Why Cockiness Trumps Competence

Faced with complex or uncertain choices, we trust cocky people over people with a proven track record. When the “rock solid” advice these cocky people turns out to be flat wrong we trust them a little less, but most of us are still going to trust them again, over an alternate adviser with a solid track record.

This study (where people were asked to judge the weight of unfamiliar people they only saw in photos with the help of advisers with different degrees of confidence in their own guesses) may help explain some things that bewilder more than a few of us.

In the United Kingdom (a name we may soon be replacing with “England”) Boris Johnsson definitely sounded a lot more confident than his ex friend David Cameron. He had no data, and virtually none of the experts on his side but that just forced the Brexit campaign to sum their reasons for leaving the most successful peace and free trade area in the world with something as simple and confident as “Rule Brittania!” or “Take Brittain back”.  Cameron relied on information and just about every expert there was, but the Brexit campaign just said “We have had it with experts”. The cocky side won.

But the title as “cockiest guy on planet earth” still has to go to Donald Trump.  He is competing against the possibly best prepared candidate for the office ever, and so far he’s holding his own. That’s a bit like seeing an elephant fly, but this study explains why. Donald Trump is not Dumbo. He doesn’t need those big ears to fly. He just needs to be unbelievably cocky at a time when Americans feel insecure. In insecure choices, we choose confidence over proven competence. After years of turmoil in Washington, the choice feels insecure.

Trump framed mouth

The Democrats are right in reminding America that things are actually going quite well. There’s a lot of turmoil out there, but the American economy is ticking on. And this election is really quite simple. One candidate has all the requirements for the job. The other has none.

J.R. Radzevick and D.A. Moore. “Competing to be Certain (but wrong)”. Social pressure and Overprecision in Judgement. (Working paper 2009). I found this study in James Montiers lovely book “The little book of behavioural investing”. 

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Behavioral Insurance

Twenty years ago I felt very alone as a behavioral person working in strategy/business development of a leading Swedish insurance company.

I was asked to help produce a new strategy for the corporate insurance division, so I looked at the old strategy and the customer base. There was no indication that the sales force had paid even the slightest attention to the overall strategy in their work. So I looked at the previous strategy, and the one before that. Still no sign. No matter which industry my company had decided to focus on, the sales people had just been going about their business as before.

Finally, ten years back, there had been a strategy that I could actually see some traces of.  The freshly recruited president had spent several months piggybacking on employees in different offices before taking up his new job, and then he had launched the Biblically inspired idea that “we insure those that take care protect themselves”. Ten years later, we had a clear over representation of financially healthy companies on our customer list. Further analysis showed that fast growing companies have more claims. The slowest growing companies also had more claims. The most profitable insurance business was in between.

We didn't want the Gazelles

We didn’t want the Gazelles

Instead of looking at any specific industry, we decided this would be our new strategy. The beautiful thing was that our competitors were all looking at different industries. This meant we could focus on financially healthy companies with medium growth for many years before they could even see what we were doing.  In an oligopoly that seldom happens since every customer we take is a customer lost for one of our four competitors. That means a concerted effort to take market share in e.g. aviation creates an insurarance price war in aviation, which quickly kills any profitability. They all looked at the market industry by industry. Being able to go below their radar was great for us. This meant we reached  a claims ratio around 50 (i.e. 50 cent per Euro of insurance premiums was paid out in claims) while our competitors were close to 100.  Another good thing was that we were really just operationalizing what our local sales people had already been doing for years. They loved hearing that!

I figured past behavior is the best indicator of future behavior. So I asked an actuary to run an analysis on companies that have had no claims for two years. Sure enough. They were the backbone of our business.  Next I asked a retired insurance claims manager to spend three months costing a thousand denied insurance claims from companies that previously had had two claim free years. That analysis made it possible to construct a one page insurance policy.

Read your insurance policy. I bet it’s a 10-50 page booklet full of sentences all starting with something like “this insurance does not cover….” and then there is a list of everything from earthquakes to avalanches, terrorist attacks, bugs and tsunamis. All of this is either the result of a negotiation that probably took place long ago at Lloyd’s of London or the result of an analysis of claims.  There is usually a good reason for most of these policies to be included somewhere in the world, but none of them are valid everywhere. They are the auto pilot of the insurance industry.  We were mostly going to take away limitations that are as likely as Sweden being attacked by Nepal (note to American readers: Nepal and Sweden are two small nations in different parts of the world). A one page insurance policy is a much better product than a 50 page insurance policy where every sentence limits the scope of the policy. We wanted to sell good sleep, and we figured we would never have to engage in another price war to keep these great customers.

one page insurance claim

After a long debate the management group declined this project. That is a pity, as I think it would have had a major impact on the insurance industry.  Past behavior predicts future behavior and that makes it possible to do great things for your best customers.

My next project was in construction. This business was not very profitable. I had two students run simple, standard engagement surveys at 37 small and medium sized construction companies that we insured. Then we ran the engagement scores against the claims of these companies. The results were as we expected. Where engagement was high and stress was low we had highly profitable business. Where the opposite was true, so was the insurance result. Stress caused accidents and lack of engagement caused theft and other losses.

37 companies is not a grand study but the scale of these patterns was astounding. We basically paid ten cents of claims per euro premium to the construction companies with the most engaged work force, and very roughly ten euros per euro insurance premium to the worst ones. That meant that unless we bring engagement and stress into our price models  we were in effect sponsoring bad management.

construction worker running

Again, this project was eventually declined. Although clearly relevant, actuaries still saw engagement as too intangible to be a price variable.  If the engagement scoring was to be done by sales people, there was a concern that they would rate every construction company as highly engaged in order to bring down the price and win more business. Underwriters and claims people were expected to do the opposite.

Now, all of this was twenty years ago, or more.  Now I’m publishing this to see if I can inspire someone to water one of these seeds. Please do, and help yourself to whatever fruit they may bring.

 

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Why HR lost its’ spot in the executive committee

Professor David Wilson figures that HR spends 85 percent of the time fixing concrete things such as making sure everyone is paid correctly, hiring and firing, training and checking the work environment*.  The remaining 15 percent spent on strategic work simply doesn’t qualify for a spot in the executive committee.  That along goes a long way toward explaining why HR has such a hard time maintaining the spot it had some ten to fifteen years ago.

HR does functional work but wants to be strategic

HR does functional work but wants to be strategic

Add the talent differential: students going into HR usually have lower grades in high school than business students do.

Add the business language of numbers: HR people seldom chose that orientation for love of numbers and ratios. Business people often do. Their language becomes the language of management teams and boards which drives short term results focus over long term development.  Try presenting engagement survey results while leaving fresh sales forecasts on the table and see how much attention you get.

My long term research project is about that. First I followed the engagement survey results of 30 publicly held corporations over a decade. The results show that engagement survey results predict profitability in the medium term and stock development in the long term.  Next, I invested in publicly held companies based purely on engagement survey results. This portfolio grew 58 percent over the last 15 months. It has outperformed the corresponding indices by far.

The result of investing purely on engagement survey results

The result of investing purely on engagement survey results

A strong strategic HR director would use this to steer her company toward higher value, but this is not happening. That is how weak HR has become.

No longer part of the strategic apex

No longer part of the strategic apex

 

Do you agree?

 

 

David Wilson is a professor in organisation studies at the Open University

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Hierarchy + Homogeneity = Stupidity

I used to make up bedtime stories for my kids. One of them was about a young lion that liked to hang out with an elephant and a giraffe. Like Simba in Disney’s Lion King the other lions could not understand this, but when drought hit the region this trio mastered the problem by having different strenghts.  The giraffe could reach fruits from the top of the trees, the elephant could stomp a hole in the scorched ground to reveal the water below, and the lion could scare some hunters away. lion giraffe elephant

Obviously, the story contains some weak spots that I don’t think my kids would accept today, but I think they got the idea that heterogeneity is good.  I also  suspect the management of Volkswagen was told  no such story when they were kids.

Now Volkswagen is trying to understand how respected engineers failed to see what a monumentally bad idea it would be to systematically cheat with the exhaust tests.

Pressure must have played a part. The pressure of a successful past combined with a non forgiving leadership….and not having the solutions available to deliver what is expected.

But above all, this looks like a perfekt example of “GroupThink”, the syndrome where a whole Group of people think as one. For those of you who don’t know: This is bad.  Groups Think better than individuals. Above all, groups make fewer mistakes.

Hierarchy
Volkswagen is a strictly hierarchical Company.  An engineer does not say “no” to something that was decided several layers up in the organization.

Homogeneity
One of the key complaints from employees in the Volkswagen group is that only Germans get promoted. Indeed, the top management Group consists of eight middle aged men. One of them was born in spain but moved to Germany as a teenager. The rest are Germans.

Stupidity
For at least a decade, Toyota hade been investing heavily in R&D with the goal of cutting carbon dioxide emissions by 90 percent. Everybody else saw the stiffening legal requirements, but this Group of middle aged germans did not invest to meet those demands.  Only a homogenous Group can be this stupid.  Only a hierarchical organization can accept such stupidity from their top people.

Lea Dunand-Chatellet, fund manager at Mirova, explains how she could ask about innovations to cut carbondioxide emissions only to be told about inventions to open the hatch without using the hands. That’s when she decided to divest in Volkswagen.

So, in the end the engineers were probably under pressure from two sides:pressure

  • A decade of non investments from the one side
  • Legal requirements and competition on the other

Cheating may have looked like their only way out: either that or failing to sell the cars that kept not only themselves, but pretty much everyone in Volfsburg employed.

Let’s stop asking ”who is to blame” and start looking at how such an important decision making Group could be allowed to be so homogenous (=stupid).  Above all, let’s not make that same mistake.

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How being different beats being smart

Check out the graph below. My portfolio (green line) is outperforming the OMX30* by 45 to 22 percent in the last year.  That is not a surprise.  This is the pattern I expect, based on my Analysis of thirty listed Corporations over ten years.

My portfolio (green) vs the OMX30 (yellow)

My portfolio (green) vs the OMX30 (yellow)

My strategy is the simplest one imaginable. I buy stock in Corporations where people are getting what they need to do a great job.  When that improves, the value of the stock improves as the result of people doing great stuff. It’s as if I sat in a bar every friday listening to the Groups of people coming in for an after work beer. Where people feel their Company is better than ever I buy. That would probably work, but I look at the data from engagement surveys instead. Wherever my “What I need to do a great job” index is growing, the stock will outperform stock in companies where this index is shrinking by 2,5 times.  Not the first year, but the second, when this higher level of “macro flow” at work has resulted in better Products, higher sales and other conventional numbers that analysts appreciate.Escalators

Now, I’m not looking at those conventional numbers. I find it useless because there are hundreds of thousands of very intelligent people out there buying stock based on them. These people have degrees from places like Harvard, Stanford and Yale and they have access to this information before I have it.  In the conventional game I would be a looser. Less intelligent, less knowledgable and slower to access this information my chances are those of an overweight, middle age man trying to win New York Marathon.   My opportunity is this: They have all read the same books at the same universities and they are making their calls based on the same traditional information from places like Bloombergs. The price of any stock is likely to reflect the value based on this information. That’s why I don’t need to look at any of that information. I buy stock ONLY on the basis of the engagement survey results.

Sometimes being different beats being smart:-)

Me and the financial analysts

 

 

*the OMX30 is the index based of the 30 main shares in the Nasdaq OMX Stockholm stock market.

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