Tag Archives: Management

Our Prestige Obsession

Long ago our distant ancestors lived through both good times and bad. In bad times, they did their best to survive, while in good times they asked themselves, “What can I invest in now to help me in coming bad times?” The obvious answer was: good relations and reputations. So they had kids, worked to raise their personal status, and worked to collect and maintain good allies.

This has long been my favored explanation for why we now invest so much in medicine and education, and why those investment have risen so much over the last century. We subconsciously treat medicine as a way to show that we care about others, and to let others show they care about us. As we get richer, we devote a larger fraction of our resources to this plan, and to other ways of showing off.

I’d never thought about it until yesterday, but this theory also predicts that, as we get rich, we put an increasing priority on associating with prestigious doctors and teachers. In better times, we focus more on gaining prestige via closer associations with more prestigious people. So as we get rich, we not only spend more on medicine, we more want that spending to connect us to especially prestigious medical professionals.

This increasing-focus-on-prestige effect can also help us to understand some larger economic patterns. Over the last half century, rising wage inequality has been driven to a large extent by a limited number of unusual services, such as medicine, education, law, firm management, management consulting, and investment management. And these services tend to share a common pattern.

As a fraction of the economy, spending on these services has increased greatly over the last half century or so. The public face of each service tends to be key high status individuals, e.g., doctors, teachers, lawyers, managers, who are seen as driving key service choices for customers. Customers often interact directly with these faces, and develop personal relations with them. There are an increasing number of these key face individuals, their pay is high, and it has been rising faster than has average pay, contributing to rising wage inequality.

For each of these services, we see customers knowing and caring more about the prestige of key service faces, relative to their service track records. Customers seem surprisingly disinterested in big ways in which these services are inefficient and could be greatly improved, such as via tech. And these services tend to be more highly regulated.

For example, since 1960, the US has roughly doubled its number of doctors and nurses, and their pay has roughly tripled, a far larger increase than seen in median pay. As a result, the fraction of total income spent on medicine has risen greatly. Randomized trials comparing paramedics and nurse practitioners to general practice doctors find that they all produce similar results, even though doctors cost far more. While student health centers often save by having one doctor supervise many nurses who do most of the care, most people dislike this and insist on direct doctor care.

We see very little correlation between having more medicine and more health, suggesting that there is much excess care and inefficiency. Patients prefer expensive complex treatments, and are suspicious of simple cheap treatments. Patients tend to be more aware of and interested in their doctor’s prestigious schools and jobs than of their treatment track record. While medicine is highly regulated overall, the much less regulated world of animal medicine has seen spending rise a similar rate.

In education, since 1960 we’ve seen big rises in the number of students, the number of teachers and other workers per student, and in the wages of teachers relative to worker elsewhere. Teachers make relatively high wages. While most schools are government run, spending at private schools has risen at a similar rate to public schools. We see a strong push for more highly educated teachers, even though teachers with less schooling seem adequate for learning. Students don’t actually remember much of what they are taught, and most of what they do learn isn’t actually useful. Students seem to know and care more about the prestige of their teachers than about their track records at teaching. College students prefer worse teachers who have done more prestigious research.

In law, since 1960 we’ve similarly seen big increases in the number of court cases, the number of lawyers employed, and in lawyer incomes. While two centuries ago most people could go to court without a lawyer, law is now far more complex. Yet it is far from clear whether we are better off with our more complex and expensive legal system. Most customers know far more about the school and job prestige of the lawyers they consider than they do about such lawyers’ court track records.

Management consultants have greatly increased in number and wages. While it is often possible to predict what they would recommend at a lower cost, such consultants are often hired because their prestige can cow internal opponents to not resist proposed changes. Management consultants tend to hire new graduates from top schools to impress clients with their prestige.

People who manage investment funds have greatly increased in number and pay. Once their management fees are taken into account, they tend to give lower returns than simple index funds. Investors seem willing to accept such lower expected returns in trade for a chance to brag about their association should returns happen to be high. They enjoy associating with prestigious fund managers, and tend to insist that such managers take their phone calls, which credibly shows a closer than arms-length relation.

Managers in general have also increased in number and also in pay, relative to median pay. And a key function of managers may be to make firms seem more prestigious, not only to customers and investors, but also to employees. Employees are generally wary of submitting to the dominance of bosses, as such submission violates an ancient forager norm. But as admiring and following prestigious people is okay, prestigious bosses can induce more cooperative employees.

Taken together, these cases suggest that increasing wage inequality may be caused in part by an increased demand for associating with prestigious service faces. As we get rich, we become willing to spend a larger fraction of our income on showing off via medicine and schooling, and we put higher priority on connecting to more prestigious doctors, teachers, lawyers, managers, etc. This increasing demand is what pushes their wages high.

This demand for more prestigious service faces seems to not be driven by a higher productivity that more prestigious workers may be able to provide. Customers seem to pay far less attention to productivity than to prestige; they don’t ask for track records, and they seem to tolerate a great deal of inefficiency. This all suggests that it is prestige more directly that customers seek.

Note that my story is somewhat in conflict with the usual “skill-biased technical change” story, which says that tech changed to make higher-skilled workers more productive relative to lower-skilled workers.

Added 10June: Note that the so-called Baumol “cost disease”, wherein doing some tasks just takes a certain number of hours unaided by tech gains, can only explain spending increases proportional to overall wage increases, and that only if demand is very inelastic. It can’t explain how some wages rise faster than the average, nor big increases in quantity demanded even as prices increases.

Added 12Jun: This post inspired by reading & discussing Why Are the Prices So Damn High?

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Toward Reality TV MBAs

The quality of firm managers matters enormously for firm productivity. How can we get better managers? We already select the best people in terms of simple features like intelligence, conscientiousness, etc. But apparently there is still huge variation in quality, even after controlling for such things. Typical MBA programs teach people some business basics, but don’t seem to help much; they mainly serve to select elites and connect them to each other.

I recently had dinner with a few San Francisco tech startup CEOs, who were worth high sums. They weren’t obviously that much smarter etc. than others. Their high value came from having actually navigated difficult business waters, successfully enough. That sort of experience and track record is gold. Some said that business success came from making the right decision at a half dozen key points; any wrong move would have killed them.

Some had first gained experience via being a personal assistant to someone else in such a role. Such an assistant goes to all meetings and sees pretty much everything that manager does, over a several year period. Apparently children learn similar things via parents dinner conversations:

The majority of male entrepreneurs in Norway start a firm in an industry closely related to the one in which their father is employed. These entrepreneurs outperform others in the same industry. … ‘Dinner table human capital’ – that is, industry knowledge learned through their parents – is an important factor.… the effect of parents helping out, although possibly quite important, is smaller. (more; HT Alex T)

If one can learn much from just watching the inside story of real firms over several years, that suggests a big win: record the full lives of many rising managers over several years, and show a mildly compressed and annotated selection of such recordings to aspiring managers. Such recordings could be compressed by deleting sleep and non-social periods. They could be annotated to identify key decisions and ask viewers to make their own choices, before they see actual choices. Recordings might be selected 2/3 from the most successful, and 1/3 from a sampling of others.

Yes, there are issues of privacy and business secrets. But these are already issues for personal assistants and others who attend key business meetings. Waiting five years could take away many business secret concerns. And we don’t have to make these videos available to the world; making manager experiences visible to only 100 times more people might increase our pool of good manager candidates by a factor of 100. And that could be worth trillions to the world economy.

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Status Hypocrisy

Humans (and some other animals) recognize two kinds of status: good and bad. Good status is “prestige” while bad status is “dominance.” Here is Trump today saying the US wants to be high status in the world, but only via good status:

We will seek friendship and goodwill with the nations of the world, but we do so with the understanding that it is the right of all nations to put their own interests first. We do not seek to impose our way of life on anyone, but rather to let it shine as an example. We will shine for everyone to follow. (more)

Many animals have a local “pecking order” set by winners of pair-wise physical fights. In some animals, rank is also influenced via prestige elements. For example, babbler birds rise in rank by doing good things for their local group, such as by sharing food and warning against predators. These things count for rank even when gained via violence, such as by fighting other birds for the best places to look out for predators, and by forcing food down the throat of other birds.

Human foragers have strong norms against using or threatening force, and even against bragging about such serious abilities. Hunters may exchange arrows to disguise who deserves credit for good hunts. But foragers are okay with communities having a shared sense of who are better sources of advice, and who are better to emulate and associate with. And it can be okay, in play mode, to brag about play abilities like singing or joking. In The Secret Of Our Success, Joseph Henrich says human cultural evolution was promoted by our tendency to copy behaviors of prestigious people.

Today we tend to say that our leaders have prestige, while their leaders have dominance. That is, their leaders hold power via personal connections and the threat and practice of violence, bribes, sex, gossip, and conformity pressures. Our leaders, instead, mainly just have whatever abilities follow from our deepest respect and admiration regarding their wisdom and efforts on serious topics that matter for us all. Their leaders more seek power, while ours more have leadership thrust upon them. Because of this us/them split, we tend to try to use persuasion on us, but force on them, when seeking to to change behaviors.

You can see this split in typical motives of heroes and villains in fiction, and in how such characters treat their subordinates. It also appears often in war propaganda, such as in accusations about different leadership styles of Trump and Clinton in the US last election.

Firm bosses today tend to be reluctant to give direct orders to subordinates, and prefer a general impression that they have their position mainly because of how much everyone respects their wisdom and effort. Bosses also prefer the impression that their main task is to collect information, apply wisdom, and make good decisions in the firm interest. Subordinates often go along with this story, as they don’t like to publicly accept domination. Employees can just conveniently decide that they respect their boss, and are persuaded by his or her arguments. And firms pay extra for the pretty dynamic bosses to which employees less mind submitting, even if those are worse at making key decisions.

Modern folk often don’t understand how the ancients could have tolerated not having democracy, as we us tell ourselves today that democracy is why we are not dominated by leaders. But while the ancients saw rival nations as under the thumb of tyrants, they themselves had kings whose virtues proved that they deserved their position. And we today look away from evidence that our leaders win elections via illicit means (such as personal connections etc.); our elected leaders are often far from the most prestigious people available. Even if we see most politicians as corrupt, we see our personal politicians as much less so. US residents look away from evidence that the US is not just high status in the world due to its good advice and general helpfulness; the US also uses force, bribes, etc.

Clearly, while there is some fact of the matter about how much a person gains their status via licit or illicit means, there is also a lot of impression management going on. We like to give others the impression that we personally mainly want prestige in ourselves and our associates, and that we only grant others status via the prestige they have earned. But let me suggest that, compared to this ideal, we actually want more dominance in ourselves and our associates than we like to admit, and we submit more often to dominance.

In the following, I’ll offer three lines of evidence for this claim. First consider that we like to copy the consumer purchases of people that we envy, but not of people we admire for being “warm” and socially responsible. I suggest that relative to us, the latter group has prestige while the former has dominance.

Second, consider the fact that when our bosses or presidents retire and leave office, their legitimate prestige should not have diminished much. That is, such people have about the same wisdom and good advice, and they remain as useful a model for copying behavior. Yet others usually show far less interest in associating with such retirees. This suggests that what people really want in associating with bosses is their dominance powers, not their prestigious advice.

For my third line of evidence, consider our differing preferences for short vs. long term mates. We are much more publicly associated with our long term mates, and so we naturally care more about what other people think of them. Their prestige will bleed over onto us. In contrast, short term mating is often done in secret. Thus we should care more about prestige in long term mates, and dominance in short term mates, even if we don’t admit this consciously.

For short term mates, humans seem to mainly care about physical attractiveness. This is in contrast to long term mates and non-sexual short term associates. Women also care about men having a deep voice, and if men are relatively attractive, women like them to show off luxury goods. Women may like creative intelligence in men, but while we can infer overall intelligence quickly and reliably from faces, that just doesn’t much influence how attractive they seem.

While there is a lot of complexity in mating preferences, and we still don’t understand it all, it seems to me that one important component is that for long term mates we more care about prestige features that are good for the group, but for short term mates, we care more about dominance features that are more directly useful to us personally. Physical attractiveness (and a deep voice) shows off capacities for violence and fertility, both of which are useful powers.

Overall intelligence can be good for the group, but for our ancestors it was much less useful to individuals. This may be part of why IQ matters more for national than individual income. We humans may have long known that smarts is good for our groups, and yet made it less of a priority in our selfish choices of associates.

Added 21Jan: The two kinds of status have different kinds of status moves. For example, you look directly at someone prestigious, but avoid looking directly at a dominator.

Added 22Jan: This can help explain why smart & sincere tend to go together.

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Masking Design Competence

Most real organizations have many design problems. This is most explicit in engineering type organizations, but such issues are nearly as common in all organizations. Any organization must make many choices regarding the design and marketing of their product or service, in how it will be financed, sourced, produced, tested, stored, transferred, priced, evaluated, etc.

For most such design problems, most organizations have some standard ideal design criteria. The organization is supposed to search in the space of possible designs for ones expected to do well according to the ideal criteria. And then adopt those better designs. In profit-oriented firms, many key criteria are closely aligned with firm profit.

According to the usual ideal norm in organizations, everything should be arranged to promote good designs according to the ideals. For example, the people who most influence a design choice should be those with the most relevant info and the strongest incentives to get it right. People should be hired and promoted according to their ability to help make good design choices. Designs should be changed when circumstances suggest that the ideal design has changed. And so on.

Real organizations also have complex Machiavellian politics. Coalitions form that promote their members at the expense of rivals. Members are chosen for their loyalty and ability to help the coalition. Coalitions sometimes reform, dropping some factions and adding others. Members must show loyalty to their coalitions by visibly promoting design choices that benefit their coalition, even when that comes at the expense of the organization’s ideal design criteria.

This conflict between design choices that meet ideals and those that help coalitions drives may of the illusions and hypocrisies in organizations. For example, people are often placed in positions of power for reasons other than their superior design competence, such as their info and abilities regarding key decisions. This creates a demand to give those people the illusion of design competence.

For example:

When I started at Lockheed Research in 1985, my mentor was a veteran who explained his secret for getting funding from the other Lockheed divisions:

Find an idea for a project we could do for them, but don’t tell them the idea. Instead break the idea into a few key parts, describe the parts to them, and let them put the parts together into the total idea. They will be much more willing to fund a project that is their idea.

A related strategy is to design a solution but then weaken it to a space of nearby solutions. Tell your manager “I think something in this space should work but I can’t figure out what” and let him reinvent your particular solution point. He then owns the design more, and can claim more credit for design competence.

As another example, as I’ve mentioned before people often pretend to ask people for advice as if they wanted info, but in fact they are seeking allies. In general, boards of advisors are rarely actually asked for their advice; they are mainly chosen to add prestige to an organization.

Meetings in organizations often take the appearance of searching for design proposals and evaluating proposals presented. But in fact proposals have usually been selected beforehand, and the meeting is to create an appearance of support form them, and for the story presented about who deserves credit. If a problem is presented for which a solution isn’t offered, that is probably because they don’t don’t see a solution with which they’d want to be associated, and would rather someone else take on that failure area.

Powerful people can also create the appearance of more design competence than they actually have by pushing vague design philosophies that others can then claim to adhere to without actually greatly constraining their choices. Also, powerful people can claim that complex organizational considerations require them to keep the reasons for their design choices secret. Others can then just assume they must have great design competence regarding such considerations.

It helps to have a culture of assuming that the people with the best credentials in terms of education and prior organization and positional prestige have the most design competence. Since these people happen to the those that are most useful for coalitions to put into positions of power, the conflict between power and apparent design competitions is reduced.

Can readers think of more examples? If so, I’ll add good ones to this post.

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Who Wants Thick Democracy?

Last night I heard the author talk on this book: The Business of America is Lobbying: How Corporations Became Politicized and Politics Became More Corporate. The audience was mostly DC policy wonks and related academics. The talk and responses to it made me realize that most policy folks, and most ordinary people as well, don’t actually like democracy that much. Let me explain.

In a democracy, candidates run for office, and the ones with the most votes win. Winners set new policies and oversee government agencies that set more policies. Prior to the vote, a limited number of issues come to the attention of voters, including candidate positions on future acts and incumbent past acts and related outcomes.

A basic fact about modern governance is that the number of issues that can gain salience in elections is only a tiny fraction of the number of policy decisions governments make. So a key question about democracy is whether and how voters can influence that vast dark matter of unseen policy decisions. How can voters, who see only a few dashboard knobs, effectively control the vast complex machinery that is a modern government?

In a “thin democracy” the answer to this question is “They can’t.” Instead, many government officials have a lot of what Bryan Caplan calls “slack.” Such officials make choices according to personal preferences, constrained mainly by physics, budgets and the choices of other officials. Here it is the set of people willing and able to take government jobs that control most of the dark matter of government policy. Government is good or bad depending these people, their cultures, and the institutions they use to organize themselves.

In contrast, in a “thick democracy” many voters collect themselves into complex organizations to monitor and lobby government actions. Such “interest groups” collect detailed preferences from members, study government acts and plans in detail, advise officials in person on preferred act details, and advise voters on candidates to reward or punish in elections. Such organizations let voters escape personal limits on how much detail they can manage.

Because thick democracy requires voters to join complex organizations managing detailed info, this scenario is subject to big agency failures. Many things can go wrong between voter input and pushing particular policies to particular officials, and agents in the mess in the middle tend to make things go wrong in their favor. Some organizations will thrive and others collapse due to basically random factors.

More importantly, we have little reason to expect that different kinds of people with different kinds of issues would have remotely similar influence through this process. In a thick democracy, influence depends greatly the complexity of your issue, the ease of monitoring relevant actions and outcomes, the trustworthiness of your agents, the quality of your members, the incentives that members can impose on each other, and the availability of preexisting organizations to build on.

Today the strongest best organized kinds of groups in our society are firms. They can impose strong incentives on members, they are already arranged to minimize agency failures, and the issues they care about are especially simple and easy to monitor. So thick democracies give firms big advantages over other interest groups. In fact:

Corporations and their trade associations now spend about $2.6 billion a year in reported [US] lobbying. … That … is about 34 times the total lobbying spending for all labor unions and groups representing public and consumer interests. (more)

Maybe one could find ways to greatly suppress this firm advantage. But that would hardly give everyone else equal influence. Because influence in a thick democracy depends on complex management of incentives and info, it gives big advantages to those who happen to be better organized.

One might hope for a third approach of “compressed democracy”. In this scenario, we would find ways to compress most of what we care about in the high-dimensional variation of government policy into a small number of summary statistics. These few summaries might then fit into the small set of issues that voters can notice in an election, letting voters control government without complex interest group organizations.

This might work via “retrospective voting”, if voters would just focus on reelecting incumbents only when their personal lives had gone better than expected, and if incumbents cared about little else besides reelection. This approach might also work via agreeing on and measuring a “national welfare” number, such as I proposed in futarchy. But so far voters have shown little interest in such approaches.

At the meeting last night, it seemed to me that most policy wonks and related academics preferred the thin democracy status quo wherein people like them and the students they train have most of the power over the dark matter of hidden policy. And I’d guess that most voters mostly agree with them. Yes, a few “activists” are eager for a thick democracy fight, seeing themselves as especially well organized for such fights, at least without “unfair” corporate competition.

But most people can’t be bothered, and aren’t particularly optimistic about what a thicker democracy would produce. Voters already get lots of status via appearing to be in control. Thicker democracy might create an orgy of rent-seeking activity, and for what? Not that voters would fight it if it were the status quo. But they see the current mostly-thin democracy status quo as reasonable. Just as we accept priests deciding most detail in religion, docs deciding most details in medicine, soldiers deciding more details in war, and teachers deciding most details in schools, we accept government officials deciding most details in government. If the rest of us get bothered enough about something, we can demand to have it done our way. But for everything else, we let someone else figure it out.

I’m not saying that this status quo is in fact the best form of government. I’m just saying I can understand why we see little inclination to change it.

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Advice Shows Status

When we give and seek advice, we think and talk as if we mainly just want to exchange useful information on the topic at hand. But seeking someone’s advice shows them respect, especially if that advice is followed. And in fact, a lot of our advice giving and taking behavior can be better understand in such status terms:

When making decisions together, we tend to give everyone an equal chance to voice their opinion. To make the best decisions, however, each opinion must be scaled according to its reliability. Using behavioral experiments and computational modelling, we tested (in Denmark, Iran, and China) the extent to which people follow this latter, normative strategy. We found that people show a strong equality bias: they weight each other’s opinion equally regardless of differences in their reliability, even when this strategy was at odds with explicit feedback or monetary incentives. (more)

Individuals in powerful positions are the worst offenders. According to one experimental study, they feel competitive when they receive advice from experts, which inflates their confidence and leads them to dismiss what the experts are telling them. High-power participants in the study ignored almost two-thirds of the advice they received. Other participants (the control and low-power groups) ignored advice about half as often. … Research shows that they value advice more if it comes from a confident source, even though confidence doesn’t signal validity. Conversely, seekers tend to assume that advice is off-base when it veers from the norm or comes from people with whom they’ve had frequent discord. (Experimental studies show that neither indicates poor quality.) Seekers also don’t embrace advice when advisers disagree among themselves. And they fail to compensate sufficiently for distorted advice that stems from conflicts of interest, even when their advisers have acknowledged the conflicts and the potential for self-serving motives. … Though many people give unsolicited advice, it’s usually considered intrusive and seldom followed. Another way advisers overstep is to chime in when they’re not qualified to do so. … many advisers take offense when their guidance isn’t accepted wholesale, curtailing further discussion. (more)

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Why Prefer Potential?

Movies that win Oscars seem to gain more viewers as a result. But it also seems that on the whole people are a lot more eager to watch Oscar nominated movies before the Oscar winners are announced. After the show, people think less about movies and more about other things. Which is odd – a burst of info comes out about which movies are good, and in response people get less interested in watching movies. If getting info about movie quality makes people like movies less, that might explain why movie execs were so keen to kill movie prediction markets. But it still leaves us with the basic puzzle: why don’t people like info on movie quality?

Actually, this is part of a much bigger puzzle. Regarding basketball players, leaders, job candidates, comedians, grad school admissions, restaurant reviews and paintings, we actually prefer to choose people described as having the potential to achieve certain things, compared to people who actually achieve those same things:

When people seek to impress others, they often do so by highlighting individual achievements. Despite the intuitive appeal of this strategy, we demonstrate that people often prefer potential rather than achievement when evaluating others. Indeed, compared with references to achievement (e.g., “this person has won an award for his work”), references to potential (e.g., “this person could win an award for his work”) appear to stimulate greater interest and processing, which can translate into more favorable reactions. This tendency creates a phenomenon whereby the potential to be good at something can be preferred over actually being good at that very same thing. We document this preference for potential in laboratory and field experiments, using targets ranging from athletes to comedians to graduate school applicants and measures ranging from salary allocations to online ad clicks to admission decisions. …

Although participants recognized that the individual with achievement was more objectively impressive on paper, they showed a general preference for potential in their hiring decisions and assessments of future success. …

We ruled out a pro-youth bias, an extremity effect, and believability or credibility perceptions as viable alternative accounts for our findings.  (more; HT Tyler)

Weird! These authors even found this effect for paintings themselves, and not just for painters. They do convincingly argue that a proximate cause is interest and deeper reasoning caused by the uncertainty, but I find it hard to see those as ultimate causes. Why are we more interested in reasoning about potential rather than achievement?

Katja Grace suggested one plausible theory to me: we hope or expect to get a better price on things with good potential, relative to good achievement. This can make some sense of our preference for potential in hiring or grad school admissions; the candidates who have actually achieved may demand more in compensation, or be more likely to reject our offer.

It might also make more sense for paintings and basketball, if we were planning to buy the painting or hire the player. But a simple price effect makes less sense if you are not going to buy the painting or hire the player, but just be a fan. This also makes less sense for movies, comedians, restaurants; few of us ever buy these things whole. We instead pay to rent them, and we don’t get better prices there if we buy potential.

The Oscars suggest a related idea: what we want is social credit for anticipating fashion. That is, we want credit for being early in evaluating things highly that others will later evaluate highly. We want to able to brag (indirectly of course) that we saw quality first. Which is plausible. But it suggests that fashion is a surprisingly big part of our lives – desires to be first in fashion drives a lot more of our behavior that we like to admit.

In fact, this seems a good test probe – let’s test this effect in many more areas of life. Areas where potential matters more than achievement are good candidates for areas where fashion matters a lot to us.

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Firm Inefficiency

Economists are often stereotyped as claiming that firms are very economically efficient, i.e., that they very effectively minimize costs and maximize profits. This is a common source of derision of economists by other social scientists. And it is true that efficiency is the standard assumption made in textbooks and in math models. But over time I’ve been persuaded that it is often far from an accurate assumption. (And I doubt that most older economists believe it.)

I’ve been persuaded by a steady accumulation of plausible examples of widespread persistent inefficiencies. No one example is overwhelmingly obvious – all have stories for why they are only apparent inefficiencies. But added all together, they persuade me. Some examples:

  1. Threats Help Productivity – When firms face more competition, they often have big bursts of productivity. But if increases were possible, why not do them before?
  2. Long-Lasting Deadwood – Firms often keep employees who are widely known within the firm to not be pulling their weight relative to other employees. They tend to be fired during a downturn, or after a takeover.
  3. Not Invented Here – Firms are famously reluctant to adopt changes that appear to have been developed elsewhere, preferring instead changes for which someone internal can take credit.
  4. Shooting Messengers – Many firms greatly discourage passing bad news up to bosses. GM was just exposed as such a firm via a safety issue. Those who do pass bad news up are punished as if they were personally a big cause of the bad news.
  5. Yes Men – If bosses keep quiet about their opinion, they can evaluate subordinates via comparing employee opinions with boss opinion. But bosses consistently forgo this by telling subordinates lots of opinions and punishing those who question such opinions.
  6. Mergers & Acquisitions – Firms that buy and merge with other firms seem to consistently lose money.
  7. Poison Pills – Rules that discourage takeover attempts by financially penalizing such attempts prevent investors from getting more for their shares.
  8. Overpaid CEOs – It is far from clear that firms actually earn more when they hire more expensive CEOs.
  9. Too Many Meetings – It is widely believed that most firms hold too many meetings that go on too long with too many people.
  10. Too Many Interviews – It is hard to find much evidence that interviews add info on job performance. So why do candidates go through so many interviews?
  11. Biased Evaluations – Bosses consistently give lower evaluations to people they didn’t hire, relative to people they did hire. Yet official evaluations don’t correct for this.
  12. Excess Credentials – People consistently feel pressure to hire people whose credentials make them look good on paper, relative to people they believe would do a better job.
  13. Few Experiments – Firms tend to be reluctant to do experiments, such as to find preferred product variations. Experiments would force them to admit they don’t yet know.
  14. Few Track Records – Meetings are full of people making predictions on decision consequences, but firms almost never keep formal track records to rate accuracy.
  15. Reward Braggarts – Firms consistently neglect people who don’t toot their own horn, even when their superior features are widely known.
  16. Allow Info Silos – Groups and divisions with a firm are allowed to keep a lot of info secret within their group. Yet if the firm works together toward a common goal, what can be the benefit of keeping such secrets?
  17. Predictable Consultants – Management consultants are often hired at great expense to give advice that is quite predictable given the opinions of those who hired them.
  18. Little Telecommuting – Telecommuting seems to save big on costs, yet is not adopted much.
  19. Discrimination – Fat women are paid less, tall men paid more, in social jobs.
  20. Cubicles – They seem to reduce productivity more than they save in office space costs.
  21. I’ll add more here in response to suggestions.

My working hypothesis to explain these inefficiencies is that the people and supporting coalitions closest to them tend to gain from them, and that selection pressures on political coalitions are often much stronger than selection pressures on firms.

If many of these inefficiencies are real, then yes government regulators can also see them, and yes it might not be that hard for smart sincere people to design regulations to increase welfare by correcting for them. However, government regulatory agencies are also “inefficient” in many ways, leading them to choose and enforce regulations which differ from those that would most increase welfare. To judge if we are better off giving regulators more powers over firms, we must judge the relative magnitudes of these two types of inefficiencies.

Note that firm efficiency may still be a reasonable assumption to make in models, even if it is not an accurate assumption. Modeling is always a tradeoff between realism and understanding.

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More Broken Evals

Back in January I quoted:

In 1980, economists … observed that salaries in companies were more strongly related to age and organizational tenure than they were to job performance. Ensuing research has confirmed and extended their findings, both in the United States and elsewhere. … One meta-analysis of chief executive compensation found that firm size accounted for more than 40 percent of the variation in pay while performance accounted for less than 5 percent. (more)

Part of the reason may be that employee performance evaluations are often political. From an ’87 paper:

Our research approach involved in-depth, semi-structured interviews with 60 executives. … from seven large organizations and represented 11 functional areas. As a group, they averaged more than 20 years of work experience and more than 13 years of managerial experience. ..

Executives admitted that political considerations nearly always were part of the [employee] evaluation process. One vice-president summarized the view these executives shared regarding the politics of appraisal:

As a manager, I will use the review process to do what is best for my people and the division. … I’ve got a lot of leeway – call it discretion – to use the process in that manner. … I’ve used it to get my people better raises in lean years, to kick a guy in the pants if he really needed it, to pick up a guy when he was down or even to tell him that he was no longer welcome here. It is a tool that the manager should use to help him do why it takes to get the job done. I believe most of us here at —- Operate this way regarding appraisals. … Accurately describing an employee’s performance is really not as important as generating ratings that keep things cooking.

Executives suggested several reasons why politics were so pervasive and why accuracy was not their primary concern. First, executives realized that they must live with subordinates in a day-to-day relationship. Second, they were also very cognizant of the permanence of the written document. .. Perhaps the most widespread reason … was that the formal appraisal was linked to compensation, career, and advancement in the organization. …

Executives generally believed the appraisal process became more political and subjective as one moved up the organizational ladder:

The higher you rise in this organization the more weird things get with regard to how they evaluate you. … The process becomes more political and less objective and it seems like the rating process focuses on who you are as opposed to what you’ve actually accomplished … As the stakes get higher, things get more and more political. ..

Although not frequently reported, a few executives admitted to giving a higher rating to a problem employee to the get employee promoted “up and out” of the department. …

A deliberately deflated rating was sometimes used to teach a rebellious subordinate a lesson. … Deflated ratings were also used as part of a termination procedure. First, a strongly negative rating could be used to send and indirect message to a subordinate that he or she should consider quitting. …. Second, once the decision has bee made that the situation was unsalvageable, negative ratings could then be used to build a strongly documented case against the marginal or poor performer.

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To The Barricades

I recently watched the classic 1952 Kurosawa film Ikiru, and have some comments. But those comments include spoilers; you are warned. Continue reading "To The Barricades" »

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