Perspectives on Risk - Apr. 20, 2022 (Management & Decisions)
McNamara Fallacy; Mutual Incomprehension; Management & Productivity; 3-2 WFH Works; Buying time promotes happiness; Improving Forecast Accuracy; The Einstellung Effect; 2nd Choice May Be Best; More
Working on another thought piece. In the mean time, here are some interesting management and decision-making research I’ve come across.
The McNamara Fallacy
Measure what can be easily measured
Disregard that which cannot be measured easily
Presume that which cannot be measured easily isn’t important
Say that which can’t be easily measured doesn’t exist
Correlation Between Management & Productivity
Management Practices, Workforce Selection and Productivity shows that well managed firms have a higher stock of higher ability workers employees. They accomplish this at least in part by selection. They are able to recruit workers from higher points of the ability distribution and remove those from the lower part of the distribution.
Appendix B.1. has an interesting scoring system for evaluating management.
How does your leadership team rank?
3-2 Hybrid Work From Home Works
A large multinational randomized 3-2 hybrid WFH vs 5 days per week in the office for 1600 professional graduate employees for six months. They found three results:
35% reductions in quit rates and 12% reduction in sick leave.
No impact on performance or promotions.
Employees shifted work from WFH days to evenings and weekends (“flexitime”)
Related: From the Derek Thompson at the Atlantic, summarizing recent research: The Five-Day Workweek Is Dying
The five-day workweek is dying.
[T]he typical five-day workweek may dissolve into something stranger and less settled—a three-day office week that exists within a longer work week.
The age of hybrid work is going to be a beautiful mess
Buying time promotes happiness
Surveys of large, diverse samples from four countries reveal that spending money on time-saving services is linked to greater life satisfaction. To establish causality, we show that working adults report greater happiness after spending money on a time-saving purchase than on a material purchase. Link to paper
Improving Forecast Accuracy
Forecast aggregation can improve accuracy via three pathways: a) reduce noise, b) tamp down bias, or c) merge the crowd’s information. Turns out, different aggregators operate through different mechanisms. https://doi.org/10.1016/j.ijforecast.2021.12.010…
The Einstellung Effect
The Einstellung Effect is an powerful blocker of problem-solving. The Einstellung effect occurs when the first idea that comes to mind, triggered by familiar features of a problem, prevents a better solution being found. Why good thoughts block better ones: the mechanism of the pernicious Einstellung (set) effect shows that:
it works by influencing mechanisms that determine what information is attended to. … The mechanism which allows the first schema activated by familiar aspects of a problem to control the subsequent direction of attention may contribute to a wide range of biases both in everyday and expert thought - from confirmation bias in hypothesis testing to the tendency of scientists to ignore results that do not fit their favored theories.
Relatedly: The Dark Side of Information Proliferation shows that when overloaded, we fall back on heuristics that make us less informed. We tend to focus on “dread risks” - unpredictable & catastrophic risks - over other concerns. And discussions of those risks tends to have the most misinformation.
Second Choice May Be Best
When silver is gold: Forecasting the potential creativity of initial ideas finds that:
participants tended to under-rank their highest-potential idea. The initial idea that participants thought was their second best tended to actually be their best idea in the end.
The paper shows that the idea that people rank first is chosen because it is doable. But the 2nd-best ranked idea is usually more abstract & requires more time to develop, so pressed-for-time creators skip it for something concrete.
Relatedly: The Risk of Caution: Evidence from an R&D Experiment
Study participants were asked to choose whether to fund hypothetical research projects using a process that mirrors real-world research and development funding decisions. The experiments provided financial rewards that disproportionately encouraged the choice of higher-risk projects. Despite these incentives, most participants chose lower-risk projects at the expense of projects more likely to generate a large payoff. We also elicited participants’ personal risk preferences and found that decision-makers who are more tolerant of risk were more likely to fund breakthrough projects. The results suggest that the risk preferences of managers in charge of research investments may have an oversized effect on the rate of breakthrough innovation and the profitability of firms.
Cultivating Your Judgment Skills - A Framework for Improving the Quality of Decisions
An oldie, but goodie from Michael J. Mauboussin that incorporates the work of Philip Tetlock. Here’s the link.
In particular, this matrix that relates the stages of skill acquisition to key aspects of judgment strikes me as useful.
How People Think
This article describes 17 of what I think are the most common and influential aspects of how people think. I really liked it. My favorite points are:
3. Prediction is about probability and putting the odds of success in your favor. But observers mostly judge you in binary terms, right or wrong.
10. Your willingness to believe a prediction is influenced by how much you want or need that prediction to be true.
7. We are pushed toward maximizing efficiency in a way that leaves no room for error, despite room for error being the most important factor of long-term success.
17. The inability to accept hassle, nonsense, and inefficiency frustrates people who can’t accept how the world works.
Whole article is worth a read.
Other Stuff:
They say quitters never prosper, but Annie Duke, former professional poker player and author of Thinking in Bets and How to Decide, is living proof that quitting can be an underrated superpower. Annie recently sat down with Astro Teller, Captain of Moonshots at X, to discuss why being a great quitter can be the key to achieving long-term success.
The value of thoughts and prayers
Christians value getting prayed for by a priest at $7.17 & a religious stranger at $4.36. Atheists or agnostics would pay a stranger $3.54 to avoid a prayer for them
Have someone who can’t communicate well? Here is a useful cheat sheet.
Toxic Culture Is Driving the Great Resignation
Doug Dachille shared Toxic Culture Is Driving the Great Resignation on LinkedIn. Great article.