Here’s What Makes the Difference
GUEST POST from Greg Satell
The conservative columnist John Podhoretz recently took to the New York Post to denounce the plotline of Disney’s new miniseries The Falcon and the Winter Soldier. In particular, he took umbrage with a subplot that invoked the Tuskegee experiments and other historical warts in a manner that he termed “didactic anti-Americanism.”
His point struck a chord with me because, in my many years living overseas, I always found that people in other countries were more than aware of America’s failures such as slavery, Jim Crow, foreign policy misadventures and so on. What they admire is our ability to take a hard look at ourselves and change course.
It also reminded me of something I’ve noticed in my work helping organizations transform themselves. Some are willing to take a hard look at themselves and make tough changes, while others are addicted to happy talk and try to wish problems away. Make no mistake. You can’t tackle the future without looking with clear eyes at how the present came into being.
A Pregnant Postcard
The genesis of shareholder capitalism and our modern outlook on how things are supposed to work can, in some sense, be traced back to Paris in 1900. It was there and then that an obscure graduate student named Louis Bachelier presented his thesis on speculation to a panel of judges including the great Henri Poincaré. It described the fluctuation of market prices as a random walk, a revolutionary, albeit unappreciated, idea at the time.
Unfortunately for Bachelier, his paper went mostly unnoticed and he vanished into obscurity. Then, in 1954, he was rediscovered by a statistician named Jimmie Savage, who sent a postcard to his friend, the eminent economist Paul Samuelson, asking “ever hear of this guy?” Samuelson hadn’t, but was intrigued.
In particular, Bachelier’s assertion that “the mathematical expectation of the speculator is zero,” was intriguing because it implied that market prices were essentially governed by bell curves that are, in many respects, predictable. If it were true, then markets could be tamed through statistical modeling and the economy could be managed much more effectively.
Samuelson, who was pioneering the field of mathematical finance at the time, thought the paper was brilliant and began to actively promote it. Later, Eugene Fama would build Bachelier’s initial work into a full-blown Efficient Market Hypothesis. It would unleash a flurry of new research into financial modeling and more than a few Nobel Prizes.
A Refusal to Reckon
By the 1960s, the revolution in mathematical finance began to gain steam. Much like had happened in physics earlier in the century, a constellation of new discoveries such as efficient portfolios, the capital asset pricing model (CAPM) and, later, the Black-Scholes model for options pricing created a “standard model” for thinking about economics and finance.
As the things gathered steam, Samuelson’s colleague at MIT, Paul Cootner, compiled the most promising papers in a 500-page tome, The Random Character of Stock Market Prices, which became an instant classic. The book would become a basic reference for the new industries of financial engineering and risk management that were just beginning to emerge at the time.
However, early signs of trouble were being ignored. Included in Cootner’s book was a paper by Benoit Mandelbrot that warned that there was something seriously wrong afoot. He showed, with very clear reasoning and analysis, that actual market data displayed far more volatility than was being predicted. In essence, he was pointing out that Samuelson and his friends were vastly underestimating risk in the financial system.
In a response, Cootner wrote that Mandelbrot forced economists “to face up in a substantive way to those uncomfortable empirical observations that there is little doubt most of us have had to sweep under the carpet until now.” He then added, “but surely before consigning centuries of work to the ash pile, we should like to have some assurance that all of our work is truly useless.”
Think about that for a second. Another term for “empirical observations” is “facts in evidence,” and Cootner was admitting that these were being ignored! The train was leaving the station and everybody had to either get on or get left behind.
The Road to Shareholder Value
As financial engineering transformed Wall Street from a clubby, quiet industry to one in which dashing swashbucklers in power ties and red suspenders became “barbarians at the gate,” pressure began to build on managers. The new risk management products lowered the perceived cost of money and ushered in a new era of leveraged buyouts.
A new breed of “corporate raiders” could now get control of companies with very little capital and demand that performance—and “performance” meant stock performance— improve. They believed that society’s interest was best determined by market forces and unabashedly pursued investment returns above all else. As Wall Street anti-hero Gordon Gekko put it, the overall sentiment was that “greed is good.”
Managers were put on notice and a flood of new theories from business school professors and management consultants poured in. Harvard’s Michael Porter explained how actively managing value chains could lead to sustainable competitive advantage. New quantitative methods, such as six sigma, promised to transform management into, essentially, an engineering problem.
Today, the results are in and they are abysmal. In 2008 a systemic underestimation of risk—of exactly the type Mandelbrot warned us of—caused a financial meltdown. We are now in the midst of a second productivity paradox in which technological advance does little to improve our well-being. Income inequality, racial strife and mental health are at historic levels.
Since 1970, we have undergone three revolutions—financial, managerial and digital—and we are somehow worse off. It’s time to admit that we had the wrong theory of the case and chart a new course. Anything else is living in denial.
A Different Future Demands You Reject the Past
Underlying Mr. Podhoretz’s column is a sense of aggrievement that practically drips from each sentence. It’s hard to see the system in which you have succeeded as anything other than legitimate without tarnishing your own achievements. While he is clearly annoyed by what he sees as “didactic,” he seems unwilling to entertain the possibility that a large portion of the country desperately wants to come to terms with our history.
We often see the same thing with senior executives in our transformation work. Yet to chart a new path we must reject the past. As Thomas Kuhn pointed out in his classic, The Structure of Scientific Revolutions, every model is flawed. Some can be useful for decades or even centuries, but eventually circumstances change and they become untenable. After a period of tumult, they collapse and a new paradigm emerges.
What Podhoretz misses about both The Falcon and The Winter Soldier is that they were able to make common cause around the values that they shared, not the history that divided them, and partner on a shared mission. That’s what separates those who are able to transform themselves and those who are not. You need to take a hard look and achieve a level of honesty and integrity with yourself before you can inspire trust in others.
In order to improve we first must look with clear eyes on what needs to be corrected in the first place. To paraphrase President Kennedy, we don’t do these things because they are easy, but because they are worthwhile.
— Article courtesy of the Digital Tonto blog
— Image credit: Pixabay
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A lot of good in-site and being part of actual change starting in HS, but in college started changing not what people do but how they do it. By seeing what the formally trained first words. That not the way it works or you need money or be in a position of authority to introduce change. I never needed neither, all I needed was to see a reason to help make a difference by applying innovation and collaboration. To solve a problem that the experts had already failed to do with money. Two realities of being part of change. People do not like change and something n the market has to force them to embrace sustainable changes and then someone in a position of authority to help open the closed door to change. Simplified it all about problem solving. In most case created by 20th century horse and buggy formal training. That the only thing of real value is money and being told the only one of value is the person with a piece of paper. That says they have value and once something has no value it tossed in the pile of things with no value we’re human or resources for the community or the government to deal with. Opening a door to change. As our reality is unsustainable and money is now only a small part of the sustainable solution need to address one reality. We have no border, just problems starting in places with the old seeing change as something to stop at any cost. Comes down to what I heard all my career. I understand we need change just has long has what you change has no impact n what I do or how I do it and the short term benefits to me and my support system. Only an unsustainable future in changing world with no borders and technology in the hands of the young now in control of the future ignoring anyone not supporting sustainable change. Going to be an interesting decade or so, as the “Tide of Change “ started just after the the 1989 economic down turn. By the 2008 the various tools for sustainable change was how in the hands of the innovators and supported by the young. like throughout history. COVID-19 open the door to 21st century sustainable change. Will require a lot of innovation and even mor.e collaboration to undo the damage the Gold Rush driven GDP has done after 2008. As the old will need to be removed or retrained to not change what they do but how to collaborate to create a sustainable Global community. As we have no borders and an unsustainable supply train.