Status In Law, Finance

By Robin Hanson · February 3, 2012 8:05 am · Comments (10)

I recently suggested that a big part of what management consulting sells is status, to cow firm opponents into submission, and that this helps explain why consulting firms use so many inexperienced recent grads of elite colleges. JustMe commented:

There are basically three things available to graduates of elite colleges that other students, no matter how hard they work, have little or no access to: elite consulting jobs, investment banking, and corporate law.

Kids from elite colleges aren’t much smarter or harder working than those from the next tier, who are cheaper to hire. But elite grads do have much more polish, shine, etc. – in a word, status. If this helps explain an elite school focus in management consulting, can it also help explain a similar focus in investment banking and corporate law?

Corporate law seems easier. If, as I suggested, our inherited sense of who will tend to win a contest in coalition politics uses certain standard status markers, then the status of one’s corporate lawyers can influence attitudes about who will win a court case. So having a high status lawyer can help get folks within an organization to support standing firm, cow lower status opponents into backing down, and influence the verdict of a judge or jury.

For investment banking, a lot of that is about getting folks with deep pockets to open their wallets to back new ventures. The more it seems that important folks associated with a venture are high status, the more others may be willing to affiliate with that venture as customers, suppliers, investors, compliant regulators, etc. So there should be a big premium on having the key person who represents a venture to potential investors be high status.

I remember Bryan Caplan once suggesting that successful real estate agents tend to be the sort of people who were popular in high school, and that house buyers (especially women) prefer to affiliate with a locally popular person as they enter a new community. Investment banking could be similar, but on higher status scale.

GD Star Rating
loading...
Tagged as: , ,

Status As Strength

By Robin Hanson · February 1, 2012 11:25 pm · Comments (16)

Yesterday I offered a theory of (some) management consulting:

Firms often have big obvious misallocations of resources, where … many highest status folks in the firm resist … changes. … If a prestigious outside consulting firm weighs in, that can turn the status tide. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant. … Good-looking kids from our most prestigious schools … are the cheapest folks you can buy with our most prestigious affiliations.

What is status? One theory is that status is a commonly-seen summary of one’s value as an ally. In places where physical strength is more useful, strength counts more for status. In places where knowing the king is more useful, knowing the king counts more. And so on. But the consulting tale I tell above seems at odds with this theory.

Imagine that status in a firm was a proxy for one’s usefulness as an ally within that firm, summarizing the threats one could credibly make, the people one could fire, the favors one could plausibly call in, etc. And imagine that the current equilibrium was that opponents of change together held more of these useful resources – they successfully blocked change.

Now imagine that the CEO hires an outside consultant who writes a report recommending change. It should be clear to everyone that this outside firm has no direct power within the firm. It cannot fire anyone, go slow on a project, etc. So if status was just a proxy for relevant local abilities, then this consultant should have little status. Thus if a consultant actually does help the CEO by lending status to the CEO’s side, status must be something else.

So I’m led to consider a sticky-feature concept of status. Long ago coalition politics was important, and foragers had to estimate how useful each person would be if they joined a coalition. So our distant ancestors considered a standard set of features, such as strength, intelligence, charisma, etc., that tended then to indicate that someone would be a useful ally. Humans evolved specialized mental modules for making such estimates, and for estimating common perceptions of such estimates.

Today we have inherited such mental modules, and often use them to estimate which side will win a contest of coalitions. And even though relevant abilities have changed somewhat, our inherited expectations about who will win a coalition contest are somewhat self-reinforcing. For example, if we expect that coalitions of taller people tend to win, then we will be reluctant to cross such a coalition, which will tend to make them win. This can be a self-reinforcing focal equilibrium of the coordination game that is coalition politics.

If the features that define status are sticky, being somewhat locked into mental models that estimate which coalitions would win contests, then outside consultants with no formal power inside a firm could still tip the balance of status by siding with a CEO. Celebrities who know little about a product could make us more willing to buy it by endorsing it, and students could gain status via past affiliation with professors who have no power in their future work world.

If students gain status by graduating from prestigious schools, and if employers hire students for the status they add to a work coalition, is school productive? Well in this situation school is privately productive, both for the student and the employer. The employer isn’t inferring a hidden ability, but buying a visible feature. So this isn’t signaling exactly. But on the other hand, it isn’t obviously globally productive. The gain an employer gets from adding status to his coalition may well come at the expense of competing coalitions.

GD Star Rating
loading...
Tagged as: , ,

Too Much Consulting?

By Robin Hanson · January 31, 2012 6:30 pm · Comments (70)

Last night I discussed the popularity of law, finance, and management consulting with Tyler and many somewhat-libertarian-leaning others. I was surprised that most were skeptical that firms get their money’s worth from consulting, more skeptical than for law or finance. I was also surprised that most focused on explaining why kids from elite schools work at such firms, rather than on why firms pay so much for this consulting.

To me, it is easy to understand why consulting firms attract so many elite students, given the wages, prestige, and job experience they offer. And it is also easy to see why firms might pay a ton for consulting, relative to law and finance – changing your basic business strategy can conceivably add enormous value, while minor changes to contract details and financing terms have limited value.

The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from kids fresh out of college, who spend only a few months studying an industry they previous knew nothing about. How could such quick-made advice from ignorant recent grads be worth millions? Why don’t firms just ask their own internal recent college grads?

Some say that consulting firms use their access to collect data on best practices, data that other firms are eager to pay for. But while this probably contributes, I find it hard to see as the main effect.

My guess is that most intellectuals underestimate just how dysfunctional most firms are. Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions.

The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant.

To serve this function, management consulting firms need to have the strongest prestige money can buy. They also need to be able to quickly walk around a firm, hear the different arguments, and judge where the weight of reason lies. And they need to be relatively immune to accusations of bias – that their advice follows from interests, affiliations, or commitments.

All three of these functions seem to be achieved at a low cost by hiring good-looking kids from our most prestigious schools. These are the cheapest folks you can buy with our most prestigious affiliations, they are smart enough to judge where reason lies, and they have few prior affiliations to taint them with bias. They can not only “borrow your watch to tell you the time,” but can also cow you into submission in accepting that time.

Yes the information contained in consulting advice can be obtained elsewhere at a lower cost. Firms could hire most any smart independent folks, or set up a prediction market. But alas those sources don’t have the raw strength of status to cow opponents into submission, opponents who in practice can block changes no matter what a CEO declares.

So mine is a signaling and status story (surprise surprise). The weight of status often decides outcomes, no matter what the CEOs commands, and so CEOs often need to bring out status ringers, to cow opponents into submission.

GD Star Rating
loading...
Tagged as: , , ,

Rising City Inequality

By Robin Hanson · January 31, 2012 3:15 pm · Comments (9)

Barkley Rosser pointed to me to an ’05 meta-analysis of tail-power estimates for city distributions:

The estimated [power α] is on average not 1.0. If the regression is properly specified in the Pareto form, the pooled estimate of α is considerably larger than one, close to 1.1. … Point estimates of α are significantly smaller if the estimate is based on population data for metropolitan areas (instead of inner cities), the estimate is based on data for recent years, the estimate is for the US city size distribution, the sample comprises only a small number of observations, and the study reports only a single estimate.

So while this confirms that for US cities recently the tail-power is close to one (as I had cited before), it is higher in the rest of the world, and in the past. See this graph of power vs. year AD:

Inequality in cities has indeed been increasing over the last few centuries. And it may well increase more in the future.

So who bemoans increasing city inequality? Who wants to redistribute success from the 1% of cities, e.g., Tokyo and New York, to the many smaller cities? Few it seems, because while many dislike inequality in wealth or firm size, most seem to like city inequality.

GD Star Rating
loading...
Tagged as: ,

The Future Of Inequality

By Robin Hanson · January 29, 2012 10:35 pm · Comments (11)

A few (3.6) years ago I wrote about the inequality over time induced by the big transitions, such as from primates to foragers to farmers to industry:

Advantages do accrue to early adopters of new growth modes, but these gains seem to have gotten smaller with each new [transition]. … 1. The number of generations per growth doubling time has decreased. … 2. … As we get better at sharing info in other ways, the first insight-holders displace others less. 3. Independent competitors can more easily displace each another than interdependent ones.

Earlier today I wrote about the inequality at each point in time, in the eras between transitions:

The number of species per genera and individuals per families has long declined with size as a tail power of two. After the farming revolution, cities and nations could have correlated internal successes and larger feasible sizes, giving a thicker tail of big items. In the industry era, firms could also get very large. Today, nations, cities, and firms are all distributed with a tail power of one, above threshold scales of (three) million, thousand, and one, thresholds that have been rising with time.

So, the unequal success that comes from some moving sooner in a big transition between growth eras has declined in more recent transitions. Yet the within-era inequality at a moment in time between groups like nations, cities, and firms has increased over time. As larger groups have become feasible, with more internal correlation in their success, the high tails of very large groups has gotten thicker, until they are now Zipf distributed evenly across many size scales. And in such Zipf distributions, typical group size increases with the both minimum efficient scale and total population, both of which have been increasing.

“But that is not all, no that is not all!” (Said the Cat in the Hat.) Continue reading "The Future Of Inequality" »

GD Star Rating
loading...
Tagged as: , , , ,

The History of Inequality

By Robin Hanson · January 29, 2012 3:45 pm · Comments (5)

I recently posted on how cities and firms are like distributed as a Zipf power law, with a power of one, where above some threshold each scale holds roughly the same number of people, until the size where the world holds less than one. Turns out, this also holds for nations:

Log Nation Size v Log Rank

The threshold below which there are few nations is roughly three million people. For towns/cities this threshold scale is about three thousand, and for firms it is about three. What were such things distributed like in the past?

I recall that the US today produces few new towns, though centuries ago they formed often. So the threshold scale for towns has risen, probably due to minimum scales needed for efficient town services like electricity, sewers, etc. I’m also pretty sure that early in the farming era lots of folks lived in nations of a million or less. So the threshold scale for nations has also risen.

Before the industrial revolution, there were very few firms of any substantial scale. So during the farming era firms existed but could not have been distributed by Zipf’s law. So if firms had a power law distribution then, it must have had a much steeper power.

If we look all the way back to the forager era, then cities and nations could also not plausibly have had a Zipf distribution — there just were none of any substantial scale. So surely their size distribution also fell off faster than Zipf, as individual income does today.

Looking further back, at biology, the number of individuals per species is distributed nearly log-normally. The number of species per genera:

and the number of individuals with a given family name or ancestor:

have long been distributed via a steeper tail, with number falling as nearly the square of size:

This lower inequality comes because fluctuations in the size of genera and family names are mainly due to uncorrelated fluctuations of their members, rather than to correlated shocks that help or hurt an entire firm, city, or nation together. While this distribution holds less inequality in the short run, still over very long runs it accumulates into vast inequality. For example, most species today descend from a tiny fraction of the species alive hundreds of millions of years ago.

Putting this all together, the number of species per genera and individuals per families has long declined with size as a tail power of two. After the farming revolution, cities and nations could have correlated internal successes and larger feasible sizes, giving a thicker tail of big items. In the industry era, firms could also get very large. Today, nations, cities, and firms are all distributed with a tail power of one, above threshold scales of (three) million, thousand, and one, thresholds that have been rising with time.

My next post will discuss what these historical trends suggest about the future.

GD Star Rating
loading...
Tagged as: , , , ,

Ideals Can Conflict

By Robin Hanson · January 28, 2012 4:10 pm · Comments (11)

The usual wisdom says we are most creative when working in groups that avoid criticism. This is wrong:

His book … was published in 1948. … Osborn’s most celebrated idea was … the essential rules of a successful brainstorming session. The single most important … was the absence of criticism and negative feedback. … Brainstorming was an immediate hit and Osborn became a popular business guru. …

But … brainstorming … doesn’t work. The first empirical test of Osborn’s brainstorming technique was performed at Yale University, in 1958. … Groups were instructed to follow Osborn’s guidelines. As a control sample, the scientist gave the same puzzles to forty-eight students working by themselves. … The solo students came tip with roughly twice as many solutions as the brainstorming groups, and a panel of judges deemed their solutions more “feasible” and “effective.” … Numerous follow up studies have come to the same conclusion. …

Nemeth … divided two hundred and sixty-five female undergraduates into teams of five. … The first set of teams got the standard brainstorming spiel, including the no-criticism rules. Other teams were told … “Most studies suggest that you should debate and criticize each other’s ideas.” The rest received no further instructions. …The brainstorming groups slightly outperformed the groups given no instructions, but teams given the debate condition were the most creative by far. On average, they generated twenty per cent more ideas. And after the teams disbanded, … brainstormers and the people given no guidelines produced an average of three additional ideas; the debaters produced seven. …

“There’s this Pollyannaish notion that the most important thing to do when working together is stay positive and get along, to not hurt anyone’s feelings. … Well, that’s just wrong.” (more)

Since the usual wisdom has resisted robust data for so long, it must be that people want to believe it. But why?

First note that we tend to believe this more about other people, and less about ourselves. It is a good idea for a good cause non-profit, or perhaps for our firm somewhere at some future date. But when we have a big immediate problem we really want to solve, we rarely invoke this process. So we believe this more in far mode.

Second, we tend to believe that idealistic things go together. For example, if art is good and peace is good, then art must promote peace, peace must promote art, and so on. Third, since far mode is more idealistic and less analytically critical, in far mode we are more willing to set aside analytic doubts to believe the simple correlation that all good things go together. Fourth, since we are especially creative, social, and uncritical in far mode, and we see all of these as idealistic good things, we are especially willing to believe that they all go together.

We are more idealistic in far mode, and all else equal far mode tends to promote idealistic things. So in far mode we tend to think all idealistic things promote each other. Peace, art, relaxation, positive moods, agreement, cooperation, altruism, creativity, love, etc. But in fact, there are usually tradeoffs – some ideals come at the cost of others.

Interestingly, the article I quote above goes on to talk about patterns of interaction that promote productivity, and it repeatedly just assumes that whatever promotes productivity promotes creativity. For example:

People who worked on Broadway were part of a social network. … The density of these connections [was] a figure he called Q. … A musical created by a team of strangers would have a low Q. … The relationships among collaborators emerged as a reliable predictor of Broadway success. When the Q was low … the musicals were likely to fail. Because the artists didn’t know one another, they struggled to work together and exchange ideas. … But, when the Q was too high, the work also suffered. The artists all thought in similar ways, which crushed innovation.

Note that this just assumes that a musical’s success is mainly a tradeoff between communication and innovation. Since a successful musical is good, and innovation and communication are good, then musicals must be good because of their innovation and communication. But lots of things that influence success could correlate with how many people you know on Broadway.

GD Star Rating
loading...
Tagged as: , ,

Far Idealism Hypocrisy

By Robin Hanson · January 27, 2012 8:15 am · Comments (10)

Not everything fits this story, but an awful lot does: we are more idealistic in far mode, which helps us hypocritically hold others to higher standards than we hold ourselves:

In 6 studies, we found that advice is more idealistic than choice in decisions that trade off idealistic and pragmatic considerations. We propose that because advisers are more psychologically distant from the choosers’ decision problem, they construe the dilemma at a higher construal level than do choosers. … Studies 1 and 2 demonstrate that compared with choosers, advisers weigh idealistic considerations more heavily and pragmatic considerations less heavily, place greater emphasis on ends (why) than on means to achieve the end (how), and generate more reasons (pros) in favor of acting idealistically. Studies 3 and 4 … [show] that making advisers focus on a lower construal level results in more pragmatic recommendations. … Finally, in Studies 5 and 6, we demonstrate the choice–advice difference in consequential real-life decisions. (more)

GD Star Rating
loading...
Tagged as: , ,

Who Talks Politics?

By Robin Hanson · January 26, 2012 9:10 am · Comments (8)

Using data from a nationally representative survey of registered voters conducted around the 2008 U.S. presidential election … [we find that] people discussed politics as frequently as (or more frequently than) other topics such as family, work, sports, and entertainment with frequent discussion partners. … The frequency with which a topic is discussed is strongly and positively associated with reported agreement on that topic among these same discussion partners, … because people avoid discussing politics when they anticipate disagreement. (more)

Political talk is quite different within vs. outside of families. Within families, politics talkers tend to be less conscientious, more emotionally stability, and more extraverted. Extraverted family members tend to talk politics more even when they disagree.

Outside of families, people tend to talk politics more when they see each other a few times week, as opposed to daily or weekly. The only other predictor of non-family talk is having an open personality type, and then only when political agreement is especially strong. Controlling for the above features, gender, race, age, education, and other personality factors (like agreeableness) did not predict who talked politics, neither in nor out of families.

So the main situation in which people somewhat talk through their political disagreements is extraverts within families, especially when extraverts are related (think Archie Bunker and meathead). At the other extreme, love fests of political agreement happen most when those with open personalities (who tend politically left) see each other outside of families a few times a week (think faculty lunches). Both of these extreme results fit my personal experience.

GD Star Rating
loading...
Tagged as: ,

Who Wants Kid $ Insure?

By Robin Hanson · January 25, 2012 11:00 am · Comments (29)

Financial inequality seems to be shaping up as a central issue in the US presidential campaign. (Other sorts of inequality, not so much.) Many note that such inequality has increased in recent decades. But let me repeat my anti-trend-tracking matra: if what matters is the efficiency of our institutions, trends are irrelevant unless they reveal such inefficiencies. So are the institutions that influence our financial inequality inefficient?

Probably the simplest and strongest argument is insurance market failure: being risk-averse, we want to insure against variations in our distant future income, but since this insurance is not available privately, governments must provide it. Why exactly this is not available privately if customers want it isn’t usually clarified. And it could be that the incentive costs of the insurance outweigh its risk-reduction benefits. But this is at least in the ballpark of a plausible institutional argument.

However, it seems to me that as a parent I wouldn’t have wanted to insure against any but the very low tail of possibilities of for my kids future income. I like the idea that one of my kids might someday be very successful or famous. And asking this of my undergrads consistently gets the same answer – very few want such insurance for their own or their kids’ future. Furthermore, parents do not much use the one clear insurance option they have – to teach their kids to share their future income with each other. Most societies used to do this, and our culture evolved away from that. So while teaching kids to share income is both personally and culturally possible, we just don’t do it.

Now you might argue that this is a signaling failure – that we would each in fact like such insurance, but dislike what our willingness to take it would say about us. But you could also tell your kids to keep this income-sharing policy a family secret, only to tell potential spouses. And once such sharing became a long family tradition then continuing it would say much less about personal features. But it seems to me that even if given the option to legally commit all their descendants to such a policy, to prevent all future signaling about it, most folks would still reject such insurance.

Thus it seems to me that most folks think the incentives costs outweigh the risk-reduction gains for such insurance, and do not want it. Thus the insurance market failure rationale for taxing the rich extra just fails.

GD Star Rating
loading...
Tagged as: , ,