Perspective on Risk - Feb. 12, 2025 (Leadership & Management)

My Thoughts On DEI; Performance Management; CEOs; Hiring & Firing; Strategy; Confidence & Worrying; Behavioral Effects; Work From Home

My Thoughts On Diversity, Equity & Inclusion

I’ve written quite a bit about this in the past, but let’s be clear, these are not just virtues but good business practices. Of course, when things are taken to extremes and/or implemented poorly they can generate bad outcomes. But as a general principal,

• How can one argue against diversity? Shouldn’t your workplace represent your customers and society? Shouldn’t you recruit from the largest possible pool of candidates?

  • At the Fed when I started, women were under-represented. At AIG, the ERM department had some diversity, but in cliques and cliches; Irish credit officers and Chinese quants. Outside of the admin staff, there was not a single black woman.

• How can one argue against equity? Shouldn’t similar performance in similar jobs be rewarded similarly?

• How can one argue against inclusion? Shouldn’t all individuals feel welcomed, respected, supported, and valued as true participants. Wouldn’t this tend to maximize overall performance? Shouldn’t we remove barriers to participation?

The most common objection is to perceived reverse discrimination - the argument that DEI initiatives, particularly hiring practices and admission policies, discriminate against historically advantaged groups by favoring other candidates. This often includes concerns about merit-based selection being compromised.

But in many cases, the “most qualified” or “best” candidate is subjective. As I’ve stated before, for the vast majority of positions, there are “minimum qualifications;” these are usually technical qualifications and provided these are met the individual can likely do the job. This should define the applicant pool and, frankly, any selection from this pool is as likely as any other to be able to perform the designated role. Interviewing and selecting the “best” individual from this pool tends to introduce biases and is proven to be a waste of time.

The CEOs and firms that have capitulated on their efforts, rather than reviewing the effectiveness of their efforts for appropriate changes, are sniveling cowards.

Improving Corporate Diversity, Equity & Inclusion

Can nudges be leveraged to enhance diversity in organizations? A systematic review

The nudges reviewed here are cost-effective and non-coercive tools that can be deployed to promote organizational diversity.

Nudges are psychologically-informed interventions that change behavior without restricting choice or altering incentives.

We focus on two types of nudges to enhance organizational diversity:

1. nudges that target organizational processes directly or the decision makers who oversee them to increase the diversity of those hired and promoted and

2. nudges that target the underrepresented candidates themselves to increase the diversity of those applying for organizational roles.

We categorize nudges designed to enhance organizational diversity, both by their target and based on the psychology they leverage to improve outcomes for women and racial minorities.

Performance Management

Hey, wait – is employee performance really Gaussian distributed?? (Data Science For Fun & Profit)

It’s probably Pareto-distributed, not Gaussian, which elucidates a few things about some of the problems that performance management processes have at large corporations, and also speaks to why it’s so hard to hire good people. Oh, and for the economists: the Marginal Productivity Theory of Wages is cleverly combined with the Gini Coefficient to arrive at the key insight.

The number of exceptional people: Fewer than 85 per 1 million across key traits

Cognitive biases can lead to overestimating the expected prevalence of exceptional multi-talented candidates, leading to potential dissatisfaction in recruitment contexts. This study aims to accurately estimate the odds of finding individuals who excel across multiple correlated dimensions. According to the literature, the three key individual differences variables are intelligence, conscientiousness, and emotional stability. … Approximately 16% of cases were classified as notable, 1% as remarkable, and only 0.0085% met the exceptional criterion of 2 SDs above the mean. Just one case was identified as profoundly exceptional. These findings highlight the rarity of individuals excelling across multiple traits, suggesting a need to recalibrate recruitment expectations. Even moderately above-average individuals on these key dimensions may merit greater recognition due to their scarcity.

The problem with 360-degree performance reviews

Investment banks’ favourite employee evaluation tool is easily gamed and frequently undermined. … The concept sounds great on paper. … But for all the talk of objectivity, the 360-degree review is often less about constructive feedback and more about office politics.

The question is whether the industry should rethink its approach to performance reviews. The current system consumes a lot of time and resources and arguably obscures more than it illuminates.

Note that this last comment is similar to my opinion on the hiring process; consumes a lot of time and resources and arguably obscures more than it illuminates.

CEOs

C-level execs, as a class, include some of the most skillful liars in the world.¹

Have CEOs Changed? (NBER)

… After the global financial crisis (GFC), the average interviewed CEO candidate has lower overall ability, is more execution oriented / less interpersonal, less charismatic and less creative/strategic than pre-GFC.

Except for overall ability and execution oriented/interpersonal, these differences persist in hired CEOs. Interpersonal or “softer” skills do not increase over time, either for CEO candidates or hired CEOs.

Hiring & Firing

How Do You Find a Good Manager?

People who nominate themselves to be in charge perform worse than managers appointed by lottery, in part because self-promoted managers are overconfident, especially about their social skills.

Managerial performance is positively predicted by economic decision-making skill and fluid intelligence – but not gender, age, or ethnicity. Selecting managers on skills rather than demographics or preferences for leadership could substantially increase organizational productivity.

Good managers have twice the impact on team performance as good workers.

Interviewing Is Not Effective

If you want to see if they understand rational actors, game theory and common knowledge, there are better ways.

What Drives Happiness? The Interviewer’s Happiness

Interviewers in face-to-face surveys can potentially introduce bias both in the recruiting and the measurement phase. One reason behind this is that the measurement of subjective well-being has been found to be associated with social desirability bias. Respondents tend to tailor their responses in the presence of others, for instance by presenting a more positive image of themselves instead of reporting their true attitude.

We also found that respondents were more likely to report a happy personality in the presence of an interviewer with a happy personality. We argue that as long as interviewers are involved in the collection of SWB measures, further training of interviewers on raising awareness on personality traits, self-expression, neutrality, and unjustified positive confirmations is essential.

Unexpected Cost Of Layoffs

The True Cost of Layoffs (Bloomberg Businessweek)

After a layoff, companies can lose more than $50,000 a month in productivity for every 100 employees remaining. Output typically returns to normal within six months.

A 10% downsizing leads to a nearly 50% increase in the voluntary turnover rate. Replacing those additional quitters at a 10,000-person firm costs more than $75 million.

A Scientific Approach To Strategy

A scientific approach to entrepreneurial decision-making: Large-scale replication and extension (Wiley)

… Key outcomes include an increase in the termination of ideas and a nuanced influence on the tendency to make strategy changes. Specifically, firms that adopted a scientific approach made a few strategic shifts, as opposed to either not changing or constantly changing their strategy.

Confidence & Worrying

Over-Confidence

Most people are over-confident; Gen-Z (29-44) and Millennials (13-29) are less so.

Working Paper No. 007: The UK public is overconfident (Behavioral Insights)

Gen Z and millennials are less likely to be overconfident than baby boomers, according to the first major survey on ‘calibration’ and overconfidence in the UK.

Risk And Productive Worrying

A classic piece from 2005 from Baupost’s Seth Klarman on Risk and “Productive Worrying” Definitely worth your time to click through to this short read.

While we believe it is crucial to worry about what can go wrong, unproductive worrying will not and cannot make a difference. Worrying that your favorite team will lose is obviously unproductive. Worrying that you might have an ulcer could even prove counterproductive. Productive worrying, on the other hand, enables you to identify action that reduces or eliminates the source of concern, often at little or no cost.

Behavioral Effects

Endowment Effect In Swifties

How Taylor Swift Fans Broke Economics (WSJ)

Swifties have the same mental biases as the rest of us, making them reluctant to sell even at eye-watering prices

Markets work on the basis of supply and demand setting a price. If there is more demand than supply, the price rises until fewer people are willing to buy and more are willing to sell. The basic problem is that Swifties mostly aren’t willing to sell, so the price soars until demand is destroyed—hitting well over $1,000 for many tickets.

… the tickets were changing hands at more than eight times face value, and both agreed they wouldn’t buy them at such a high price. … But both dismissed the idea out of hand. … Given they wouldn’t buy at this price they ought to be, on traditional economic assumptions, willing sellers.

… we are all biased in favor of what we already own, valuing it more highly merely because we already have it, something they call the endowment effect.

Creativity’s Origin

Creativity’s Neural Origin Revealed (Neuroscience News)

Summary: Researchers have identified how the brain’s default mode network (DMN) collaborates with other regions to produce creative thought. By using advanced brain imaging techniques, they tracked real-time brain activity during creative tasks.

This study reveals that the DMN initiates creative ideas, which are then evaluated by other brain regions. Understanding this process could lead to interventions that enhance creativity and aid mental health treatments.

Cracking Under Pressure

Excessive reward incentives may lead to cracking under pressure.

A neural basis of choking under pressure

We found that increases in reward drive neural activity during movement preparation into, and then past, a zone of optimal performance. We conclude that neural signals of reward and motor preparation interact in the motor cortex (MC) in a manner that can explain why we choke under pressure.

One-sentence summary: In response to exceptionally large reward cues, animals can "choke under pressure", and this corresponds to a collapse in the neural information about upcoming movements.

Why do we crumble under pressure? Science has the answer (Nature)

The results “help us understand how reward-outcome-mediated behaviour is not linear”, says Bita Moghaddam, a behavioural neuroscientist at Oregon Health & Science University in Portland. To a certain extent, “you just don't perform better as the reward increases”, Moghaddam says.

Incentives Trump Everything

This, of course, is why Greenspan’s hyper-libertarian perspective proved dangerous. Free markets need rules and people to enforce the rules, because market participants incentives to self-police are insufficiently strong.

Belief In Conspiracy Theories

Do people sincerely believe conspiracy theories that they endorse? (PsyArVix)

Overall, our results suggest that a substantial minority of participants answering surveys endorse conspiracy theories that they do not sincerely believe.

Work From Home

The bottom line is that there should not be some one-size fits all strategy. Some jobs require collective interaction, others don’t. Your strategy should fit your needs.

Home Sweet Home: How Much Do Employees Value Remote Work?

We estimate the value employees place on remote work using revealed preferences in a high-stakes, real-world context, focusing on U.S. tech workers. On average, employees are willing to accept a 25% pay cut for partly or fully remote roles. Our estimates are three to five times that of previous studies. We attribute this discrepancy partly to methodological differences, suggesting that existing methods may understate preferences for remote work. Because of the strong preference for remote work, we expected to find a compensating wage differential, with remote positions offering lower compensation than otherwise identical in-person positions. However, using novel data on salaries for tech jobs, we reject that hypothesis. We propose potential explanations for this puzzle, including optimization frictions and worker sorting.

Work-From-Home/Telework Can Be An Optimal Strategy

Office Occupancy Holding Near 50%

More Stuff

1. Paul Graham reflecting on a Brian Chesky speech. He of course included this footnote to the quote:

[1] The more diplomatic way of phrasing this statement would be to say that experienced C-level execs are often very skilled at managing up. And I don't think anyone with knowledge of this world would dispute that.