Manias, Panics, and Crashes: a history of financial crises – book review

I originally wrote this review in 2004. Seems like a good moment to pass it along again.

Manias, Panics, and Crashes: a history of financial crises, fourth edition by Charles P. Kindleberger (New York: Wiley 2000)

A recent Wall St Journal article described this book as a “must read” classic for anyone involved in financial markets. I have been involved directly in financial markets in two ways recently. First, I spent a year chasing around chasing angel investors and venture capitalists during the DotCom boom to fund Valuedge (the software company I co-founded in 1999 and left in 2004, though I still hold a large ownership interest).  Second, I receive quarterly statements for my 401K retirement investments. Primarily driven by my experiences with Valuedge and the phenomenal boom time of the DotCom era, I read through Kindleberger’s durable book (originally published in 1978 and never out of print since).

Although I have come to refer to the year 2000 as the Tulip Phase of Valuedge after the well-known Dutch tulipmania in the 1630s. Little did I know that financial bubbles, booms, and the inevitable crashes and depressions are a very common feature of capitalism. The first couple of chapters describe or mention dozens of bubbles and booms located around an amazing array of geopolitical centers. These have been focused on anything and everything: the well-known tulips in the 1630s; railroads; copper; English country houses; agricultural land; private companies going public (Britain 1888, US 1928 and IPOs 1998-2000); and many others.

The first lesson, then, is that booms and speculative bubbles are a commonplace feature of the capitalist world.

So, why do these bubbles and speculative manias occur? The answers are complex, involving human psychology, malfeasance, regulation (or lack), banks, and government. Read Kindleberger .

An important explicit message from Kindleberger is that economists’ models of “homo economicus” and “the market” are far from a useful mirror of what actually goes on. People are not even vaguely rational in their economic behavior and markets never constructively approach the model of a market found in Econ 101 or for that matter anywhere else that I have ever heard of.

This is not just an academic concern. In recent years our politics has displayed a dominant rhetoric that calls for the application of “market solutions” to almost every area of our lives, particularly those where traditionally we expect government to provide services, regulations, etc. Instead, we now reflexively think that “market solutions” are inherently more efficient and effective than government services. Liberals, trapped in their abandonment of even the moderate criticism of capitalism that the Catholic Church, for instance, engages, have provided no useful critique of “market solutions” as a universal policy approach.

At a practical level, this public policy fixation on “market solutions” combined with a generalized attack on all government spending, is driving a generalized impoverishment of the public infrastructure of our civil society and not coincidentally an enrichment of the wealthy and particularly the super-rich.

I recommend this book to anyone with an interest in the day-to-day political and economic life of the world.

Successful Intelligence – R. J. Sternberg – book review

Successful Intelligence: how practical and creative intelligence determine success in life by Robert J. Sternberg (NY: Penguin Putnam, 1997)

(download a PDF of this book review whitepaper)

Throughout my life I have been interested in intelligence, mine and that of others. From early years at Taft School where I was regularly described as a “gross underachiever” to later in my work life when I began to understand that “smarts” came in all shapes and sizes, intelligence has been an interesting issue. Who has it and how can you figure out what kind each person has?

Successful Intelligence (SI) presents an interesting addition to my own practical knowledge of intelligence and a further jumping-off point from Howard Gardner’s efforts in Frames of Mind: the theory of multiple intelligences.

The preface gives away the whole story. Let me quote a bit:

“Successful intelligence is the kind of intelligence used to achieve important goals. People who succeed, whether by their own standards or by other people’s, are those who have managed to acquire, develop, and apply a full range of intellectual skills, rather than merely relying on the inert intelligence that schools so value. These individuals may or may not succeed on conventional test, but they have something in common that is much more important than high test scores. They know their strengths; they know their weaknesses. They capitalize on their strengths; they compensate for or correct their weaknesses. That’s it.” (bold in text) (p. 12)

So, this is quite an invigorating start! Intelligence is something we use in day-to-day life.

The first half of SI takes up a review and critique of traditional efforts to define and measure human intelligence. For those of us who followed the uproar over The Bell Curve (Herrnstein and Murray, 1994) or have otherwise been exposed to critiques of standard approaches to intelligence, skip quickly to Part III “Successful Intelligence Is What Counts”.

SI posits three key elements of successful intelligence:

  • analytical
  • creative, and
  • practical intelligence

Analytical intelligence focuses on problem solving. SI discusses this under the following headings:

  • Problem recognition
  • Problem definition
  • Formulating a strategy for problem solving
  • Representing information
  • Allocating resources
  • Monitoring and evaluation
  • Well-structured and ill-structured problems
  • means-ends analysis
  • working forward
  • working backward
  • generating and testing
  • Mental sets and fixation
  • Decision Making
  • economic models
  • utility models
  • game theory
  • satisficing

Creative intelligence focuses on finding good problems. Here SI struggles to develop a coherent and satisfying definition for creative intelligence by posing an “investment theory of creativity”. Unfortunately, this discussion struggles with a metaphor standing in as a definition: “Creatively intelligent people are like investors. They buy low and sell high.” This line of argument leads to the following notion of what creativity is about:

“In the investment view of creativity, then, the creative person buys low – comes up with an idea that is likely to be rejected and derided. That person then attempts to convince other people of the value of the idea and thus increase the perceived value of the investment. If he has finally convinced others of its value, the creative person sells high – leaves the idea to others and moves on to the next unpopular idea.” (p.190-191)

From my perspective and experiences in the business world, this gives much too much importance to the Don Quixote aspects of the process. What exactly is the “investment” here? Is it really true that creative people set out to be “rejected”? (Perhaps, some reading in the literature of innovation in industry might be helpful here. Although these are looking at the problem of creativity from a more macro level, Eric von Hippel’s Sources of Innovation and Everret Roger’s Diffusion of Innovations might shed some light on creativity.)

Leaving aside my quibbles about the difficulties SI has with defining creative intelligence, this chapter closes with a set of observations about how to develop creative intelligence. The section headings provide a good slice though these (paraphrased here):

Successfully intelligent people:

  • actively seek out, and later become, role models
  • question assumptions and encourage others to do so
  • allow themselves and others to make mistakes
  • take sensible risks and encourage others to do the same
  • seek out for themselves and others tasks that allow for creativity
  • actively define and redefine problems, and help others to do so.
  • seek rewards for, and themselves reward, creativity
  • allow themselves and others the time to think creatively
  • tolerate ambiguity and encourage tolerance of ambiguity in others
  • understand the obstacles creative people must face and overcome
  • are willing to grow
  • recognize the importance of the person-environment fit

The discussion of practical intelligence is altogether too brief because too much of this chapter is taken up with further efforts to debunk various standing notions of the connection between standard views of intelligence and real world success.

Practical problems are characterized by, among other things, an apparent absence of the exact information necessary for solution and also by their relevance to everyday experience.” This leads to a discussion of the roll of “tacit” knowledge. BUT, SI’s use of the word “tacit” bears little resemblance to either my own usage or a dictionary definition (in this case my usage and the dictionary are in good synch).

“What, exactly, is tacit knowledge? It has three characteristic features. First, tacit knowledge is about knowing how – about doing. It is procedural in nature. Second, it is relevant to the attainment of goals people value, not the kind of academic drivel without practical value that teachers sometimes try to stuff in students’ heads. And, third, it is typically acquired with little help from others.” (p. 236)

Now, if we strip out SI’s confusing use of the word “tacit” (perhaps you may want to substitute “practical” or “worldly”), we now have a statement about that body of knowledge that one gains through the actions, association,and activities of day-to-day life – the world of knowledge accumulated through work, hobbies, social interactions and play. Go back and reread the paragraph quoted above. Excise “tacit” and substitute “worldly”. Now we can see what SI is trying to say. I have more than a small quibble with SI’s third feature. In my experience, most of my “worldly” knowledge was directly or indirectly gathered from the people around me. This usually occurred in an expressly “helping” mode.

Although SI is hardly a comprehensive or mature statement of exactly what successful intelligence is or how we can encourage its development, it at least moves the discussion of intelligence onto a plane where we can think of intelligence as a poly-dimensional entity. This gets us beyond the intellectually barren territory of IQ and other such nonsense. Further, SI helps to move us towards notions that can support practical thinking and policy making to support increasing the body of successful intelligence in all human beings.

Viewing this from my personal perspective as a business manager, I could not help but note the immense surface overlap between SI’s description of successful intelligence and many of the underlying principles ascribed to high-performance organizations. Here, for example, are statements (bolded in the SI text) from the discussion of Problem Solving:

“Successfully intelligent people don’t wait for problems to hit them over the head. They recognize their existence before they get out of hand and begin the process of solving them.“(p. 158)

“Successfully intelligent people define problems correctly and thereby solve those problems that really confront them, rather than extraneous ones. In this way, the same problems don’t keep coming back into their lives. They also make the effort to decide which problems are worth solving, in the first place, and which aren’t.” (p. 160-161)

“Successfully intelligent people carefully formulate strategies for problem solving. In particular, they focus on long-range planning rather than rushing in and then later having to rethink their strategies.” (p. 163)

“Successfully intelligent people represent information about a problem as accurately as possible, with a focus on how they can use that information effectively.” (p.165)

“Successfully intelligent people think carefully about allocating resources, for both the short term and the long term. They consider the risk-reward ratios and then choose allocations that they believe will maximize their return.” (p. 169)

“Successfully intelligent people do not always make the correct decisions, but they monitor and evaluate their decisions and then correct their errors as they discover them.” (p. 170-171)

Now, if you substitute the words “successful companies” or “successful organizations” for “successfully intelligent people, you will get a set of useful statements about high-performance organizations. Hmmmm…

(download a PDF of this book review whitepaper)

Book Review: Outside Innovation by Patricia Seybold

May 5th, 2008

The transformation of “customer driven”, “customer-centered”, “customer-defined” from just empty buzzwords in the latest management books to central values, key strategic skills is continuing.

Patricia Seybold’s 2006 book Outside Innovation: How Your Customers Will Co-Design Your Company’s Future (Harper Collins, New York 2006) provides a broad review of many techniques used by a wide range of companies to incorporate customers and customer ideas into product design. The book is sufficiently current to include examples for web-centered customer environments. Ms. Seybold has gathered a large number of examples in varying market segments. This makes the book a worthwhile read just for these through examples. Unfortunately, the formalization of the ideas remains low. This makes this book look and feel like a collection of anecdotes. The book closes with “Five Steps to Outside Innovation”, “Five Core Competencies to Master”, and “Five Pitfalls to Avoid”. Unfortunately Ms. Seybold never really develops her copywrited, “Customer Scenario” to organize the methods and approaches to get beyond the notion that customer inputs to innovation are a series of “I want….” statements.

Getting the Right Things Done – the manager’s focus

Peter Drucker wrote a charming little book in 1967, The Effective Executive: The Definitive Guide to Getting Things Done. I have now read it numerous times and each revisit rewards me.

Just this morning I was speaking with a manager about efforts to refocus a business on new services and the difficulty of dragging along the old, tried-and-true services that still have a customer base and generate revenues. Drucker had quite a bit to say about this problem of the past. In the chapter titled, First Things First, he wrote, “Systematic sloughing off of the old is the one and only way to force the new.” And, “Yesterday’s successes ….. always linger on long beyond the productive life.”

Drucker wrote in the same chapter, “It is more productive to convert an opportunity into results than to solve the problem — which only restores the equilibrium of yesterday.” This seems like quite a provocation to most managers. After all, managers and management are all about problem solving. Or so we seem all to think. But, from Drucker’s perspective, problems are always about the past. This is very clear from his notion that solving problems only reestablishes the status of the past, some sort of guarantee that we can reproduce the results of the past. Whereas, opportunities are about the future.  The future is where customers in the real world are, not in the past. Drucker sees the world as continually evolving and requiring new solutions to new problems, always defined by customers.

So, then, back to where I started. One of the hardest things for any manager to do is to look away from the products and services of the past. These may very well still be producing revenues and profits, though analysis and planning are telling them that future customers and revenues must come from elsewhere.

Customer-Centered Business – Peter Drucker and Web Marketing

Drucker

Recently I have been returning to Peter Drucker‘s work, specifically The Practice of Management (originally published in 1954, the current edition is HarperBusiness, 1993). On page 50, Drucker says the following:

“What is our business is not determined by the producer but by the consumer. It is not defined by the company’s name, statutes, or articles of incorporation but by the want the consumer satisfies when he buys a product or service. The question can therefore be answered only by looking at the business from the outside, from the point of view of the customer and the market what the consumer sees, thinks, believes and wants at any given time must be accepted by management is an objective fact deserving to be taken as seriously as the reports of a salesman, the tests of the engineer or the figures of the accountant — something few managements find it easy to do. In management must make a conscious effort to get honest answers from the consumer himself rather than attempt to read his mind.”

Customer -Centered Business

So here we are reading something written in 1954 that is still very difficult to do. Almost everyone in business speaks the words, the rhetoric,  of the customer centric business. But it still seems incredibly difficult to overcome the centripetal forces of day-to-day business and really engage customers directly and frankly.

Web-Marketing

A recent social web marketing seminar (Social Media Club Boston) reminded me again of this very same problem. One of the presenter’s, Greg Jarboe, SEO-PR, told a wonderful story of  how Southwest Airlines learned that though they might forbid the use of the word “cheap” internally, customers on the web are searching for “cheap airfares” not “inexpensive” or “frugal” or “cost-effective”. Even on the web, or perhaps even more so, the customer defines the terms and values of the game. All the more reason to put effort into finding out what they customer really wants.