Dispatches from a Small Business
Posts tagged ‘HBS’
When I was at HBS, a bunch of us who sat in the back row (the "skydeck" in HBS parlance) would play buzzword bingo based on the class discussion.
Google books has a way of querying their books database for word frequency. I laughed when I saw this chart for "incentivize." It's the hockey stick!
I tell folks all the time that 99% of the time the problem with bad governance is not bad people in the government (or at least not bad before they entered government) but bad incentives and information.
Take the recent public reaction against the new TSA search procedures. Its not that everyone in the TSA aspired for a job where they could grope stranger's nads. Its that the incentives in government make risk management impossible.
Let's look first at the cost side. How much do internal TSA evaluation and incentive systems value
Can we safely say close to zero? I don't think anyone at the TSA is being denied promotion because they were insufficiently concerned with the fourth amendment.
So what is it that does matter in their incentive system? I would argue that they have one single, overriding concern -- to avoid an incident for which they can be retroactively blamed as being insufficiently diligent. If you are confused about how this incentive might arise, Conservatives need only look at themselves. How many of you have pounded Janey Napolitano for being insufficiently diligent, for example in her "the system worked as it was supposed to" comments.
I spent a lot of time at HBS, in consulting at McKinsey, and in corporate life worrying about incentive systems. And the absolute first rule, in my mind, is to ignore the official incentive system and explore what really drives behavior. For example, a company might have a finely balanced set of published performance measures, but if the last three promotions all went to the person who sucked up the most to the boss, the latter will likely influence behavior much more than the published system.
The same is true at the TSA. I have no idea what their official performance metrics are. But to a large extent these metrics are irrelevant anyway in an environment where it's impossible to be fired and salaries and promotions have more to do with seniority than performance. In this environment, unofficial incentives are going to be very powerful, and I am virtually positive the overriding such incentive is avoiding blame due to lack of diligence.
So we should not be surprised if the TSA runs out of control with its diligence in a way that is unchecked by any considerations of cost, privacy, or risk management. This incentive is so powerful that the only way to override it is either through executive leadership or legislative action. We'll see if we get either, but trashing privacy and the fourth amendment tend to be bipartisan hobbies so I am not wildly confident much will change.
This is one of the better simple explanations of both the appeal and hidden risk of CDO's. The example, which is short and is worth working through, ends this way:
Suppose that we misspecified the underlying probability of mortgage default and we later discover the true probability is not .05 but .06. In terms of our original mortgages the true default rate is 20 percent higher than we thought--not good but not deadly either. However, with this small error, the probability of default in the 10 tranche jumps from p=.0282 to p=.0775, a 175% increase. Moreover, the probability of default of the CDO jumps from p=.0005 to p=.247, a 45,000% increase!
The dark magic of structured finance conjured many low-risk securities out of many risky securities. Like all dark magic, however, the conjuring came at a price because if you didn't get the spell exactly correct it was easy to create something much more risky and dangerous than you were likely to have ever imagined.
As an ex-engineer who used to do a lot of operations analysis as well as post-disaster failure analysis, this shares a central theme that I have found in many such failures -- people tend to overestimate their own knowledge.
Coming in to a class at HBS, the professor had us all do a 20 question survey. It asked us questions like "what is the population of Argentina" and then asked us to give the lowest and highest number we thought it would be such that the answer had a 95% chance of being in that range. Based on this, only one of our 20 answers should have been out of my limits. About eight of the answers were out of my ranges. It was a really good lesson in overestimating one's knowledge.
Which leaves me with a thought -- if we define a large part of the problem as overestimating our understanding of a certain phenomenon, from your observation of the Obama administration and its personalities, what gives you any confidence that a new lager of government regulators will solve this problem?
I just finished "The Box," which is a history of container shipping. Never has any book I have read elicited so many laughs from my family. Nothing says "geek" like reading a book about shipping containers.
But, for those of you who might similarly be turned off by the subject matter as unpromising, I can say this is easily one of the most interesting business books I have ever read. It is fascinating to see how the entire economics of an industry can be changed not by some arcane advance in silicon, but by a metal box. In a period of about 20 years, the entire merchandise shipping business, which had remained virtually unchanged for thousands of years, was completely reinvented. Every ship and every port had to be replaced. Moreover, these changes resonated far beyond shipping, as they enabled much of the global manufacturing revolution of the last generation.
Because pre-container shipping and transport were so highly regulated, the book provides a great window on how regulation affects innovation, and vice versa. It also focuses quite a bit on how unions and in particular union work rules affected industry economics, and how these unions reacted to change in the industry.
And of course, the book allows us to look at any number of interesting business strategy issues:
This situation was reminiscent of a business case I had at HBS about the beginnings of the high fructose corn syrup (HFCS) market. It was run as a computer simulation among teams. Basically, almost not matter what everyone did, the industry ended up in over-capacity and everyone lost money. The only successful strategy was the Wargames approach ("the only winning move is not to play').
Jane Galt makes a case against industrial animal husbandry, a position which she argues is not inconsistent with being a libertarian or classical liberal. While I don't get as worked up about such practices as cruel, I don't think it is inconsistent for a libertarian to be so concerned. And I don't rule out that I would be just as worked up if I were more informed about what was going on.
However, what really caught me eye was this:
This is an approximate description of what happens to industrially
farmed chickens . . . lifted, mind you, from a business school case
aimed at helping industrial farms be more efficient, by using rose
coloured chicken contact lenses to cut down on the need for debeaking
'em.
I can attest that this was indeed a real case that we studied at Harvard Business School*. In fact, it so freaked me out at the time as a concept that I included it in my most recent novel. From BMOC [warning, profanity lurks ahead]:
Poor, boring, earnest Julian
was always prepared, because he was always terrified, scared to death
that one night slacking off might somehow destroy his future Career
(always with a capital-C), and therefore future Life, much like the
fear of catching AIDS from a one night stand. Julian participated
(unfortunately) all too much in class, droning on in that irritating
voice of his, advocating positions as spectacularly expected as
Susan's were non-conformist.Julian,
therefore, was not really a candidate to get cold-called to open the
class discussion, particularly this late in the year. However, it
was clear to everyone in the room, particularly the professor, that
Julian longed to open a case. Every day Julian would look at
the professor with this hopelessly wistful expression, only to be
followed by a look of desolation when someone else was chosen.So
today, letting Julian open was in the same spirit as the homecoming
queen giving a pity-fuck on the last day of high school to the geek
who has been mooning and sighing over her for four years. And right
at this
moment, Julian had the same surprised and ecstatic look on his face
that the geek would have.But it was not just the site of
Julian creaming all over himself at his chance to open that had Susan
longing for the piranha button. Some satanic twist of fate had
Julian Rogers earnestly and painstakingly laying out a strategy and
plan for the new product roll out of ... contact lenses for chickens.
Contact fucking lenses for Christ-sake chickens. Right this very
second he was outlining his sales pitch to chicken farmers,
explaining how putting contacts in chicken's eyes will somehow
reduce the number of chickens that have to have their beak cut off.
Did she hear that right? This had to be a joke "“ but no,
everyone seemed to be taking it seriously, and certainly Julian was
taking it deadly seriously.
* I know those anti-capitalists out there will be using this as evidence that business school is crafted to keep us cold and heartless. HBS consisted of studying 2-3 cases per day for about 200 days a year, which means that over two years one might read a thousand business cases. This case was more in the spirit of breaking the monotony of yet another case on brass vs. plastic water meters rather than part of a consistent attempt to make us cold and heartless.
A reader sends this one in, after reading my book BMOC. One of the characters in the book is a business man who has a knack for monetizing wacky business models (one example: providing free fountains to malls in exchange for being able to harvest the coins out of them). The book is named after his new company called BMOC, which specializes in making teens popular.
This caused a reader to send me this web site for FakeYourSpace.com. They are selling popularity their own way, by providing you comments and visits from hot and cool friends on your MySpace pages. Sort of sock puppetry for teens.
Welcome to Fake Your Space. You have found a new and
exciting service which offers help to all the men and women out there
who don't feel like they are popular enough on social networking sites
such as MySpace, Facebook, and Friendster.
If you are tired of seeing everyone else with the hottest friends and
want some hotties of your own, then this is the place for you.
LOL. Wish I had thought of it for my book. Below the fold is the business model for BMOC, which I thought was crazy enough:
As a way to celebrate the holidays and perhaps compensate for a more relaxed pace of blogging for a while, I am beginning a serialization of my new novel BMOC. If there is interest, I will keep it going for a while. So, lets get started. Enjoy! (You didn't really feel like doing any real work today, did you?). By the way, for you prospective business school students, though it may seem un-serious, embodies my best advice for you. Chapters 3 and 4 continue here.
chapter one
Robert
Gladstone, multi-millionaire CEO of the M Group, looked around the
room at his fellow conspirators and longed for the piranha
button.
Asymmetrical Information comments on Greg Mankiw by observing:
Harvard scores lowest in student satisfaction *and* enjoys the highest yield (%
of students admitted who attend) of any leading American university. How can the
same institution be so desirable and so disliked at the same time?
The data presented for is for the undergraduate school and my experience is with the graduate school of business, but I think some of my experience can still help answer this question.
At the time I attended, I was sure that the Harvard Business School (HBS) was the best place for me to attend. I still think that is true. First, it had (and has) a great reputation with both people hiring for jobs and the general public. The Harvard diploma has power, power that hasn't lessened even 20 years later. Second, it had a style that worked well for me personally. I sat in on classes at other business schools, but HBS classes had an interactive, and often combative, style that I loved and thrived in. Yes there was work, but the workload never was worse than my undergraduate school. I would not change my decision.
That being said, while I have showered my undergraduate school with cash, Harvard has not gotten one dime from me. Because as an institution, it sucked. It had an incredible arrogance to it, often stating publicly that its customer was NOT the students, but was the businesses who hired its graduates and society at large. And this was the attitude at the business school, which I was often told was the most student-friendly part of Harvard. My college roommate Brink Lindsey apparently had a similar experience at Harvard Law, as he was part of a group that founded N.O.P.E., which stood for Not One Penny Ever (to Harvard).
At every turn, one ran into petty, stupid stuff that did nothing to contribute to the educational experience but were frustrating as hell. The faculty was often arrogant and the administrative and housing staff uncaring.
At the risk of sounding petty, I will share two examples. These are small things, but are representative of hundreds of similar experiences over two years.
I do not think it an exaggeration to say that had Harvard scoured every post office in the country for employees, it could not manage to provide worse customer service day-to-day.
And I think this is the answer to the paradox. If you can tolerate the faculty arrogance, you can get a great education, but Universities are more than just a school. For most students, Harvard is also their landlord, their only restaurant choice, their local police force, etc. etc. And for all these other functions, they are terrible.
There is a price one pays for slipping into the Harvard Business School through some mysterious hole in the Harvard admissions process: From time to time, one must be ready to be humbled by their peers. Of course, with nearly 900 people in a graduating class, one expects someone in that group to distinguish themselves at some point. However, this large groups is somehow indistinct - at HBS one spends most of their time with 90 people in their "section", spending the vast majority of waking hours, both in class and in the pub, with this group. After a couple of years with the same 90 people, one gets the overwhelming impression of normality -- these people are just as full of shit as anyone else I have gotten to know.
So it is both expected and with some surprise that I have begun to see these 90 people start making headlines. My section-mates have distinguished themselves as executives and industry leaders and entrepreneurs and lifestyle writers and business writers and fashion moguls and artists even as the notorious. Humiliating levels of fame and success seem to be the rule among these ostensibly ordinary people.
This week, however, another member of our 90-person section (1989-B, on the off chance you are a fellow alum and were wondering) has gone to the next level. This week Time magazine named Jim Balsillie, CEO of RIM (the Blackberry people) to their list of the 100 most influential people. Wow. Congratulations Jim. The bad news is we are all totaled humbled about our own success trajectories in comparison. The good news is that Jim will obviously "draw fire" away from the rest of us when Harvard comes looking for money. Its a funny combination of old and new to think about the CEO of Lili Pulitzer and the CEO of Blackberry sitting next to each other all through our first year.
Postscript: By the way, for those of you who may be tempted to put me on suicide watch, I am pretty much joking, though not about my section mates - they are all as awesome as portrayed here -- but about any dissatisfaction with my career. Several times in my life I have been presented with opportunities to pursue high-profile wealth. In most cases, I have turned these down, with zero regrets. In fact, since one of the first of these rejected opportunities involved following Jeff Skilling from McKinsey to Enron, I really, really have no regrets. Each day I am out visiting my operations at some National Park or other, I will think about the rest of you filling out your TPS reports.
UPDATE: Welcome to fellow sectionmate Karen Page, author of numerous Amazon 5-star rated books on food, wine and becoming a chef, who links to me today (oops, Karen is slipping - a few of the books only have 4-1/2 stars). Not only is Karen part of that vast section B conspiracy to make me feel inadequate, she also has a much cooler blog than mine.
Steven Metcalf has an interesting article in Slate on the state of Harvard University. And, if you don't really care about what messes the twits from Harvard are making of the place (and I don't blame you) it is also a good look at problems in universities in general. My favorite passage is this one:
From Bradley's descriptions"”and from my own experience"”academia has devolved into a series of now highly routinized acts of flattery, so carefully attended to that one out-of-place word is enough to fracture dozens of egos.
One only has to observe the shrill and over-the-top reactions to some of Lawrence Summers recent remarks to have this ring true.
I actually have several connections to Harvard. As a high school senior, I was fortunate to have my choice of Ivy League schools, and I chose Princeton over Harvard, in large part because it was obvious even then that the Harvard's graduate schools and faculty egos took precedence over teaching undergraduates. At Princeton I got to know Neil Rudenstine, then provost of Princeton and later President of Harvard. Rudenstine was basically far too good a man to run Harvard, sort of like sending Mother Theresa in to run Haiti. The faculty devoured him, and drove him to a breakdown.
More recently, I attended the Harvard Business School (HBS). Many of you who are unfamiliar with Harvard would likely assume that the b-school was the snobbiest and most condescending arm of the university. In fact, the opposite was the case -- the B-school was both isolated from and looked down on by the rest of the university, its isolation reinforced and symbolized by the river that separates HBS from the rest of the campus. Many an outsider have commented on how approachable HBS students and faculty are as compared to the rest of the university, which is ironic since most of the rest of the university, busy polishing their egalitarian credentials, condescendingly denigrate HBS students for being, well, grubby capitalists rather than lofty intellectuals like themselves. As a result, HBS crew teams were routinely booed through the entire Head of the Charles regatta, and HBS graduates are booed by the rest of the university at every graduation ceremony.
As a result, Princeton gets much of my time and love and attention and, well, money, while Harvard gets nada.
Update: I am reminded that this last feeling about Harvard is not limited to the B-school. My good libertarian college roommate Brink Lindsey (I wish he would start blogging again) tells me that when he was at Harvard Law, a group of his friends formed N.O.P.E., which stood for Not One Penny Ever [to Harvard].
Roy Soifer recently suggested, as reported in Photon Courier, that the percentage of Harvard Business School graduates going to Wall Street jobs can be used as a reverse indicator of the market (i.e. lots of graduates going to Wall Street means the market is peaking and due for a fall).
As a graduate of that HBS in 1989, I have a few thoughts. First, the vast majority of HBS graduates go into Wall Street, consulting, or the corporate world. The relative popularity of these three destinations tends to vary over time. To some extent this variation is due to what's "hot", and to some extent its due to simply to what jobs are available and what recruiters are showing up on campus.
Second, though pride urges me to agree with this statement from Photon Courier, I really can't:
But one would hope that MBAs from a leading school--who have certainly studied business cycles--would reflect more on the principle of "buy low, sell high" before deciding among their various offers.
When I graduated from HBS, I don't remember having a clue what I wanted to do. Its all fine and good to talk about trying to get in early on a growth sector, but that implies I am taking a job to maximize NPV of future incomes. If that were the case, I would have gone to Wall Street, or remained a consultant. But I also would have probably hated it.
A more interesting HBS graduate job indicator for me has been "how has the jobs people have evolved since they graduated". When I graduated, everyone seemed to be investment bankers and consultants. At our fifth year reunion, everyone was posturing as to how successful they had been, how far they had risen, etc. Most people were still in the same type jobs, with only a few outliers who had switched careers already. Our tenth reunion was totally different. At our tenth, no one talked about their job - everyone talked about their kids. The contrast was dramatic. Many people were in different careers, including a number who were testing the dot-com waters.
At the fifteenth reunion, everyone seemed much more relaxed. Job performance stress at from the fifth and family starting stress at the tenth were mostly gone. Many, many people (including me) had their own businesses, and few of these were ones anyone would have predicted; I don't think anyone was a consultant anymore. Here are a few examples just from our 90-person section of businesses graduates are running now:
My observation - very few were the types of businesses that come recruiting at HBS.
My parting observation about career choices through life comes from Dan Simmons' great Hyperion series, where the prophet Aenea gives here famously concise advice to humanity:
Choose Again.
Certainly true with careers.
