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Nightmare or Hope? Your decision.

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You have only yourself to blame for the quality of your decisions. Improve it. Start today.

Are you committed to becoming a spot-on decision-maker who can make great decisions that actually guide your world? Because chances are, your personal decision-making process is no guarantee of that.

We’ve just finished two years of hate-filled, vitriolic lies and attacks. Most of us were swayed, one way or another, by the election rhetoric and talking heads. One thing is certain: few of us went to the candidates web sites, read their platforms and policies. Even fewer then consulted a range of economists, industry professionals, and others to figure out whether the policies were realistic, whether we have any data on that kind of policy, or whether they would even lead to the kind of world we want.

Pretty much all of us relied mainly on charisma (or lack thereof) and ideology (or lack thereof) and knee-jerk logic to make our decision. And yes, this means you, my above-average-intelligence friends! Intelligent people seem to believe that they understand things better, even though when it comes to politics, there’s no reason to believe that. Smarts are no defense against relying on shallow, biased media reports and cherry-picked statistics.

The challenge: improve your decision making!

Here’s my challenge to you: actually learn from this experience.

Whether you’re feeling fear, anger, hope, or happiness today, grab a piece of paper. Write down all your fears. ALL of them. If you are convinced our President-elect is a terrorist whose greatest desire is to bring down America, write that down. If you’re convinced he’ll raised your taxes, write that down. If you’re convinced that taxes a worse financing decision than debt when you’re running a deficit, write that down, too.

If you believe that America will become a hotbed of corrupt moral practices, write that down.

Now write down your hopes. If you believe we will magically become debt-free in an economic prosperity paradise brought on by a single change in President, write that down. If you believe that America will become a multicultural paradise of acceptance and love, put it on paper.

For both your fears and your hopes, jot down the basis (or lack thereof) you have for those beliefs. You are the ONLY ONE who will see this, so be honest. Expect to have fairly little evidence for any of this.

You know now what you’re projecting on this candidate, good or bad. You could be wrong about a lot of what you’ve written. In fact, you probably are. And you’ve done this with every election you’ve ever voted in.

Now is the time to learn, instead.

Arrange to re-evaluate your decision-making in 2012

Head over to TimeCave.com, and schedule an e-mail to yourself to be delivered in July, 2012. Type in everything you’ve written. Also paste in the following debrief form. Then in 2012, you may be able to make an even higher-quality decision than you did this year.

DEBRIEF OF MY 2008 DECISION
1. Where was I right in my ability to project the candidate’s results?
2. Where I was right, how much of that was due to the candidate’s efforts, and how much of that was external factors that the candidate couldn’t control?
3. Where was I wrong?
4. How much of *that* was under the candidate’s control?
5. Where did I get my information about the candidate?
6. Am I using the same or different sources this time?
7. Do I know how high-quality the sources are? Why do I believe they are high (or low) quality?

When you receive the email in 2012, spend some time thinking through the questions. You may discover that your fears were misplaced. The world didn’t come to an end. You may discover that your hope was a bit overblown. The world didn’t become paradise.

Either way, you’ll discover that you can find ways to improve your decision-making in 2012. That’s a good thing. You will begin to be more nuanced and more thoughtful in your vote, which is one of the most important decisions you’ll ever make.

And why not start now? Campaign 2012 starts in about three weeks…

What problems are markets the answer to?

I am a proponent of free markets for the things that markets are good at. Markets are great at pricing things whose future attributes are relatively predictable by the market players, and that don’t require a decision-making time horizon greater than the market trade horizon. For example, markets are great at pricing stocks, because companies are ongoing entities and the market can judge performance over time (both past and possible future) to do the pricing. Furthermore, it’s not critical to society (or wasn’t prior to the current mess!) that any one company continue to exist.

When it comes to something like oil, however, I believe markets are a really bad mechanism. The time horizon for market pricing is far, far shorter than the lifespan of the world’s oil supply. So pricing becomes based at best on marginal cost to produce, rather than on anything relative to the actual value to society. For example, according to the book “The Omnivore’s Dilemma,” about 1/3 of the world’s population only gets fed because we have genetically modified corn that requires special petroleum-based fertilizer. I would suggest that the market price of oil (to the extent that it’s a market and not simply OPEC’s arbitrarily-set price) doesn’t include any component that has to do with the future of the world’s food supply. Most (all?) market players just don’t know enough about the full supply chain of which oil is a part to price it properly.

This, in my mind, is where Government comes in. I consider the role of government to adjust the playing field so prices and practices result in what’s best for overall society long-term. Government is the only entity that can change things around to align the individual incentives (“how do I get rich?”) with the community incentives (“how do we do what’s best for us as a society?”)

Sadly, I’m not sure there’s anyone in Government who thinks that way. As far as I can tell, most politicians in Congress believe their job is to grab as much of the common pie as possible for their constituents, rather than representing their constituents in determining how to spend our community-wide fund on projects to benefit the entire community.

Global meltdown: Bush saves the day! (in 40 minutes!)

Meetings! I just love meetings … no, I don’t. I hate meetings. But perhaps that’s just because I’m no good at running them.

According to an MSNBC article today, Bush met with the leaders of 20 countries Saturday night. To quote the article:

“After the almost 40-minute meeting and his six-minute statement, the president left the White House for a nearly two-hour mountain bike ride in the nearby Virginia woods.”

Jeez. I really wish I had his meeting facilitation abilities. At a meeting with 20 world leaders, all of whom are undoubtedly known for their keen wit, brevity, and ability to grasp huge honkin’ financial issues in seconds, it would still take me 10 minutes to do introductions. After all, I like to spend about 30 seconds having each person state their name, the country they lead, and their form of government (“Parliamentary,” “Representative Democracy,” “Puppet Dictatorship,” etc.)

That would leave only 30 minutes for the meeting itself, clearly not enough time to lay out the mess, explain the economic issues and how policy can resolve them, etc. Whatever his other problems, it seems Bush is able to resolve a 20-country, unprecedented global financial meltdown in 40 minutes, just by talking for six minutes… astounding! Perhaps it’s the two-hour bike rides? They send enough oxygen to his head that he can think super-clearly.

This is what passes for world leadership.

We have the most advanced technology in history and the ability to feed every man, woman, and child on the face of the planet. Yet we’re still plagued by poverty, famine, gross wealth inequality, and violence. Our human abilities simply aren’t up to coping with issues of this magnitude. We’ve created systems so complex that even the major player (e.g. Paulson) can’t understand them. And our leaders? They’re as clueless as the rest of us, it seems.

So this whole meeting brings up only one major question: Where can I get a job that lets me take two-hour bike rides while the country—ostensibly my responsibility—melts down around me?

My biggest concern about Bush in 2000 was that every company he’s ever run, he’s run into the ground. That concerns me. Past behavior is, alas, the best predictor of future behavior.

“Shrub,” by Molly Ivins, recounted the messes prior to his being elected. At the time, I imagined he and his policies wouldn’t be the best for the country, but I honestly didn’t believe they could screw up an entire country.

And to be fair, he and his policies only exacerbated structural problems that had been in the works for years. Heck, Clinton’s the one who lowered Fannie Mae mortgage standards allowing the subprime mortgages to start to take hold. And the financially illiterate actually took out the mortgages. And the further financially illiterate (the financial and banking sector, as it turns out) bought the repackaged mortgages.

But at the end of the day, it’s the leader who needs to be seeing farthest. As is common knowledge by now, they didn’t bother to read the report entitled ‘Bin Laden Determined to Attack Inside the United States.’ And even though such minor folks like Warren Buffett have been warning about derivatives for years, their market ideology got well in the way of noticing that the numbers didn’t add up.

There’s not much I can do about it from where I sit. Except vote.

Why the finance industry should accept much more blame for the crisis.

If what we want to do is point fingers, there’s plenty of blame to go around. At the end of the day, though, I hold the creators of the securities as being far more responsible than the home buyers.

Professionals should be held to higher standards

First off, the financial companies are supposedly professionals. That means they understand far more about how all this works. Bluntly, I hold them to a higher standard. If they’re going to take home billions in pay, I expected them to think through their investing decisions and security formation very, very carefully.

The financial community has gone wild in abstracting away risk and reward from underlying securities. And they’ve gotten very, very rich from that. But they’re professionals. If they buy a mortgage-backed security and are surprised that people can default on the mortgage, then they need to take full responsibility for that. Period.

Stocks and bonds and mortgages all represent actual entities in the world who are actually doing stuff. If you remember this, you can make intelligent decisions. Warren Buffett became the richest man in the world by doing this intelligently and sharing with everyone who cares to listen how he does it. When others in the finance community choose to ignore that underlying reality because it’s convenient, I can’t have much sympathy when the house of cards collapses.

(Upcoming crisis: if they buy a credit swap from someone who can’t actually guarantee the underlying loan, then again, they absolutely deserve whatever they get. Especially if they’re the ones who lobbied for non-regulation in the credit swap market!

My solution involves using eminent domain to reclaim every penny and every asset paid to every employee of the i-banks who created, traded, and sold these entities. then the taxpayers pay for the remainder of the bailout. Aren’t you happy I’m not in charge?)

Selling a financial product to numerically illiterate customers is bad business

Second, innumeracy. You can say all you like that it’s the dumb mortgage holders who bought dumb mortgages. And I agree. Only they weren’t dumb; they were simply ignorant. We don’t teach people anything about financial literacy in school. Even when I got my MBA, it took quite a while for the group of very bright (but non mathematical) students in the room to understand how to calculate simple financial concepts like “net present value.”

Most people don’t really understand the math of a variable rate mortgage, and certainly aren’t good enough at budgeting and forecasting future scenarios to realize what is and isn’t a good financial decision.

Again, the mortgage underwriters were professionals. For them to say, “we sold these to people who couldn’t pay, it’s their fault,” is simply absurd.

If you’re in the business of making loans and then carrying those loans on your books, it’s YOUR responsibility to make sure the loans can be paid off! Not because you owe the customers anything, but because Accounting 101 GAAP rules say that you don’t count on an asset’s value unless you’re highly certain it’s going to be worth that much.

If a bank writes a mortgage and chooses to relax its standards under the theory that it can sell the mortgage before the borrower defaults, then the bank is being irresponsible (not to mention implicitly defrauding the folks it sells the mortgage to).

The “2nd tier” buyers can also be smart about what they’re buying

The 2nd-tier people buying that mortgage from the bank are buying an asset they don’t understand. They’re free to ask for a payment guarantee from the bank to accompany the mortgage. They didn’t, and are then surprised that the default rates were higher. (These people clearly missed the whole Junk Bond crisis that had all these same elements.) If I have to buy insurance on my house in case there’s a fire, then the 2nd-tier buyers should also be smart enough to demand the bank guarantee the default rate that they claim their mortgages will produce. Or if the banks won’t do that, then the 2nd-tier buyers should at least look at the mortgages to make sure they’re as high-quality as the bank believes them to be.

Rating agencies don’t exempt finance professionals from due diligence

“But the rating agencies…” you begin to cry. Screw the rating agencies, people. If a buyer of a mortgage-backed security decides to trust a rating agency’s evaluation of a security that everyone admits is hard to value, then again, you’re consciously deciding to allow your business’s integrity to reside in the hands of the rating agency.

You could take a random statistically valid sample of mortgages and hire a bunch of interns to re-run credit and income checks to make sure the mortgages are sound. You could further ask whether you believe the borrowers can still repay after rates increase. It’s called “due diligence” but it requires admitting that there’s a physical reality that might get in the way of your free money-printing machine. It also requires doing legwork in the physical world, which the finance people were understandably loathe to do.

It wasn’t the consumers who came up with the idea that these mortgages were affordable

And lastly, the marketing of these mortgages were designed to persuade people to take them out. Well, it worked. And for banks and lenders to be shocked that their marketing worked, and then further shocked that their own lax standards put them in a position where their borrowers couldn’t repay is just hubris beyond belief.

So yeah, many consumers should have made better decisions. But they’re not professionals, they’re not financially literate, and they’re being subjected to $100,000,000 of marketing and sales tactics.

The mortgage writers and derivative creators are financially literate professionals who chose to ignore their own historical underwriting standards and sell mortgages that couldn’t be repaid. They then took these bad mortgages, repackaged and resold them to other institutions that didn’t bother to do real due diligence.

To me, the case is clear: if I have to blame someone, I’ll blame the industry of “professionals” who ignored the financial realities of their customers, invested in bad quality securities, eschewed due diligence, and generally took the profits when times were good and are now trying to shove away responsibility for their own decisions now that times are bad.

Greenspan? Rapidly approaching status of “bad joke” in my mind.

According to a New York Times article about Greenspan and his policies today, Greenspan is defending his stance on derivatives (he was pro-derivatives) by saying the whole imploding economy is because of people acting in bad faith in the markets, but the deregulated derivatives approach was somehow still “right.”

Mr. Greenspan is apparently living in a world without people. I’ve been aware of Wall Street and its tendancy to, er, stretch the boundaries of good and bad faith since Greenspan took office. In case he didn’t notice, we had a Savings and Loan Crisis, a Junk Bond collapse, Long-Term Capital Management’s collapse, the Internet bubble popping, then a wave of corporate scandals that even took down Arthur Andersen. Where was he during this 20-year march of greed that he could champion deregulation under the belief that people wouldn’t be greedy and would act in good faith without regulation to impose penalties when they didn’t?

How could he cling to a theory that depended, oh-by-the-way, on the naive belief that people would do the “right” thing even though the instruments let them become unbelievably wealthy by doing the wrong (but legal) thing?

I just don’t get it. And I find myself repeating it over and over in stunned disbelief. He actually believed that Wall Street would police itself, after having presided over several TRILLION dollars worth of corruption and greed with several successive financial instrument “advancements.”

I’m so very, very glad that the man is no longer making policy. Of course, having the head of an investment bank now in the position doesn’t exactly fill me with confidence. Goldman has a good reputation, but at this point, I’m not at all sure that anyone steeped in the financial industry culture for 20+ years has the objectivity to know whether the system is fundamentally broken (they have a vested interest in believing it’s not), or whether it simply requires some trillion-dollar tweaks to put it back in order.

From sole practitioner to organization guy

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On Twitter, I’ve recently alluded to my new job. I’ve started working at Babson College helping to facilitate a community-wide re-examination of Babson’s capabilities, strategy, and future direction. I will then be helping to implement the community’s recommendations.

This job is incredibly exciting. The new Babson president, Len Schlesinger, has been a colleague, friend, mentor, and originally professor of mine since 1989. He’s one of the most visionary people I have ever met, combined with a firm grasp of data and execution. In short, he dreams big dreams and has what it takes to make them happen.

He came to Babson to build on its strength in entrepreneurship (we’ve been #1 in entrepreneurship for the last 15 years), to take Babson to its next level. What that next level is will be defined by the community in our next four months of conversation.

This should be incredibly exciting! I will continue to produce the Get-it-Done Guy podcast and, of course, will be finishing the Get-it-Done Guy book as well. I hope to continue posting to this blog, though until the book is done and I have more time on my plate, my entries will likely be relatively fewer and farther between.

To hear Len discuss the tension between business pressures and the ethical dimensions of business leadership, listen to (1 hour) Leadership and Ethics Series: “Organizational Leadership in Search of the Triple Bottom Line: The ‘Victoria’s Dirty Secret’ Campaign.

How we explain success may be different from what really causes it.

I was reading Steve Salerno’s “anti-SHAM” blog as he was commenting on Hillary’s speech at the DNC last night. He didn’t think much of her story. She told a story of her success, he said, that may have been a tad… biased.

That got me thinking about how much our own stories do and don’t have anything to do with actual events. Certainly the book “Mistakes Were Made (but not by me)” by Carol Tavris, Elliot Aronson documents thoroughly how we distort our own memories to tell a story consistent with how we’d rather view ourselves.

This is my response to Steve:

Check out “The Halo Effect” by Phil Rosenzweig. In it, he basically discredits 99% of popular business books and research by pointing out that after-the-fact explanations where the outcome is known always come out the same, regardless of actual circumstances. The “halo” of known success (or failure) causes all the players to remember the past in a very specific way.

For example, ask people why XYZ Co. was successful and they’ll always talk about a visionary leader, good teamwork, flexibility, etc. You can predict those explanations with such certainty, apparently, that any research based on after-the-fact explanations is virtually worthless. (Because if you can predict in advance what people will say, then it obviously can’t be based on the actual situation.)

To avoid the halo effect, you would have to approach people in companies before success is known. Then ask them to describe the current environment. Then 10 years later (or whenever), see if their in-the-moment descriptions correlated with later business performance.

Though Rosenzweig limits his discussion to company success, I believe we also have a halo effect with successful people. We love the rags-to-riches, hard-work-and-skill-wins stories. No matter the truth of a situation, those are the stories we use to explain known success.

(Why is Bill Gates so extraordinarily successful? You’ll hear about strategy, ruthlessness, etc., etc. All the standard after-the-fact explanations. But that misses the point. There are lots of strategically brilliant, ruthless people who didn’t dominate the computer industry. In Bill’s case, mommy was on a board with the chairman of IBM, the head of Digital Research missed the chance to produce DOS so Bill was the 2nd choice, and IBM was stupid enough to let Gates keep all the rights to the software. Without those factors, all outside his control, he might have been just another 2-bit software developer. But that isn’t a story that we like to tell.)

When I look as objectively as I can at my successes and those of my friends (and many of my Harvard MBA friends have been very successful), I notice that hard work and skill seem far, far less important than, say, choosing the right industry, negotiating a compensation structure based on someone else’s work (e.g. paid as percentage of someone else’s transaction), and being lucky in your timing. Finance and entrepreneurship fit the bill.

But no one likes the story, “I made $100 million because I was frickin lucky.” That raises the question of whether the person deserves it, etc., etc., etc. We don’t want to challenge whether Gates deserves it because deep in our hearts, we hope we can make it big and don’t want to question whether or not we deserve it.

I’m sure Hillary frames her life as hard work, ambition, etc. And I can’t blame her. I suspect anyone in that position would frame their life that way. In part because of the halo effect, and in part because saying, “our achievements owe as much to luck as to skill” isn’t something many of us are willing to admit to ourselves.

It’s not so easy to say “subprime borrowers” should be responsible.

The New York Times had an article today on the advertising campaigns that led to the spate of subprime borrowing.

The reader comments fall into two broad categories: “Borrowers should have known what they were getting into.” and “Big, bad, evil banks.” I think both attitudes are naive.

Borrowers should have known… Really?

Borrowers should have known? How? Our high school graduation rate is only about 70% overall, and it’s hard to believe that every single high school graduate is educated in how to make good financial decisions. In fact, it’s easy to believe that many high school graduates have difficulty with so-called “word problems” in math (and taking out a mortgage, people, is the mother of giant word problems).

I have an MBA from Harvard and when considering my mortgage, found myself staring at a 90-page document full of 8-point type, written in incomprehensible legalese. I had no real choice but to go on the “plain english” explanation of my bank and mortgage broker, both of whom had likely received lots of training in how to make the sale.

Thankfully, I settled with a fixed-rate mortgage. But I found out six years later that even with my MBA, I’d misunderstood (been mis-explained to?) how the variable rate mortgage worked. It turns out the first variable reset was directly to the target interest rate of prime-plus-X%. That was news to me! I thought the first reset was capped and only slowly moved to the target.

Furthermore, people were bombarded with sound bites saying “Life richly” by companies who, frankly, they trusted. Banks have historically been trustworthy institutions. They were known as financially conservative, considered decision makers. So people may well have been inclined to trust the ads. Lacking the education to do a financial analysis, they may have thought, “if the bank says this is a safe loan, it must be. After all, they make prudent financial decisions.”

Even so, whether or not you trust the ads, whether or not you even believe the ads, advertising works! It creates behavior change. That’s why advertisers pay $1,000,000 for a 30-second spot in the Super Bowl: because a well-constructed ad can manipulate emotion and cause people to buy stuff they don’t need.

So I can’t just say “be responsible.” That’s too tall an order and obviously, it didn’t happen and isn’t likely to suddenly start happening.

(And a note to the commenter on the article who says he’s from “old money” and that the borrowers should stop waiting for “mommy and daddy” to bail them out. Are you serious? You inherited your wealth and have a problem with people being bailed out by “mommy and daddy?” Look in the mirror sometime!)

The banks shouldn’t have been so greedy. Really?

Banks shouldn’t have been so greedy. In what universe? When we deregulated them (why did we do that?), they became businesses subject to the same profit pressures as any other public businesses. Furthermore, the folks at the top had bonuses become tied to growth measures. The bonuses and stock options were relatively short-term. Bonuses were based on yearly performance, and stock options often begin vesting immediately, or at the most, have a 5-year time horizon.

This gives everyone at the bank incentive to push short-term sales and profit now. When you’re selling a 30-year loan, but your compensation structure rewards you for 5-year results, it’s makes total sense to design a product that generates a lot of sales. If it blows up in year seven, well, that’s a shame, but if we wanted accountability out seven years, we should have designed the system that way.

And before you go off saying, “well, that’s just plain WRONG,” consider that we all make this kind of decision every day. Do you eat high-fructose corn syrup? If so, you’re trading short-term sugar high for long-term health consequences. How about, say, do you drive a car? If so, you’re using a non-replaceable resource that won’t be there for your kids because you want to live in a luxurious suburb instead of an inner city where you could walk to the grocery.

The banks did exactly what they were supposed to do: produce short-term returns by persuading people to buy products that, in the short-term, were safe, affordable, and met people’s needs.

How do we avoid this again?

That’s simple: we don’t. At least, not by focusing on one half of the equation. For better or worse (I believe worse), we’ve evolved to the point where we consider business to have no binding responsibility to the community or society. Thanks to Milton Friedman, as long as business is profitable, measured solely by one-year pretax, cash income, we reward the people who run the businesses and the people who invest in the businesses.

We have an advertising industry that complements business by having a good 100+ years of learning on how to create emotional needs that don’t exist and link those to people’s purchase decisions so people actually go buy consumable stuff instead of saving their money. It works, and it isn’t going away.

We also have an educational system that apparently isn’t preparing people to make intelligent financial decisions. Given the negative savings rate and average household credit card debt, I feel pretty comfortable suggesting that even the college-educated, financially literate aren’t turning on that financial intelligence as often as they should be. Or, if I want to be extra-generous to the people, perhaps their good financial sense is still being overwhelmed by the emotion-laden ad messages.

If we want to avoid this again, we have to do something to rebalance this triumverate. We need to educate people and stop advertising so much. Or we need to link compensation and measurement to much longer-term, broader measures than short-term profit (which means you, gentle reader, will have to stop evaluating your savings and investments on one-year returns), and educate people. Or we have to tone down the emotional advertising and educate people.

Hmm. All three of my top-of-the-head solutions seem to have education as one of those components. So let’s get to it, people. The school systems aren’t doing it, so it’s up to us. If you’re financally literate, grab a friend and teach them to be, too. If you’re not, find a friend and learn something. Then practice watching commercials and rather than thinking, “Oh! I want that!” calculate exactly how many more years you’ll have to put off retirement if you decide to buy that cool, neato new widget.

Speaking of cool, neato things to buy, consider this: Your life will be much, much better if you buy my “You Are Not Your Inbox: Overcoming Email Overload” audio product. Your teeth might sparkle, you might get all the sex (men) and cuddling (women) you could ever desire. In fact, you will find that saving 30 minutes a day adds up to three weeks a year. If you make $52,000/year, that means the savings would be more than $3,000. All for the low, low price of $47. Keep me in business, people.

There, you’ve been psychologically manipulated. Go buy. And if you don’t have the cash, you can charge it on your credit card or your home equity loan. Go wild.