will cause some cheating in your corporation — or even within your top management.

Each organization has to find its own way.

I can’t solve that problem. There are two factors that are at war. You don’t want the cheating — which is bad long term and bad for the people who are doing the cheating. However, you do want to maximize the real performance. And the two techniques are at war.

What people generally do is give people the unreasonable goal and tell ’em, “You can’t cheat.” That’s basically the goal at General Electric. They say, “We don’t want any excuses. … But don’t cheat. … If you can’t handle those two messages, why, perhaps you’d be happier flourishing somewhere else.” That is the American system in many places.

I’ve got no answer to that tension. Low goals do cause lower performance and high goals increase the percentage of cheating. Each organization has to find its own way.

Frederick W. Taylor: Time Management Skills

SteelMill_interior

There is no question that the tendency of the average man (in all walks of life) is toward working at a slow, easy gait, and that it is only after a good deal of thought and observation on his part or as a result of example, conscience, or external pressure that he takes a more rapid pace.

***

From Frederick W. Taylor’s 1904 book Shop Management, which appeared long before his Principles of Scientific Management (1911). Taylor is considered the father of management consulting.

The natural laziness of men is serious, but by far the greatest evil from which both workmen and employers are suffering is the systematic soldiering which is almost universal under all of the ordinary schemes of management and which results from a careful study on the part of the workmen of what they think will promote their best interests.

The writer was much interested recently to hear one small but experienced golf caddie boy of twelve explaining to a green caddie who had shown special energy and interest the necessity of going slow and lagging behind his man when he came up to the ball, showing him that since they were paid by the hour, the faster they went, the less money they got, and finally telling him that if he went too fast the other boys would give him a licking.

This represents a type of systematic soldiering which is not, however, very serious, since it is done with the knowledge of the employer, who can quite easily break it up if he wishes.

The greater part of the systematic soldiering, however, is done by the men with the deliberate object of keeping their employers ignorant of how fast work can be done.

So universal is soldiering for this purpose that hardly a competent workman can be found in a large establishment, whether he works by the day or on piecework, contract work or under any of the ordinary systems of compensating labor, who does not devote a considerable part of his time to studying just how slowly he can work and still convince his employer that he is going at a good pace.

The causes for this are, briefly, that practically all employers determine upon a maximum sum which they feel it is right for each of their classes of employees to earn per day, whether their men work by the day or piece.

Each workman soon finds out about what this figure is for his particular case, and he also realizes that when his employer is convinced that a man is capable of doing more work than he has done, he will find sooner or later some way of compelling him to do it with little or no increase of pay.

Employers derive their knowledge of how much of a given class of work can be done in a day from either their own experience, which has frequently grown hazy with age, from casual and unsystematic observation of their men, or at best from records which are kept, showing the quickest time in which each job has been done. In many cases the employer will feel almost certain that a given job can be done faster than it has been, but he rarely cares to take the drastic measures necessary to force men to do it in the quickest time, unless he has an actual record, proving conclusively how fast the work can be done.

It evidently becomes for each man’s interest, then, to see that no job is done faster than it has been in the past. The younger and less experienced men are taught this by their elders, and all possible persuasion and social pressure is brought to bear upon the greedy and selfish men to keep them from making new records which result in temporarily increasing their wages, while all those who come after them are made to work harder for the same old pay.

34 Insights From Nassim Taleb

Nassim Taleb, the author of The Black Swan and Antifragile: Things That Gain from Disorder with 34 insights from his facebook account:

  1. The artificial gives us hangovers, the natural inverse-hangovers.
  2. The only problem with the last laugh is that the winner has to laugh alone.
  3. Intelligence without imagination: a deadly combination.
  4. There is no more unmistakable sign of failure than that of a middle-aged man boasting of his successes in college.
  5. Never trust a journalist unless she’s your mother.
  6. One of life’s machinations is to make some people both rich and unhappy, that is, jointly fragile and deprived of hope.
  7. [If] someone is making an effort to ignore you he is not ignoring you.
  8. The danger of reading financial & other news (or econobullshit) is that things that don’t make sense at all start making sense to you after progressive immersion.
  9. It’s a sign of weakness to worry about showing signs of weakness.
  10. Friends, I wonder if someone has computed how much would be saved if we shut down economics and political science departments in universities. Those who need to research these subjects can do so on their private time.
  11. I trust those who trust me and distrust those who are suspicious of others.
  12. A good man is warm and respectful towards the waiter or people of lower rank.
  13. Journalists feel contempt for those who fear them and a deep resentment for those who don’t.
  14. When someone starts a sentence with the first half containing “I”, “not”, and “but”, the “not” should be removed and the “but” replaced with “therefore.”
  15. High Modernity: routine in place of physical effort, physical effort in place of mental expenditure, & mental expenditure in place of mental clarity.
  16. The only valid political system is one that can handle an imbecile in power without suffering from it.
  17. Journalists cannot grasp that what is interesting is not necessarily important; most cannot even grasp that what is sensational is not necessarily interesting.
  18. Never buy a product that the owner of the company that makes it doesn’t use, or, in the case of, say, medication, wouldn’t contingently use.
  19. Just realized that to politely get rid of someone people in Brooklyn say “call me if you need anything.”
  20. Injuries done to us by others tend to be acute; the self-inflicted ones tend to be chronic.
  21. We often benefit from harm done to us by others; almost never from self-inflicted injuries.
  22. You will never know if someone is an asshole until he becomes rich.
  23. When someone writes “I dislike you but I agree with you”, I read “I dislike you because I agree with you.”
  24. A great book eludes summaries. A great aphorism resists expansion. The rest is just communication.
  25. For a free person, the optimal – most opportunistic – route between two points should never be the shortest one.
  26. What counts is not *what* people say, it is *how much* energy they spend saying it.
  27. Used skillfully, a compliment will be much more offensive than any disparagement.
  28. I trust those who are greedy for money a thousand time more than those who are greedy for credentials.
  29. Just as eating cow-meat doesn’t turn you into a cow, studying philosophy doesn’t make you wiser.
  30. It is a great compliment for an honest person to be mistaken for a crook by a crook.
  31. Many want to learn how to memorize things; few seek that rare ability to forget.
  32. If you have something very important to say, whisper it.
  33. The ultimate freedom lies in not having to explain “why” you did something.
  34. A book that can be summarized should not be written as a book.

The Fragilista

Fragilista

They think that the reasons for something are immediately accessible to them, even if they have no clue.

No matter how complex or difficult, no problem results in an “I don’t know.”

They are the fragilista.

Frequently found wearing suits and spending a lot of time in meetings, they prefer to tinker with things they do not understand rather than doing nothing.

This isn’t my idea, it’s Nassim Taleb’s.

In Antifragile: Things That Gain from Disorder, he writes:

[The fragilista] defaults to thinking that what he doesn’t see is not there, or what he does not understand does not exist. At the core, he tends to mistake the unknown for the nonexistent.

Fragilistas are naive rationalists.

They think that the reasons for things are, by default, accessible to them. They know the cause and effect of everything, or at least that’s what they think.

Because they mistake what they don’t know for the non-existent, they exhibit a strong — if mistaken — regard for the powers of reason.

They lack humility and respect for the first law of ecology: we can never do merely one thing.

Any action we take, and in this case inaction is a course of action, results in some unwanted consequences.

According to Taleb, the problem with the fragilista is that they “make you engage in policies and actions, all artificial, in which the benefits are small and visible, and the side effects (are) potentially severe and invisible.

Fragilistas are everywhere.

They are the doctors who intervene too much in the body’s natural ability to heal, prescribing powerful medications with small benefit and possibly severe side effects.

There is the management fragilista who: (1) introduces a bureaucratic solution to what is really a people problem; (2) manages by best-seller; (3) seeks refuge in the false security of best-practices; (4) fails to come up with reasonable benchmarks for judging performance of solutions; (5) does everything and thus does nothing; etc.

There is the policy fragilista who feels that continuous interventions into the financial market are necessary for stability.

In Filters Against Folly, Garrett Hardin writes:

Whatever plan of action we adopt in our attempt to remake the world, our usual first step is to pin a laudatory label on what we are doing. We may call it development, cure, correction, improvement, help, or progress. We load untested conclusions onto ill-stated premises. But every intervention in an existing system is, for certain, only an intervention. We will make progress faster if we honestly call the changes “interventions” only, until an audit shows what we have actually done. Needless to say, such honesty will be resisted by most promoters of change.

The point isn’t to avoid risk or even intervention but rather to be humble about our knowledge, or lack of it.

To know when we should avoid small, immediate, and visible benefits that introduce the possibility for large (and possibly invisible) side effects. Less is more.

This isn’t foolproof but one possible way to counter the fragilista is to ensure rationale is explicitly (and publicly) stated up front.

When we mess with an existing (complex) system we’re intervening; we can never do merely one thing.

Opinions and Organizational Theory

When I think about the world in which we live and the organizations in which we work, I can’t help but think that few people have the intellectual honesty, time, and discipline required to hold a view. Considered opinions are a lot of work, that’s why there are so few of them.

We have a bias for action and, equally important, a bias for the appearance of knowledge.

Think about it. When’s the last time you heard someone say I don’t know? If my experience was any indication, it seems the higher up the corporate ladder you go, the more unlikely you are to say or hear those three words.

Too Busy to Think

No one wants to tell the boss they don’t know. The boss certainly doesn’t want to let on that they might know either. We have too much of our self-worth wrapped up in our profession and others opinions of us.

Because we don’t know, we talk in abstractions and fog. The appearance of knowledge becomes our currency.

Who has time to do the work required to hold an opinion? There is always an email to respond to, an urgent request from your boss, paper to move from one side of your desk to the other, etc. So we don’t do the work. But so few others do the work either.

Perhaps an example will help.

At 4:45 pm you receive a 4 page proposal in your inbox. The proposal is to be decided on the next day at a meeting with 12 people.

To reflect on the proposal seriously, you’d have to stay at work late. You’d need to turn off the email and all of your other tasks to read a document from start to finish. And, after-all, who has time to read four pages these days? (So we skim.)

If we really wanted to do the work necessary to hold an opinion we’d have to: read the document from start to finish; talk to anyone you can find about the proposal; listen to arguments from others for and against it; verify the facts; consider our assumptions; talk to someone who has been through something similar before; verify the framing of the problem is not too narrow or wide; make sure the solution solves the problem; etc.

So we don’t do the work. Yet we need an opinion for the meeting, or, perhaps more accurately, a sound bite. So we skim the document again looking for something we can support; something that signals we’ve thought about it, despite the fact we haven’t.

We spend the time we should be learning and understanding something running around trying to make it look like we know everything. We’re doing work alright: busywork.

We turn up at the meeting the next day to discuss the proposal but our only real goal is to find a brief pause in the conversation so we can insert our pre-scripted, fact-deficient, obfuscating generality into the conversation. We do, after-all, have to maintain appearances.

The proposal ultimately reaches consensus, but this was never really in doubt. If you flip this around for a second, it must be the easiest decision in the world. Think about it, here you have a room full of smart people all in agreement on the best way to proceed. How often does that happen? A true no-brainer is hardly worth a memo or even a meeting.

It’s easy to agree when no one is thinking.

And organizational incentives encourage this behavior.

If the group makes the right decision you can take take credit. And, if by chance things go wrong, you don’t get the blame. Group decisions, especially ones with consensus, allow for all of the participants to have the upside and few if any to have the downside.

When groups make decisions based on consensus, no one is really accountable if things go bad. Everyone can weasel out of responsibility (diffusion of responsibility).

When you’re talking to someone familiar with the situation you might say something like, ‘we were all wrong’ or ‘we all thought the same thing.’

When you’re talking to someone unfamiliar with the situation you’d offer something more clever like ‘I thought that decision was wrong but no one would listen to me,’ knowing full well they can’t prove you wrong.

And just like that, one-by-one, everyone in attendance at the meeting is absolved.

The alternative is uncomfortable.

Say, rather than jetting off to pick up the kids at 5 you stay and do the work required to have an opinion. While you get home around 11, exhausted, you are now comfortable with a well thought out opinion on the proposal. Maybe two things happen at this point. If you’ve done the work and you reached the same conclusion at the proposal, you feel like you just wasted 6 hours. If, however, you do the work and you reach a different conclusion, things get more interesting.

You show up at the meeting and mention that you thought about this and reached a different conclusion — In fact, you determine this proposal doesn’t solve the problem. It’s nothing more than lipstick.

So you speak up. And in the process, you risk being labelled as a dissenting troublemaker. Why, because no one else has done the work.

You might even offer some logical flow for everyone to follow along with your thinking. So you say something along the lines of: “I think a little differently on this. Here is how I see the problem and here are what I think are the governing variables. And here is how I weighed them. And here is how I’d address the main arguments I see against this. … What I’d miss?”

In short you’d expose your thinking and open yourself up. You’d be vulnerable to people who haven’t really done the work.

If you expect them to say OK, that sounds good, you’d be wrong. After all, if they’re so easy swayed by your rational thinking, it looks like they haven’t done the work.

Instead, they need to show they’ve already thought about your reasoning and arguments and formed a different opinion.

Rather than stick to facts, they might respond with hard to pin down jargon or corporate speak — facts will rarely surface in a rebuttal.

You’ll hear something like “that doesn’t account for the synergies” or “that doesn’t line up with the strategic plan (you haven’t seen).” Or maybe they point the finger at their boss who is not in the room: “That’s what I thought too but Doug, oh no, he wants it done this way.”

If you push too far you won’t be at the next meeting because everyone knows you’ll do the work and that means they know that by inviting you they’ll be forced to think about things a little more, to anticipate arguments, etc. In short, inviting you means more work for them. It’s nothing personal.

Five Key Lessons in the Fight Against Poverty

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty

I finally got around to reading Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.

The book brings to light some of the complexities of poor people’s lives by exploring the difficult decisions they face, which are often about things we take for granted, like access to enough food and clean water, or vaccinations.

Further complicating matters, these decisions are often made in an environment of no information, misinformation, and without any margin for error.

The richer you are, the more “right” decisions are made for you. The poor have no piped water, and therefore do not benefit from the chlorine that the city government puts into the water supply. If they want clean drinking water, they have to purify it themselves. They cannot afford ready-made fortified breakfast cereals and therefore have to make sure that they and their children get enough nutrients. They have no automatic way to save, such as a retirement plan or contribution to Social Security, so they have to find a way to make sure that they save. These decisions are difficult for everyone because they require some thinking now or some other small cost today, and the benefits are usually reaped in the distant future. As such, procrastination very easily gets in the way. For the poor, this is compounded by the fact that their lives are already much more demanding than ours …

Five Key Lessons in the Fight Against Poverty

Although we have no magic bullets to eradicate poverty, no one-shot cure-all, we do know a number of things about how to improve the lives of the poor. In particular, five key lessons emerge.

First, the poor often lack critical pieces of information and believe things that are not true. They are unsure about the benefits of immunizing children; they think there is little value in what is learned during the first few years of education; they don’t know which is the easiest way to get infected with HIV. When their firmly held beliefs turn out to be incorrect, they end up making the wrong decision, sometimes with drastic consequences. Even when they know that they don’t know, the resulting uncertainty can be damaging.

Second, the poor bear responsibility for too many aspects of their lives. The richer you are, the more the “right” decisions are made for you. …

Third, there are good reasons some markets are missing for the poor, or that the poor face unfavorable prices in them. The poor get a negative interest rate from their savings accounts (if they are lucky enough to have an account) and pay exorbitant rates on their loans (if they can get one) because handling even a small quantity of money entails a fixed cost.

Fourth, poor countries are not doomed to failure because they are poor, or because they have had an unfortunate history. It is true that things often do not work in these countries: programmes intended to help the poor end up in the wrong hands, teachers teach desultorily or not at all, roads weakened by theft of materials collapse under the weight of overburdened trucks, and so forth. But many of these failures have less to do with some grand conspiracy of the elites to maintain their hold on the economy and more to do with some avoidable flaw in the design of policies, and the ubiquitous three is: ignorance, ideology, and inertia.

Finally, expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies. Children give up on school when their teachers (and sometimes their parents) signal to them that they are not smart enough to master the curriculum; fruit sellers don’t make the effort to repay their debt because they expect that they will fall back into debt very quickly; nurses stop coming to work because nobody expects them to be there; politicians whom no one expects to perform have no incentive to try improving people’s lives. Changing expectations is not easy, but it is not impossible.

Despite these lessons, we are far from knowing everything.

The book is, in a sense, just an invitation to look more closely. If we resist the kind of lazy, formulaic thinking that reduces every problem to the same set of general principles; if we listen to poor people themselves and force ourselves to understand the logic of their choices; if we accept the possibility of error and subject every idea, including the most apparently commonsensical ones, to rigorous empirical testing, then we will be able not only to construct a toolbox of effective policies but also to better understand why the poor live the way they do. Armed with this patient understanding, we can identify the poverty traps where they really are and know which tools we need to give the poor to help them get out of them.