Daily Office:
Thursday
14 January 2010
¶ Matins: Malcolm Gladwell drops another one of his buzz-bombs on conventional wisdom in this week's New Yorker. In "The Sure Thing," he argues that successful entrepreneurs are extremely risk-averse; like predators, they don't waste their time and energy unless they feel certain about prevailing. (They do A LOT of homework.)
One of Mr Gladwell's subjects is John Paulson, the hedge fund manager who make a killing betting against the sub-prime boom; the meatiest part of the essay, for us, anyway, is the light that Mr Paulson's success casts on current thinking about compensation for investment bankers. (We've copied out a lengthy extract because only subscribers can access the piece online.)
Paulson's story also casts a harsh light on the prevailing assumptions behind corporate compensation policies. One of the main arguments for the generous stock options that are so often given to CEOs is that they are necessary to encourage risk-taking in the corporate suite. This notion comes from what is known as "agency theory," which Freek Vermeulen, of the London Business School, calls "one of the few academic theories in management academia that has actually influenced the world of management practice." Agency theory, Vermeulen observes, "says that managers are inherently risk-averse; much more risk-averse than shareholders would like them to be. And the theory prescribes that you should give them stock options, rather than stock, to stimulate them to take more risk." Why do shareholders want managers to take more risk? Because they want stodgy companies to be more entrepreneurial, and taking risks is what everyone says that entrepreneurs do.
The result has been to turn executives into risk-takers. Paulson, for his part, was stunned at the reckless behavior of his Wall Street counterparts. Some of the mortgage bundles he was betting against — collections of some of the sketchiest subprime loans — were paying the investor who bought them six-per-cent interest. Treasury bonds, the safest investment in the world, were paying almost five per cent at that point. Nor could he comprehend why so many banks were willing to sell him CDS insurance at such low prices. Why would someone, in the middle of a housing bubble, demand only one cent on the dollar? At the end of 2006, Merrill Lynch paid $1.3 billion for First Franklin Financial, one of the biggest subprime lenders in the country, bringing the total value of subprime mortgages on its books to eleven billion dollars. Paulson was so risk-averse that he didn't so much as put a toe in the water of subprime-mortgage default swaps until Pellegrini had done months of analysis. But Merrill Lynch bought First Franklin even though the firm's own economists were predicting that housing prices were about to drop by as much as five per cent. "It just doesn't make sense," an incredulous Paulson told his friend Howard Gurvitch. "These are supposedly smart people."
The economist Scott Shane, in his book The Illusions of Entrepreneurship, makes a similar argument. Yes, he says, many entrepreneurs take plenty of risks — but those are generally the failed entrepreneurs, not the success stories.
Just another reason to applaud when banks complain that they'll lose their talent if they're forbidden to pay big bonuses.
¶ Lauds: What was the Philharmonic spokesperson thinking when refusing to name Burt Hara, the guest clarinetist (and apparent auditioner for the principal's chair), when the Times asked who it was who had played Rachmaninoff so beautifully?
After an unsuccessful round of auditions to fill the position vacated by Mr. Drucker, the orchestra has invited a series of guest clarinetists to sit in, to test their mettle and see how they relate to the rest of the orchestra. That is standard practice in the business. But the orchestra is treating public performances as if they were private auditions, not wanting to give one player a leg up over others through any sort of outside judgment.
That does not count as "thinking."
¶ Prime: Farming in Detroit? According to David Whitford, at Fortune, the population of Detroit (once the nation's fourth-largest city) is expected to drop to 700,000. What to do with all that empty space? (via The Infrastructurist)
Faced with those facts, a growing number of policymakers and urban planners have begun to endorse farming as a solution. Former HUD secretary Henry Cisneros, now chairman of CityView, a private equity firm that invests in urban development, is familiar with Detroit's land problem. He says he's in favor of "other uses that engage human beings in their maintenance, such as urban agriculture." After studying the city's options at the request of civic leaders, the American Institute of Architects came to this conclusion in a recent report: "Detroit is particularly well suited to become a pioneer in urban agriculture at a commercial scale."
In that sense, Detroit might actually be ahead of the curve. When Alex Krieger, chairman of the department of urban planning and design at Harvard, imagines what the settled world might look like half a century from now, he sees "a checkerboard pattern" with "more densely urbanized areas, and areas preserved for various purposes such as farming.
¶ Tierce: Anyone who read John Cassidy's excellent New Yorker piece about the Chicago School of economists will have been struck by Eugene Fama's somewhat demented-sounding pronouncements ("I don't even know what a bubble means.") Jonah Lehrer ponders his stubbornness at The Frontal Cortex, and proceeds to critique the very usefulness of "the School of X."
The lesson is that the process of discovery benefits from our differences, from the disagreements and contradictions that arise when people with different assumptions discuss the same data. When everyone agrees, or has the same academic background, then the stubbornness is reinforced. The theory doesn't change. The School of X - and it doesn't matter what X is - remains tethered to its dusty preconceptions. The failure never leads to a better answer.
¶ Sext: The fantastic Sam Sifton makes us dream about lunch at the Breslin Bar. Can it possibly be as good as his writing about it? (NYT)
It tastes like a date you don’t want to end.
And it won’t, as it happens. The Breslin is the sort of restaurant you end up thinking about a lot, not always pleasantly, staring up at the ceiling at 3 in the morning in cold sweat and mild panic. Yes, the food is good. But it is monochromatically good: it is 10 colors of fat. Excess can become wretched, and fast. It’s cool to hook up with the Breslin, especially if you’re lucky enough to sit in one of the semiprivate nooks near the open kitchen. But we should see other people. It would be death to be a regular there.
(Er, isn't Mr Sifton a little old to be talking about hook-ups?)
¶ Nones: That entrepreneurial opera, Google in China, has come to the end of the first act. Hats off to Miguel Helft, at the Times, for putting it nicely and simply:
Google’s decision amounts to an implicit admission that its gamble that it could help open China has failed.
Only those who are ignorant of Chinese history can imagine that any outsider is going to "help" in any significant way. They'll be imitated and driven out, just as Google has been.
¶ Vespers: At Survival of the Book, Brian notes the passing of B Dalton — ubiquitous, but not very good.
I'm not surprised to learn that B. Dalton was a mere effort to take advantage of the growing number of Baby Boomers with disposable income who liked to read in the 1970s. The place always struck me as a bastion of self-help and financial books. Say what you want about B&N, as Ted Striphas explains in his book (The Late Age of Print), it started out as a way to take advantage of the college book market, and in some ways it retains that feel.
¶ Compline: We're of one mind with Jeffrey Pfeffer on the topic of Tiger Woods's future:
Third and most importantly, people ally with those they see as winning-a phenomenon sometimes called “basking in reflected glory.” Our own self-esteem is higher if we are connected with and root for success. In the end, what matters is performance. With enough success, all is forgiven. Maybe it shouldn’t be, but that’s the way the world works. As William Rhoden wrote in a recent New York Times piece, even though basketball coaches Bob Knight and John Calipari broke rules and behaved inappropriately, both found high-paying jobs because they could produce winning teams. Today, few people bother about the fact that people ranging from Jack Welch to Rudy Giuliani to politicians too numerous to name were unfaithful to their spouses. What matters is that you convey that you aren’t embarrassed and go about your life.
So don’t cry for Tiger Woods. If he has enough sense to get back on the golf course and wins some tournaments, all the current ruckus will soon fade into the background. And, you, too, can survive career setbacks if you demonstrate resilience and continue doing what made you successful in the first place.
We also agree that Mr Woods doesn't owe anyone any explanations. We feel quite fervent about that, in fact: we'd rather not know what goes on his, or anyone else's, bedroom. (The Corner Office)
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