The Fallacy of Equivocation at the Economist

In a remarkably shoddy example of anti-market propaganda emanating from the Nottingham Business School, the Economist runs a screed that starts out with the debatable but reasonable premise that business leaders exaggerate their omniscience. It somehow ends up with the unsupported conclusion that business schools should abandon economics, finance, and the pursuit of profit for the cant trio of “sustainability,” “social responsibility,” and “leadership for all not for the few.”

The crude equivocating shifts from intellectual humility to moral humility to altruism would qualify for an F in any class on composition, much less philosophy. The vague assertions about “business excess” (entirely unsupported or even defined), the implicit attribution of these excesses to the teachings of business schools (ditto), and the wild leap at the end (replacing business school education with an agora-like setting in which sophists mingle with scientists and philosophers with philistines to figure out what are “social needs”), all conduce to a massive loss of reader brain cells per sentence. This article might be useful as a sort of mine detector–anyone who finds it congenial is best separated from responsibility for educating or commenting on business or economic issues.

 


When Industry Analysis Goes Flat

Barry Lynn, apparently some sort of John Kenneth Galbraith wannabe, has an amusingly cockeyed post over at the Harvard Business Review blog. He seems to think that state regulations protecting local beer distributors from vertically integrated competitors are the font of virtue, preserving needed diversity in the beer market by allowing craft and micro-brewers to get their product delivered. But if the big brewers were legally able (and motivated) to foreclose distribution of the small brands, they would be legally able to do it without vertically integrating into distribution (by requiring exclusivity).

A simpler analysis: When there were many  competing major brewers, independent multi-brewer distributors made economic sense, since they eliminated needless duplication of sales and delivery of all those brands to retail establishments. With the consolidation of the beer industry into two giant companies that own all the big brands (and a shift from on-premises to at-home consumption), a single-brewer distribution firm can now internalize almost all those economies. Then the beer industry starts to look a bit more like the soft-drink industry, where two major firms own and develop all the major brands and we don’t blink an eye at their bottler/distributors having exclusive relationships with the upstream brand owners or even being vertically integrated with them. If your local Costco or supermarket won’t carry a micro-brew or an off-brand soda, it’s unlikely to be due to market power on the part of the distributors.

UPDATE: It seems that AB InBev, owner of Budweiser and many other beer brands, is indeed shifting to more of a product innovation strategy and running into distribution problems with these new products:

“That’s not to say that AB InBev has perfected the process. Profit this year was hurt by higher distribution and administration costs in the U.S. as the brewer struggled to keep up with demand for Platinum and Lime-A-Rita, which required extensive — and expensive — countrywide distribution.”

So maybe there are strategic reasons why AB InBev would want more control over its distribution pipeline.


Nassim Taleb, the Angry Version of Malcolm Gladwell

I’ve now read most of Taleb’s new book Antifragile: Things That Gain from Disorder.  Not sure why I read Taleb.  I’m ashamed to admit it.

His stuff is certainly entertaining. Really entertaining.  But it’s just narcissistic drivel (I mean, the heights of arrogance in this book are something else, somebody should put together a web compilation of the best Taleb drivel) — basically advice on how to be more like Taleb.  But, more importantly, it’s hard to really evaluate everything that he covers.

The Antifragile book is about everything – thoughts on diet and exercise (go paleo), ideas on personal interactions (don’t go to lame parties with boring people), and of course lots of genius advice on the economy.  Everything is not-so-neatly packaged into his (anti-)fragile scheme/a.

The formula of his book seems simple enough: invent a name/concept (antifragile), package everything under that scheme, include lots of swearwords and epithets directed at “the other” (e.g., fragilista), sprinkle in some citations to science, mix in some chicken soup stories (you know, about the time when you stormed out of the conference because everyone was being so unreasonable) – and voila, you’ve got your book.

It’s sort of a twist on the Malcolm Gladwell genre.  Though, Taleb is perhaps an angry version of Gladwell.

I think there might be some interesting points in the book, perhaps, but I’ll try to post about those later.   Mostly I see lots and lots of re-packaging and popularizing (moral hazard, the principal-agent problem, learning from failure, self-organization and information aggregation, competition, unintended consequences, etc, etc).  Popularizing things of course has it’s place too.

Meanwhile, strategy scholars were also amongst the heap of academics ridiculed in the book.  Here’s Taleb on his MBA experience:

When I was in business school I rarely attended lectures in something called strategic planning, a required course, and when I showed my face in class, I did not listen for a nanosecond to what was said there; did not even buy the books.  There is something about the common sense of student culture; we knew that it was all babble.  I passed the required classes in management by confusing the professors, playing with complicated logic…

He does thankfully recognize that strategy scholars themselves have noted the planning problem in existing work (e.g., he cites Bill Starbuck’s work – but that argument goes back to Alchian, 1950 etc).

Taleb then goes on to say:

Almost everything theoretical in management, from Taylorism to all productivity stories, upon empirical testing, has been exposed as pseudoscience.

Cute.  I love any argument that in wholesale fashion dismisses a field like that.  Is there pseudoscience in management?  No question.  There is in any field.  And the field of management might even have a disproportionate share of pseudoscience in it.  But the whole book is characterized by those types of glib dismissals (very few are spared), which then makes it hard to evaluate anything novel that Taleb himself might have to say.


HP/Autonomy and Public Company Governance Perplexities

I’ve been listening to my good friend Todd Zenger for the last few years explaining that the strategic management field is predicated on the idea that corporate managers know more than the uninformed stock market and its lazy analysts. Dick Rumelt’s Good Strategy/Bad Strategy makes a similar point. The idea is that finding unique resource synergies is a good way to get competitive advantage but a bad way to please narrow-minded investors who hate unique strategies that are hard for them to evaluate. Raghurum Rajan’s recent presidential address to the American Finance Association makes a similar point, although with a much more positive spin on the role of equity markets in supporting the creation of entrepreneurial enterprises. With such an eminent set of eloquent and insightful advocates, it’s hard not to tentatively consider the perplexing idea that stock markets systematically undervalue powerful synergistic corporate strategies.

Then I wake up.

You probably followed the news about HP’s massive writeoff on its perplexing Autonomy acquisition of a year ago. The headline to that story was HP CEO Meg Whitman’s claim that Autonomy had cooked its books and fooled its auditors prior to HP’s purchase of the firm under previous, perplexingly hired, CEO Leo Apotheker. It isn’t clear that the extent of the alleged fraud can explain the gigantic size of the writedown by HP, but in any case outsiders like short-seller Jim Chanos, much of the British tech analyst community, and the very useful John Hempton, proprietor of the Bronte Capital blog, had long smelled a rat. They thought, even prior to the acquisition, and using only the company’s official accounting statements, that there was something fishy about Autonomy’s books. How could HP’s finance team and the outside auditors have failed to notice this at the due diligence stage? It’s perplexing.

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David Stern and the Aging Emperor-CEO Syndrome

NBA Commissioner David Stern recently fined the San Antonio Spurs $250,000 and severely chastised them for the decision by Gregg Popovich, their near-legendary coach, to rest his aging stars at home rather than fly them to Miami for a meaningless (but nationally televised) tilt with the defending-champion Miami Heat. Is Stern losing his grip? Does he need an intervention and/or a forced retirement as he reaches his managerial dotage? While I haven’t heard of Commissioner Queeg–whoops, Stern–clicking steel balls in his hand or searching for the keys to the strawberries, a Caine Mutiny scenario may be approaching if he continues to deteriorate. Other firms with long-term, successful “emperor” CEOs have found their later years to be problematic. See Eisner, Michael (Disney) or Olson, Kenneth (Digital Equipment Corporation) or maybe Cizik, Robert (Cooper Industries).

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Excessive government paperwork–meta edition

An earlier post described the sclerotic impact of excessive regulatory documentation requirements on real-estate development projects. it turns out that the private sector isn’t the only victim of this tendency:

I think we all know what the logical response to the GAO meta-meta-study is…

H/t Instapundit.


Jeremy Lin and Moneyball: The Problem of Identifying Talent

After watching Jeremy Lin (Knicks) score 38 points against the Lakers tonight, I’m now on the Lin bandwagon.  I don’t really even follow basketball that closely, but this seems like an intriguing story.

How on earth did someone like this go unnoticed?   Seriously.  He happened to get an opportunity to show his stuff as Carmelo Anthony and Amare Stoudemire are injured – and boy has he delivered.

Here’s a kid who didn’t get recruited for college ball, despite a tremendous record in high school.  He was a superstar at Harvard but went undrafted by the NBA after graduating from Harvard (in economics) in 2010.  He played a few games for Golden State and Houston, but was cut by both.  He has played D-league basketball this year, until a few weeks ago.  As of last week, he did not have a contract.

But come on: is basketball truly this inefficient at identifying and sorting talent?  The comparisons and transfer of ability across “levels” (high school-college-professional) of course is tricky, though you would think that with time there would be increased sophistication.

Now, four games of course doesn’t make anyone a star.  But even if Lin proves to “just” be a solid bencher, it seems that talent scouts clearly undervalued Lin (who lived in his brother’s apartment until recently).  How much latent talent is out there?  (I think that at the quarterback position in professional football – there are significant problems in identifying talent, but that’s another story.)

There are of course also some very interesting player-context/team-fit, interaction-type issues here, and I’m not sure that this really gets carefully factored beyond just individual contribution (thus not recognizing emergent positive, or negative, player*player effects).  It’ll be interesting to see what happens, for example, when Carmelo Anthony is added back into the mix.

Well, it’ll be interesting to see how all this plays out.  There is in fact a sabermetrics-type, stats-heavy, Moneyball-like thing in basketball as well – called ABPRmetrics.  I would be curious to know whether there are ways to statistically identify Lin-type undervaluation and potential, and whether phenoms like this lead to better metrics for identifying talent.

UPDATE: Here’s ONE analyst/statistician who saw Lin’s potential in 2010.


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