David Brooks had some interesting things to say this morning about the limitations of economic theory under current conditions. He begins with a great brief overview of classical models:
The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior.
Markets tend toward efficiency. People respond in pretty straightforward ways to incentives. The invisible hand forms a spontaneous, dynamic order. Economic behavior can be accurately predicted through elegant models.
I am not an economist. That has been clear since Econ 101 in 1969. But I’ve got to say that a big chunk of the classical model described so succinctly by Brooks struck me as far-fetched even in that classroom. Sure, the graphs and formulae were enticing, but when I was taught that economic actors (you and I and Secretary Paulson) were 100% rational, fully-informed, and independent it just struck me as silly.
I understand that models are designed to be abstracted versions of reality. As such, it’s okay if some of the assumptions they make are not entirely accurate. Economic theories are, as I understand it, designed to guide us in making policies that affect the economic system. They are not designed to predict what I will do, but what we all will do on average. Economics is, after all, a social science.
Still: completely rational fully informed decision-makers? I’ve always known that this does not describe me and I’ve been pretty sure it doesn’t describe you either.
As it turns out, what we’ve learned about the brain in the last twenty years demonstrates that it doesn’t describe anybody. And, for a bit more than twenty years, the small-but-growing school of behavioral economists is developing an economics based on how people really act, both individually and together.
Two results of this reformulation of economic theory are particularly interesting (by which I mean, of course, particularly interesting to me).
First, behavioral economics really is a social science. It recognizes that people are not independent actors. They place a very high value on their relationships with others. In fact, as Brooks says, “people seek relationships more than money. If behaving a certain way helps a stock trader or a regulator fit in with his crowd, he’s likely to keep doing it without too much rigorous self-examination.”
Secondly, behavioral economics is based on the assumption that most of us are very bad at making rational decisions most of the time.
That sounds more like me. I wish I made my choices just as the classical economists describe. I wish I was able to process all of the available and relevant information and arrive at a fully rational decision. But, alas, it’s just not me. I would love to make better decisions for myself and my business, but it sounds like my brain is conspiring against me. What can I do about this?
When I was in high school one of my chores was to pick up the turkey for Christmas and Thanksgiving. I would drive a few miles outside of town to the Wagner farm and pick up a nice turkey, never frozen, freshly butchered and cleaned for the oven.
These were delicious turkeys and the Wagners had a nice business. They had run a family farm for at least three generations, with lots of corn, some cattle, chickens and swine. The turkey business was added as a 4-H project by one of the kids and it took off nicely. By the time we became customers they had been in business for about three years and were selling nearly 800 turkeys and making over $1500 a year, which wasn’t bad at a time when average farm income in our area was under $10,000. [click to continue…]
I ran across this quote by Douglas Adams this morning:
Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.
It put me in mind of some learning research in Africa not long ago.
Researchers ran some intelligence tests on groups of apes and on groups of three- and four-year-old humans. They discovered that the apes performed at least as well as the kids on most of the tests, including tests of quantitative skills. However, there was one type of test where the kids did much better than the apes. [click to continue…]
Malcolm Gladwell’s new book Outliers hit my Kindle at about 2:00 this morning. It is an examination of what makes the very successful, well, very successful. And the conclusions strike right at the heart of one of favorite national myths: the belief that each and every one of us is uniquely and exclusively responsible for our own success.
For example, Gladwell discusses research showing that his birthday is the single thing most likely to determine whether a Canadian-born kid will make it to the elite Major Junior A hockey league (and from there to the NHL). [click to continue…]
I came across this quotation from Alfred North Whitehead in Keith McFarland’s book The Beakthrough Company.
“The art of progress is to preserve order amid change, and to preserve change amid order.”
The quotation came shortly after McFarland’s discussion of the importance of “insultants”–people who are brave enough to challenge the basics of their business. In that context, I took the inclusion of the Whitehead quote to suggest that CEOs ought to take advantage of periods of relative order and stability, when the business is running smoothly, to rethink the fundamental assumptions of their business model and strategy. That still makes since to me.
But this morning I was in a meeting with a group of CEOs and something happened that caused me to understand this concept in a fresh way. [click to continue…]
organizational learning and organizational innovation are always part of the unplanned, unintended, emergent side; they can’t be commanded, and no organizational structure–no matter how clever or well-designed–can make learning and innovation happen
I spent the last week sitting in meetings: valuable meetings, important meetings, but meetings. You know the kind: sitting down all day in a room with no windows listening to presentations.
I got home and came across the Eepybird video. It got me thinking. [click to continue…]
I write a lot about the power and importance of fresh ideas. I also write a fair amount about how to get fresh ideas and see things from new perspectives. But here’s a question: how do you know which ideas are really good? That’s another way of asking: how do I take new insights and decide what to do?
Most of us follow some rational decision-making process. At some point in this process we have a sense that we know what to do. Some people reach decisions very quickly (this is what Malcolm Gladwell’s hugely popular Blink is about); others are slower and more deliberate. But in the end most of us, at least those of us who often have to make important decisions, usually feel confident that we’re making the right choice for all the right reasons.
Robert Burton’s book On Being Certain summarizes recent findings in brain science indicating that this confidence is misplaced. In fact, Burton tells us that our feeling of certainty is completely irrational. [click to continue…]
I’ve mentioned this comment by Gary Hamel’s before: most executives in an industry or a company are “blind in the same way,” both to what is happening and to what they don’t see happening. In his new book Iconoclast, Gregory Berns presents the neuroscience that explains why this is true.
Experience modifies the connections between neurons so that they become more efficient at processing information. Neuroscientists have observed that while an entire network of neurons might process a stimulus initially, by about the sixth presentation, the heavy lifting is performed by only a subset of neurons. Because fewer neurons are being used, the network becomes more efficient in carrying out its function.
The brain is fundamentally a lazy piece of meat. It doesn’t want to waste energy. That’s why there is a striking lack of imagination in most people’s visualization of a beach sunset. It’s an iconic image, so your brain simply takes the path of least resistance and reactivates neurons that have been optimized to process this sort of scene.
Efficiency is great most of the time. That’s why Six Sigma works. But sometimes, when you’re looking for a change, a fresh idea, a new approach, efficiency makes you blind. When you rely on your experience too often, when you trust common sense, you’re building neural connections that are hard to circumvent. You become been blinded by your own knowledge. [click to continue…]
About a month ago I came across two interesting posts questioning the value of Best Practices. I work in an environment where there is a lot of talk about Best Practices and BKMs, so I was intrigued. Last night I came across another skeptic. That must mean it’s time to write about this to see what I think.
The first post was on August 5 in Dave Pollard’s How to Save the World blog on Salon. In an article titled “12 Tools That Will Soon Go the Way of Fax” and CD Dave wrote:
It’s natural that people want to hear what the leading companies and individuals in any area of business endeavour are doing, but the sad truth is that most “best practices” are so devoid of context, of the knowledge and history that explains why they are so effective, that they essentially become unactionable. Show, don’t tell, and discuss, don’t proclaim, are the information behaviours of the future. Less efficient, perhaps (stories take a while to tell, and voice is harder to browse through for fast learning), but much more effective.
For all of the good intentions that accompany best practices in concept, I believe the focus on them has diminished our organizations by building a dependence on faint copies of what has worked for others as the basis for serving our stakeholders. We have not challenged ourselves enough to author the original idea or discover the truly creative solution, and now when innovation really matters to our success, we’re totally unprepared to make it happen. We must correct this shortcoming right now.
Finally, last night, I came across another discussion in Cynthia Barton Rabe’s book Innovation Killer. She argues that Best Practices and BKMs are part of ExpertThink which, along with GroupThink, is a major killer of innovation. [click to continue…]
At the end of my last post I wrote “Do a Fermi problem every once in a while to keep yourself sharp.” It turns out that not everyone knows what a Fermi problem is. Sorry. Let me explain.
Fermi problems are named for the great physicist Enrico Fermi who was extremely fond of posing such questions to his students and colleagues. Here’s an example of a Fermi problem: tell me how many cars could fit in the parking lot(s) of the big shopping mall near you.
There is no way you could get the correct answer to this question without spending a lot of time measuring and counting and figuring. But a Fermi problem is an exercise in quantitative understanding rather than computation. So what you need to do is come up with a quick answer that’s pretty close. [click to continue…]
About a month ago I came across two interesting posts questioning the value of Best Practices. I work in an environment where there is a lot of talk about Best Practices and BKMs, so I was intrigued. Last night I came across another skeptic. That must mean it’s time to write about this to see what I think.