What if there are no real Black Swans at all? — (And the “Dynamite Prize in Economics” goes to… Alan Greenspan)
News item: Alan Greenspan is the recipient of this year’s Dynamite Prize in Economics as “the economist most responsible for causing the Global Financial Crisis.” The once-lauded Federal Reserve chairman has been awarded the “Dynamite Prize In Economics” by his fellow economists, according to the blog Real-World Economics Review. The Real World Economics Review Blog has over 11,000 subscribers, and they have named Alan Greenspan its recipient for this prize. Finishing second and third were Milton Freidman and Lawrence Summers. (No, receiving this prize is not a good thing). Here is a line from the article:
This blog established the prize in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, “Black Swan” event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.
(I first read about this here on the Huffington Post).
Their next prize will go the Revere Award winner:
The economics establishment has attempted to evade responsibility for the Global Financial Collapse by calling it an unpredictable, “Black Swan” event. But in fact some non-neoclassical economists foresaw the crisis and warned the public of its approach. The Revere Award aims to give these economists the professional and public recognition that they deserve, to encourage others to utilize their methods, and to increase the likelihood that, for the benefit of humankind, empirically responsible economists will be listened to in the future.
And I got to thinking. I have presented a synopsis of The Black Swan by Nassim Nicholas Taleb. I like the book, and I have bought into the philosophy of the book pretty enthusiastically. The book says that “nobody knows anything.” Here are the characteristics of a black swan:
• A Black Swan is an event which follows three attributes:
• First, it is an outlier. (rarity)
• Second, it carries an extreme impact.
• Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. (retrospective, though not prospective, predictability).
But these economists definitely call into question the explanation of the current crisis as an actual example of a “black swan.” And, I have been quite intrigued by Gawande’s simple formulation: the two great problems are ignorance and ineptitude. (see my earlier post here).
Maybe some of the events that we label as “black swans” are in fact knowable. The trick is to overcome enough ignorance, and find the right experts with the right knowledge, to be better prepared and make better decisions and take better steps… In other words, the crisis may not have been the result of ignorance, but ineptitude.
This much is clear. Some economists missed it – and others (fewer) got it right. It looks like we may have listened to the wrong economists.
Anyway, I’m intrigued by all this.
What do your best customers most value about doing business with your company? Ask them!
What do your best customers wish your company would do much better? Ask them!
Where do your most knowledgeable workers think your company is most vulnerable? Ask them!
What should be done about that? Ask them!
You get the idea.
Anna Bernasek is the author of The Economics of Integrity: From Darwin to Toyota, How Wealth Is Based on Trust & What That Means for Our Future, published in 2010 by harperstudio, an imprint of Harper Collins. In Chapter 6, she shares an especially interesting account of a crisis and how the company founder resolved it.
About 100 years ago, Leon Leonwood Bean had a passion for the outdoors and “imagined how satisfying it would be to have a hunting shoe that kept his feet warm and dry when he was deep in the Maine woods.” After searching without success to find such a shoe, he decided to design one himself that was essentially made by sewing rugged leather uppers to rubber bottoms. In 1912, he came upon a list of nonresident Maine hunting license holders and contacted them with a flyer that promoted The Maine Hunting Shoe. “We guarantee them to give perfect satisfaction in every way.” That guarantee nearly ended the company. Alas, through no fault of his, 90 of the first 100 pairs sold were returned because stitching created leaks that resulted in cold, wet feet.
“True to his word, Bean borrowed money to return the payment for all ninety pairs of shoes. It was a humbling lesson but it didn’t stop him. Bean went about fixing the problem and sent out more flyers. That was the beginning of L.L. Bean, one of America’s most successful family businesses and a household name.”
A business crisis such as this does not develop integrity, it reveals it.
In The Checklist Manifesto, Atul Gawande explains that complicated processes like surgery, where human error can lead to tragedy, require checklists.
Note: you can listen to HBR’s Katherine Bell interviewing Gawande here:
One of the most important, but often seen as superfluous, steps in his Surgical Safety Checklist is to make sure everyone in the operating room knows each other by name. Gawande found that when introductions were made before surgery, the average number of complications and deaths fell by 35%. He attributed this dip to the “activation phenomenon”: Having gotten a chance to voice their names, people were much more likely to speak up later if they saw a problem.
On a recent visit to the Harvard Business School, I experienced the emboldening power of names firsthand. After announcing my last name to the parking lot sentry, whom I hadn’t seen for months, he asked, “Is your first name Whitney?” A number of luminaries pass in and out of HBS daily, yet this man remembered my name; I found myself sitting a little taller. Taking the positive influence of names even further, many have credited Bill Clinton’s remarkable political success to his prowess at not only reading people but also remembering their names.
Just as much as hearing or saying your name can boost your confidence, not hearing your name can hurt your performance. For example, in the midst of writing this post, my colleagues and I co-hosted a business event. When introductions were made, my name was inadvertently omitted. All were aware of the omission as soon as it happened, but it was done. When I thought to chime in during the Q&A (and ordinarily would have), I couldn’t quite. Because I had been unnamed, self-doubt crept in, and I found myself unable to fully participate.
Contrast my experience with the activation playing out on the U.S.-based reality show Undercover Boss, in which senior executives at major corporations go into the belly of their company for a week as an entry-level hire. As CEOs come out of the trenches, circling back with their front-line employees, learning their names, and in most instances asking them to become involved in crafting corporate policy, the message writ large is — I want you to speak.
As leaders, it’s imperative to surround ourselves with people who will voice their opinions. And, given the complex hierarchical constructs within our firms, we must grant them permission to do so. Lucky for us, as Gawande’s experiment proved, empowering employees and others can be as simple as asking or remembering their name.
Whitney Johnson is a founding partner of Rose Park Advisors, Clayton M. Christensen’s investment firm. Previously, she was a double-ranked Institutional Investor analyst at Merrill Lynch covering both telecom and media in the emerging markets.
In the Updated Edition of Profit from the Core published by Harvard Business Press (2010) and written with James Allen, Chris Zook provides updated key examples while adding new ones and renders “the lessons learned in a way that management teams can use can use as a tool to reflect on the way forward in today’s economy.” He notes that turbulent conditions such as those in 2010 create confusion, blurred boundaries, less time to react, less tolerance for error, and often fewer resources. “Yet they also create opportunities to strengthen and expand strong cores, and even to invest to reshape the structure of your industry ahead of competitors.”
Given what Zook characterizes as “the current structural crisis in business,” here are the key points he lists in the Preface:
• Sustained and profitable growth requires a strong, well-defined core.
• Most sustained profitable growth companies have leadership positions in their cores that form the epicenters of their strategies.
• The number-one rule if strategy is to discourage your customers from investing in your core.
• The greatest source of strategic error, we [at Bain] find, stems from an inaccurate understanding of the core and its full potential.
• String cores often contain hidden assets that prove to be the seeds of the next wave of growth – the topic of my most recent book, Unstoppable.
• The key to sustained and profitable growth is to find a repeatable formula that utilizes the most powerful and differentiated strengths in your core and applies them to a series of new “adjacent” markets.
* * *
Note: Zook’s concept of “core” bears striking resemblance to Jim Collins’ concept of the “Three Circles”,” introduced in Good to Great: (a) What a company can be the best in the world at (and equally important, what it cannot be the best in the world at), (2) What drives the company’s economic engine, and (3) What those in the company care most passionately about.
As Anna Bernasek suggests in the Introduction, “If we ignore the important ways that people cooperate to create wealth, we miss the most valuable source of wealth creation imaginable. Recognizing the true value of relationships, we can build stronger relationships and create and share greater wealth. It’s a powerful way to reinvigorate the economy.” With regard to this specific book, she explains, it is a tool kit “for creating integrity anywhere in the economy. When policy makers are thinking about changing health care, reforming the tax system, or improving the financial system, they can use these tools to systematically build value. I encourage readers to see that integrity unlocks enormous opportunities for wealth creation that we may not yet imagine.”
Throughout her lively and eloquent narrative, Bernasek examines a number of situations in which everyone involved benefits because they do what is right and do it right, who abide by rules that “set people free to do the right thing, rather than holding people back,” rules and values that encourage activity and create more wealth. What is required to deliver a gallon of milk offers a case in point. Here’s the supply chain: farmer (serviced by feed supplier, co-up, vet, hoof trimmer, and nutritionist) > milk hauler > second driver > milk plant > distributor > store > consumer. Prior to point of sale, everyone involved must be both worthy of trust (i.e. honest, following the rules, being careful on the job) and trusted by everyone else. These relationships of trust throughout the process require an integrity that produces value for everyone involved.
The other examples that Bernasek examines include the ATM value and supply chain, what the Federal Reserve is and does, Toyota’s production system (whose integrity has recently been rigorously questioned), L.L. Bean’s total trust in its customers, W.L. Gore & Associates obsession with quality, and eBay that provides a mini-case study of mutual trust within a multi-dimensional structure. When eBay was launched, its backbone was a feedback that subsequently underwent several modifications. “Users if eBay get feedback on how they conduct themselves from other users. This was critical for two reasons. First, the feedback system provided users with an incentive to behave well.” Misbehave and you cannot be associated with Ebay. “Second, the feedback system effectively brought everything out into the open.” In terms of behavior lacking integrity, Martha Reeves and the Vandellas said it best:
“Nowhere to run to, baby
Nowhere to hide
Got nowhere to run to, baby
Nowhere to hide”
I agree with Bernasek that the potential ROI from a commitment to personal integrity will be substantial for an individual and even greater in direct proportion to the number of people who share a commitment to collective integrity. The potential applications and benefits of the principles that Anna Bernasek affirms are unlimited. I share her hope that our nation will adopt the economics of integrity even as I fear that the “legions of entrenched interests eager to protect their turf,” seeking its own advantage through special pleading and sophisticated public relations,” will once again prevail. How can we expect them to demonstrate integrity when they do not possess it?