THE RECKONING: As Credit Crisis Spiraled, Alarm Led to Action

Background:The NY Times reports on the what triggered Paulson and Bernacke to seek an immediate 700 billion fund to prevent the American markets from collapsing. Read full story on NYTimes.com.

Risk will always equal potential reward

Greed, as it periodically does when traders and bankers forget the lessons of the past, clouded judgments. Some very smart people talked themselves into believing in the repeal of one of the fundamental laws of economics: risk will always equal potential reward. The idea that risk can be eliminated and high yields guaranteed is as idiotic as the idea that gravity can be suspended. Remember Long-Term Capital Management? Ten years ago it figured out how to eliminate risk using highly sophisticated computer programs and rolled up annual returns averaging 40 percent — until it collapsed in a heap.

Read more by John Steele Gordon on the Financial Mess: Greed, Stupidity, Delusion — and Some More Greed here.

The F.A.Q.’s of Lehman and A.I.G.

Doug Diamond and Anil Kashyap of the University of Chicago explain the recent financial crisis.

For most of the last 20 years we have been studying banks, monetary policy, and financial crises. So for us the events of the last year have been especially fascinating.The last 10 days have been the most remarkable period of government intervention into the financial system since the Great Depression. In talking with reporters and our noneconomist friends, we have been besieged with questions about several aspects of these events. Here are a few of the most frequently asked questions with our best answers.
Read more on NYTimes.com

Management Wisdom Courtesy of Jeff Pfefer

Jeff Pfeffer has spent the past twenty years figuring out what management ideas have some systematic data behind them and what ideas are make for a good story but are simply wrong. Guy Kawasaki (who wrote a fantastic little book on entreprepreurship, The Art of the Start, which I am using in one of my classes) has sat down with Pfeffer and asked him questions on his book What were they thinking?. Read the interview. 

What Don Quixote Can Teach Managers and Entrepreneurs

Miguel de Cervantes. 2003. Don Quixote. HarperCollins Publishers, New York. Translated by Edith Grossman. 

When I first encountered Don Quixote, I thought that a manager or entrepreneur could not possibly learn anything from this lunatic Spaniard. But on reflection I realized that Don Quixote provides some valuable insights into leadership and the challenge of dealing emotionally with the uncertainties inherent in any new venture. Let me briefly summarize the book:

Alonso Quixano, an unmarried retired country gentleman, has become addicted to reading fictional accounts of chivalrous knights who allegedly secured peace, justice, and prosperity for medieval society and were rewarded with great social prestige and extraordinarily beautiful maidens. Not realizing these knight tales are fictional, he commits himself to fight the evils in his native land by becoming a knight-errant, renaming himself Don Quixote. The book documents his adventures that invariably lead to failure and ridicule. Except for his neighbor Sancho Panza, who becomes Don Quixote’s squire, everybody realizes that Don Quixote is mad.  His imagination transforms the real world into the fantasyland of a medieval knight:  His castle is a commonplace inn, his ladylove—a peasant woman once met many years ago. The invading armies are flocks of sheep. The giants he attacks are just windmills.

There are two main lessons in the book: one for leaders and one for entrepreneurs.

A great vision is not sufficient to be successful. Without a good grasp of reality, you cannot make vision come true.  But when you are an ultra-realist as Sancho is, you cannot inspire anyone to follow you.  Don Quixote is able to lead and later keep Sancho from defecting in the wake of constant setbacks precisely because Don Quixote has no doubt that his vision is right and that they will succeed in the end. Sancho cannot take over this leadership role from Don Quixote because he lacks the ability to imagine a different future.  Therefore, to become effective leaders we also need to cultivate the imagination. When I help organizations develop their leadership, I will put more emphasis on the need to recruit skills to imagine a new future as well as skills to develop and execute the current strategy. Those skills don’t need to coincide in the same person.

The second key insight from the book for me is that we can deal much better with failure when we take on a job because we truly want to spend our lives in this line of work. Failure will almost certainly occur in some form for entrepreneurs, and in this book, Don Quixote repeatedly fails as a knight-errant.  Someone with little commitment to their work would perceive these setbacks as a reason to abandon the quest, but Don Quixote simply sees them as the cost of becoming who he wants to be.  As entrepreneurs, we had better not start a new business just for the money! When I recruit people in my organization for important jobs, I need to make sure that they are not doing it just to increase their paychecks.

Taming Your Inner Homer Simpson

My Kellogg students will remember that I asked them to rate their intelligence vis-a-vis the average member of the class. I routinely had 75 percent of all student who rate themselves above average. That is 25% too many. A colleague of mine warned me that 90% academics feel undervalued by their institution. But until now I read Dahlia Lithwick review of Richard Thaler’s and new book Nudge: Improving Decisions About Health, Wealth, and Happiness I did not know that 94 percent of professors at large universities to believe themselves better than the “average professor.” Read Lithwick excellent review of the book.

The Latest Reasoning about our Irrational Ways

Elizabeth Kolbert reviews in the New Yorker the latest on findings on how people behave in irrational ways when making economic decisions.  Read her Reviews of two new books.
“Predictably Irrational: The Hidden Forces That Shape Our Decisions” (Harper; $25.95); by Ariely, Dan;
“Nudge: Improving Decisions About Health, Wealth, and Happiness” (Yale; $25); by Thaler, Richard H.

Irrational fear: No good at risk

The Economists reviews of “Risk: The Science and Politics of Fear” by Dan Gardner
THE official death toll from the September 11th terrorist attacks in 2001 was 2,974. But in 2002 America’s death toll on the roads grew by more than 1,500—casualties of the terrorism-inspired exodus from safe aeroplanes to dangerous motor cars. A swan washes up on a British shore, dead from bird flu, and the press panics, while the 3,000 people who die every year on the country’s roads (13 times the number of people who have ever died from bird flu) go largely unremarked. Human beings are notoriously bad at dealing with risk. Two new books explore why, and investigate the effects that misunderstanding risks can have on public policy. The first, an excellent work by a Canadian writer, Dan Gardner, is a broad meditation on the nature of risk, beginning with a psychological explanation for why people find it so difficult to cope. Mr Gardner analyses everything from the media’s predilection for irrational scare stories to the cynical use of fear by politicians pushing a particular agenda.

His take on terrorism in the book’s penultimate chapter is refreshing. He punctures ludicrous claims that “this conflict is a fight to save the civilised world” (George Bush) or that terrorism’s threat is “existential” (Tony Blair), and expertly deflates the more self-serving statements made by the terrorism industry that has mushroomed since the September 11th attacks.

Mr Gardner never falls into the trap of becoming frustrated and embittered by the waste and needless worry that he is documenting. A personal anecdote about an unwise foray into a Nigerian slum in search of a stolen wallet disposes of the idea that the author is immune to the foibles he describes. What could easily have been a catalogue of misgovernance and stupidity instead becomes a cheery corrective to modern paranoia.

The second book, by Simon Briscoe, a journalist on the Financial Times, and Hugh Aldersey-Williams, a writer, aims to be more focused. It forsakes a general treatment of risk for a rigorous analysis of several dozen of the most popular media scare stories, ranging from family breakdown and over-inflated housing markets to climate change, genetically modified foods and unsafe vaccines.

The book, however, feels rushed, which is a shame because Mr Briscoe is something of a statistician. Many chapters come to no definite conclusion on the magnitude of the risk they analyse, instead simply presenting a mass of evidence and leaving it for the reader to decide. A gimmicky scoring system gives each story marks out of five in three separate categories of “panic”, “risk” and “personal empowerment”, but nowhere is it explained exactly what the scores mean. As a guide to which risks to fear and which to ignore, it is not much use.

The chief paradox in both books is that anybody alive today faces far fewer risks than at any time in human history. Diseases that killed millions are found only in medical textbooks in large swathes of the world; life expectancy has risen hugely over the past two centuries; and, despite misty nostalgia for better times, most societies are safer today than even 50 years ago. Yet fear and panic have not disappeared—instead of worrying about polio, famine or war, people fret about wrinkles, paedophiles and virtually undetectable levels of industrial chemicals in food. Both books try to correct this irrational view of the world, reassuring readers that most of the hobgoblins by which they are menaced are unnecessarily frightening.

Risk: The Science and Politics of Fear.
By Dan Gardner.
Virgin; 368 pages; £17.99

Economist.com

Introducing the Meeting Meter™

Are you participating in too many meetings? Are these meetings too long? Time is money and group time costs much more money than the time of a single person. With the Meeting Meter™ you can develop an agenda and calculate the true cost of meetings while they take place. The Meeting Meter™ is a simple tool for creating more effective meetings.

More Information

You can download the Meeting Meter™ for free.

What CEOs are Reading

The common perception is that CEOs are reading the latest popular management books to help them with their difficult job. An article in the New York Times suggests otherwise. I am not sure if the CEOs that Harriet Rubin portrays in here article are representative of all CEOs and I think the title of the article “C.E.O. Libraries Reveal Keys to Success” is an overstatement, but any manager should read what she has to say. 

Harriet Rubin: Michael Moritz, the venture capitalist who built a personal $1.5 billion fortune discovering the likes of Google, YouTube, Yahoo and PayPal, and taking them public, may seem preternaturally in tune with new media. But it is the imprint of old media — books by the thousands sprawling through his Bay Area house — that occupies his mind. “My wife calls me the Imelda Marcos of books,” Mr. Moritz said in an interview. “As soon as a book enters our home it is guaranteed a permanent place in our lives. Because I have never been able to part with even one, they have gradually accumulated like sediment.” Serious leaders who are serious readers build personal libraries dedicated to how to think, not how to compete. Ken Lopez, a bookseller in Hadley, Mass., says it is impossible to put together a serious library on almost any subject for less than several hundred thousand dollars. Perhaps that is why — more than their sex lives or bank accounts — chief executives keep their libraries private.

The full article is available at:

http://www.nytimes.com/2007/07/21/business/21libraries.html?em&ex=1185163200&en=a2705daffa9a1d95&ei=5087%0A