Tag Archives: Management

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.

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Leading Isn’t About Info

By Robin Hanson · August 13, 2011 10:00 am · Comments (9)

The study recruited 150 participants and divided them into groups of three. One person was randomly assigned to be the group’s leader; all were told they could contribute advice, but that the leader was responsible for making the decision. Then they undertook a group task: choosing a job candidate. Of 45 items of information about the candidate, some were given to all three, and some to only one of the participants. … Group members rated the most narcissistic leaders as most effective. But … the groups led by the greatest egotists chose the worse candidate for the job. … “The narcissistic leaders … inhibited the communication because of self-centeredness and authoritarianism.” … Good leaders facilitate communication by asking questions and summarizing the conversation—something narcissists are too self-involved to do. (more; HT Karl Mattingly)

I predict that as the above result becomes more widely known, we will not much change our tendency to choose egotists as leaders. Yes the ability to get subordinates to reveal unusual info is valuable to the organization as a whole, but today this ranks pretty low among the many competing considerations in choosing a leader, and that probably won’t change much in the foreseeable future.

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Respect Forecast Accuracy

By Robin Hanson · July 13, 2011 11:05 am · Comments (13)

The topic at Cato Unbound this month is “What’s Wrong with Expert Predictions.” Dan Gardner and Philip Tetlock’s lead essay points out a puzzling lack of interest in forecast accuracy:

Corporations and governments spend staggering amounts of money on forecasting, and one might think they would be keenly interested in determining the worth of their purchases and ensuring they are the very best available. But most aren’t. They spend little or nothing analyzing the accuracy of forecasts and not much more on research to develop and compare forecasting methods. Some even persist in using forecasts that are manifestly unreliable. … This widespread lack of curiosity … is a phenomenon worthy of investigation.

My response essay considers this puzzle. The editor summarizes:

Robin Hanson argues that most people aren’t interested in the accuracy of predictions because predictions often aren’t about knowing the future. They are about affiliating with an ideology or signaling one’s authority. … He suggests that one way to make predictions more accurate might be to lift both the social stigma and legal prohibitions against gambling.

Key quotes:

Even if disinterest in forecast accuracy is explained by forecasting being only a minor role for pundits, academics, and managers, might we still hope for reforms to encourage more accuracy? …

Hope … mainly comes from the fact that we pretend to care more about forecast accuracy than we actually seem to care. We don’t need new forecasting methods so much as a new social equilibrium, one that makes forecast hypocrisy more visible to a wider audience, and so shames people into avoiding such hypocrisy. …

It isn’t enough to devise ways to record forecast accuracy—we also need a new matching social respect for such records. Might governments encourage a switch to more respect for forecast accuracy? Yes: by not explicitly discouraging it!

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Raid The Rich

By Robin Hanson · June 19, 2011 12:10 pm · Comments (9)

Me in March on Why Track Trends?:

Tyler’s thesis is that the US has slower growth than decades ago because we’ve used up the low hanging fruits. … My grad school (Caltech) didn’t teach macro … so I’ll stay agnostic for now. But what I can speak to is how little such trend analysis or projection matters, at least for most economic policy.  … The question of which institutions will most increase economic welfare rarely depends much on the exact values of the sorts of parameters social scientists and the media track with such enthusiasm and concern.

Me 1.4 years ago on Enable Raiders!:

A robust, properly functioning market for corporate control is vital to the performance of a free-enterprise economy. …

It is hard to exaggerate how very important this is – we’d be so much richer now if it it had long been easier for raiders to take over public firms. We now put many inexcusable obstacles (listed below) before such raiders, including disclosure, super-majority, poison pill, and merging delay rules.

Today’s Post:

Growing income disparity in the United States … has reached levels not seen since the Great Depression. In 2008, … the [140,000 member] top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, … with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. …

In 1975 … the top 0.1 percent of earners garnered about 2.5 percent of the nation’s income, including capital gains. …. By 2008, that share had quadrupled and stood at 10.4 percent. … The share of the income commanded by the top 0.01 percent rose from 0.85 percent to 5.03 percent over that period. For the 15,000 families in that group, average income now stands at $27 million.

The inquiring mind is surely curious to know who exactly are today’s super-rich, and how much richer they are now than before. But good policy is mostly about good institutions, which just shouldn’t depend much on such parameters. If you worry that managers get paid more than they contribute to firm value, a robust solution is to strengthen competition for corporate control, so raiders can takeover and then fire overpaid managers. Trying to independently determine manager contribution is far far harder.

If you worry instead about how much managers respond to taxes by reducing their efforts or moving to other jurisdictions, that also probably doesn’t depend much on just how rich they are or how much that has changed in recent decades. Wanting to tax managers more because you learned that they made more money than you thought seems much more like envy than neutral efficiency analysis.

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Letting Leaders Off

By Robin Hanson · May 30, 2011 8:00 pm · Comments (10)

Bryan Caplan:

The gold standard of modern social science is … a “random controlled trial.” … And yet… real-world policy-makers continue to neglect, evade, and actively oppose experimental tests of efficacy. … Tim Harford explains why:

Politicians resist pilot schemes with objective measures of success. … politically inconvenient is the fact that half of the pilot schemes will fail… so the pilot will simply produce stark evidence of that failure. …

This is all a nice example of a theme I’ve been pushing for a while ….

Political agency problems are often a byproduct of voter irrationality. The principals give their agents grossly suboptimal incentives, then complain that the agents fail to carry out their assignments. … Pay-for-performance is a good idea, but the public is too irrational to accept it.

Note that private CEOs are also quite reluctant to run randomized trials of their business ideas. Yes some trials happens in marketing, but firms overall still display a puzzling neglect of randomized trials, and of prediction markets. Both mechanisms offer more accurate info, but at the cost of a high rate of clear public embarrassments – clear evidence showing that you endorsed crap.

Yes firms do implement incentive pay more often, but firms still remain puzzlingly reluctant to correct such incentives for overall trends in the economy or the local industry. Maybe voters are more reluctant than stockholders to discipline their agents, making the private sector more efficient at managing many forms of activity. But in both cases there remains a puzzling reluctance to force leaders to prove their value.

My hypothesis: leaders have status, with which voters and stockholders want to affiliate. While people talk about being offended by leader dominance, they are actually quite eager to submit, and reluctant to risk leader wrath by questioning leader quality. The people’s romance with the state makes them even more reluctant to hold political leaders accountable, so this effect is even worse in politics.

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I Talk Wed. At Harvard

By Robin Hanson · April 21, 2011 9:40 am · Comments (6)

Next Wednesday I’ll talk at Harvard business school on “Toward Information Accounting“:

What gets measured, gets done. Today, organizations account in great detail for revenue and the costs of materials and time, but have only crude informal accounting of info contributed to key organizational decisions. Because info cost and value are poorly measured, info production is neglected.

Can we use prediction markets to do better? Imagine speculative betting markets on many key organizational questions, and two key changes in business practice. First, let the division responsible for each decision declare lower-bound estimates of the value of more info on each related question. A division might, for example, declare that 1% lower error in estimating 3rd quarter sales of product X is worth at least $5000. There are standard ways to calculate such info value in specialized situations, such as inventory management.

Second, let trader accounts be denominated in a new “color of money.” Instead of doing zerosum betting, the market for each question would be subsidized at a level matching its declared info value. As a result, the subsidy amounts lost to traders as prices become more accurate would on average correspond to that question’s declared info value. For example, on 3rd quarter sales of product X, its 0.7% lower error might have earned a $3500 subsidy, going to George who gained $2000, Sue who gained $1500, Sam who gained $1000, and Fred who lost $1000.

Given these two new practices, trader account gains could be interpreted as noisy estimates of the info value those accounts transmitted via their trades. Losses could be interpreted as info destruction. Simple statistics applied to the pattern of changes in an account over time could estimate its consistent gains, amid its temporary fluctuations. The total consistent gains for the accounts of a division could be credited to that division in its ordinary cost accounting, while that same amount is debited from the divisions who declared info value on those questions.

When one created an account with an initial cash deposit, and authorized an individual or team to trade that account on specific questions, one would in essence say: “Try to show us that you can consistently add info value here via your trades. We’ve started you out small, but if you can show consistent gains we may give you more to work with. At annual review time we’ll credit your account’s consistent gains (or losses) to you (and your division) as value you transmitted to this organization, to be compared with your time and other costs of participation.”

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Leading Isn’t Helping

By Robin Hanson · December 2, 2010 6:35 pm · Comments (5)

A lab experiment suggests groups reward leaders mainly for projecting high status, rather than for raising group payoffs. Perhaps having high status leaders raises the status of other group members, or members compete more with low status leaders in the hope of replacing them. If this pattern applies more generally to organization managers, it helps explain why they pay so little attention to improving the efficiency of their organizations, and so much to infighting and domination displays. Read and weep:

In a repeated public-goods game … players were more likely to mimic the actions of a leader they perceived as a high-status individual; they ignored leaders perceived as low-status and, when they had a chance, punished them for trying to lead. …

In each round … [each of the 80] players … had to decide what portion to keep for themselves and how much to contribute to a group account. Whatever was put into the group account was doubled and then split equally by the group of four. … Each group had a leader whose contributions everyone could see. The leader was determined by scores on an arbitrary trivia quiz. In half the experiments, the leader was the player who had the highest score (high status); in the other half,… the lowest score (low status). …

At the end of each of the 20 rounds, each follower observed his or her own earnings and the leader’s contributions. The leader observed the contributions of each of the followers. On average, players allocated between 40 and 50 percent of their [money] to the public pot, whether they had a high- or low-status leader. However, contributions from followers with low-status leaders dropped off in later rounds even though their leaders began giving more and more. … Groups with high-status leaders showed greater stability, and the followers were more likely to imitate their leaders — even though those leaders … [didn't increase their] contributions. …

In the 21st round of the game, followers were given the option to punish the leader by issuing points that decreased a player’s profits in the experiment, and vice versa. … Once punishment was introduced, contributions increased significantly for the groups with a low-status leader and only slightly for those with a high-status leader. However, low-status leaders punished others and, in turn, were punished more. They made significantly less money in the experiment than any other player. (more, more; HT Tyler)

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New Vs. Old Guard

By Robin Hanson · November 1, 2010 10:00 am · Comments (23)

Jon Stewart can pretend all he wants that the point of his big rally Saturday was just for chuckles, or just to encourage a more reasonable, substantive and civil tone in American politics. The reality is that his own audience on the Mall had an additional agenda, and it was decidedly partisan and decidedly liberal. … It’s self-defeating and even delusional to think progressive policies are going to be achieved just by agitating nobly for a more positive style in politics. (more)

So why is the U.S. left suddenly so eager to emphasize its civility and maturity compared with the right?

In both primitive tribes and modern board rooms, incumbents play out a standard script when arguing with upstarts. When a new guard bids for more influence relative to an old, the new suggests the old is weak, corrupt, out of touch, and past their prime, while the old suggests the new is immature, inexperienced, unrealistic, and untried. The old guard tries to sound calm and reasonable and suggest things are ok, there’s no need for disruptive change, or perhaps that we can’t afford to change captains midstream in a crisis. The new guard will suggest a crisis, with problems getting worse until we change tact, or perhaps that only new leadership can take full advantage of new opportunities.

We are so habituated to expect these patterns that we use these arguments, and are persuaded by them, even when they are unlikely to apply. For example, in a modern two party political system, the party out of power is probably nearly as corrupt and mature as the party in power. Nevertheless, the out party will complain of corruption, while the in complains of immaturity.  The circle of autopilot-thought life continues.

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Tyler On A Roll

By Robin Hanson · September 6, 2010 3:00 pm · Comments (1)

Five thought-provoking posts in six days:

What Is Management About: “Business is much more about being organized and managing people than it is about ideas. Past a certain scale, ideas don’t seem to matter much … Much of the time spent discussing `ideas’ in a business context is actually time spent slowly maneuvering large groups of managers into a compatible mind-space so that they can work together effectively.” (more)

Why Little Airline Plain Talk: Half of [employees] dislike or sometimes even despise their customers and that their natural speech patterns, given their true feelings, would come across negatively. … They face lots of customers, with varying and often unreasonable expectations, and they have few resources to buy them off with. (more)

Most Story Protagonists Kidless: “At least 50 percent of the great literary characters exit the book without having reproduced.” … The decline of the heroic ideal in literature, and the decline of the journey of adventure, seem to be stronger forces in predicting fictional family size. (more)

Why Corporate BS Talk: Since it is hard to oppose fluffy generalities in any very specific way, a common strategy is to stack everyone’s opinion or points into an incoherent whole. Disagreement is then less likely to become a focal point within the corporation and warring coalitions are less likely to form. … Rule of thumb: when you see the demoralizing, start with the premise that it is being done for morale. (more)

Happiness As Bad Signal: “Happiness” to me sounds boring, as if the person has a limited imagination when it comes to wants and an inability to be frustrated by the difficulty of creating new peak experiences. … Viewed as a signaling problem, “happiness” fails when it comes to credibly demonstrating the possession of some extreme quality or another. The busier people are, and the higher wages are, the more important it should be to signal extreme qualities to command the attention of interesting others. (more)

Don’t stop now Tyler!

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Types of Thinkers

By Robin Hanson · June 14, 2010 4:00 pm · Comments (17)

You have to do much more now to get into a top school like Yale or West Point, and you have to start a lot earlier. … I sat on the Yale College admissions committee a couple of years ago. … It turned out that a student who had six or seven extracurriculars was already in trouble. Because the students who got in—in addition to perfect grades and top scores—usually had 10 or 12. ….

People who can climb the greasy pole of whatever hierarchy they decide to attach themselves to. But I think there’s something desperately wrong, and even dangerous, about that idea. … The head of my department had no genius for organizing or initiative or even order, no particular learning or intelligence, no distinguishing characteristics at all. Just the ability to keep the routine going. … Why is it so often that the best people are stuck in the middle and the people who are running things—the leaders—are the mediocrities? Because excellence isn’t usually what gets you up the greasy pole. What gets you up is a talent for maneuvering. …

You will find yourself in environments where what is rewarded above all is conformity. I tell you so you can decide to be a different kind of leader. … For too long we have been training leaders who only know how to keep the routine going. Who can answer questions, but don’t know how to ask them. Who can fulfill goals, but don’t know how to set them. Who think about how to get things done, but not whether they’re worth doing in the first place. …

What we don’t have, in other words, are thinkers. People who can think for themselves. … Thinking means concentrating on one thing long enough to develop an idea about it. Not learning other people’s ideas, or memorizing a body of information, however much those may sometimes be useful. Developing your own ideas. In short, thinking for yourself. You simply cannot do that in bursts of 20 seconds at a time, constantly interrupted by Facebook messages or Twitter tweets. (more)

It is tempting to agree that our organizations are inefficient because they systematically fail to reward the right sort of thinking.  After all, the author of the above and I fancy ourselves as this other neglected but superior sort of thinker.  But while there are indeed many sorts of thinkers, this author offers no evidence that the currently rewarded mix is actually the wrong mix. (And it is a bad sign that it doesn’t seem to occur to him to look for such evidence.)

Routine-preserving conformists may not look as impressive to the eyes of foragers, to Versailles courtiers, or to me.  But they may still be what our world most needs, and so most rewards. See also the overlapping debate on if multitasking is vital or vile.

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