A college degree ain’t what it use to be

Last December, in my post titled “That’s Messed Up!”, I wrote about how broken feedback can explain just about any problem.  Now, I’m going put that to the test on often debated topics in our society - education and healthcare.  I’ll start with education.

I often hear “a college degree ain’t what it use to be.”  Same goes for a high school diploma.  Why?

Schools use to award diplomas to those who mastered the requirements.  The standards were high.  A diploma was a reliable sign that the person was literate, self-driven, able to complete assignments and responsible. 

That’s when grades (i.e. feedback on student performance) were awarded based on the mastery of the material.  To move to the next level you had to pass the previous level.  That isn’t the case anymore.   

While some students gain a lot from education, they share distinctions with too many who were promoted for reasons other than their true academic performance.  And it’s hard to tell these people apart, so the simplest thing to do is to assume the degree means little or nothing.  Of course there are some distinguishers like graduating with honors and winning academic awards, but the diploma itself is too easily had to be of much informational value.

There are many reasons why students receive inflated grades.  All these reasons can be traced back to more feedback problems.  For example, there may be many reasons why teachers give inflated grades (e.g. don’t want to have a tough conversation with a student or parent, believes self-esteem is more important than grades) but the root cause is that administrators allow it by not giving proper feedback either willingly, because the administrator may have the same views on inflated grades as teachers, or unwillingly, because the teachers’ union doesn’t allow behavior changing action to be taken against the teacher giving inflated grades.

Want to fix education?  Fix the feedback problems.  Get rid of grade inflation, fire ineffective teachers and pay great teachers well.  Finally, give schools more power to kick out troublemakers.  To earn the privelege of occupying a desk funded by our tax dollars, we should expect kids to behave in the classroom.  Troublemakers simply should not be tolerated.  Let the parents deal with the brats they created.  

I’ll tackle healthcare in another post.

Price Gouging

Thomas Sowel offers some good words on price gouging from Basic Economics: A Citizen’s Guide to the Economy (Basic Books, 2000):

 …when some natural disaster such as a hurricane or flood suddenly destroys many homes in a given area, the price of hotel rooms in that area may suddenly rise, as many compete for a limited number of of rooms…

People who charge higher prices for hotel rooms, or for other things in short supply in the wake of some disaster, are especially likely to be condemned for “greed”, but in fact the relationship between supply and demand has changed.  Prices are simply performing one of their most important functions - rationing scarce resources.  When some natural disaster suddenly makes these resources even more scarce than usual, it is important that prices reflect that underlying reality, so as to reduce the demand that each individual makes on the reduced supply.

Regardless of what hotel owners charge, a sudden and widespread destruction of housing in a given area means that there may be not nearly enough hotel rooms for all the displaced people to get the kinds of accommodations they would like.  If prices had remained at their previous levels after the hurricane, a family of four might  well rent two rooms - one for the parents and one for the children.  But when hotel prices shoot up well beyond their usual level, all four family members may crowd into one room, in order to save money, leaving the other room for other people who have likewise lost their homes and are equally in need of shelter.  If the government were to impose price controls under these conditions, then those who happened to get to the hotels first would take up more space and leave more latecomers without a place to sleep indoors.

Similarly, if local electric power lines were put out of commission for a few days, the demand for flashlights in that community might suddenly increase, causing prices to rise before new shipments of flashlights could arrive.  Had prices remained at their previous level, a family might buy several flashlights, so that each member could have one.  But, at suddenly higher prices, the would likely buy only one or two, leaving more flashlights for others with a similarly urgent need. 

Why we do what we do

I lifted this from an econblog I frequent at Marginal Revolution.  It’s a nice piece of work from Adam Smith and I wanted to collect it to remind  me  why capitalism works so well to improve the standard of living for the masses, far better than most people realize.  This is from Smith’s Wealth of Nations, Book 1, Chapter 2. 

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely.

Though I’m not sure what to make of the last two sentences.  I don’t believe people give money to beggars out of benevolence.  I think givers get something from giving that appeals to their own self-love.  Perhaps a good feeling they helped someone in need or an ease to the discomfort they get from the sad stare of the unfortuanate person on the receiving end. 

Addendum:  I actually lifted this from Cafe Hayek, not Marginal Revolution.

Budgeting

Organizations and businesses alike struggle with budgeting.  Bad budgeting begins and ends at writing numbers down on a piece of paper.  Good budgeting begins with making it clear what happens when a budget is missed. 

This explains so much

http://blog.pmarca.com/2008/03/the-psychology.html

You really have to live through this stuff in order to appreciate the insights on the link above.  If you ever found yourself wondering how the heck such poor decisions could be made in an organization, or how such disastrous results came about on something you were involved with, this link will be an awakening.

A Liberal to Conservative Conversion

Read about it:

http://www.villagevoice.com/news/0811,374064,374064,1.html/1

What is it that got this guy to change his mind?  It seems like he finally realized the truth. 

“The trouble with our liberal friends is not that they’re ignorant: It’s just that they know so much that isn’t so.” -Ronald Reagan

How to run a business part 2

More golden nuggets from Philip Fisher:

By this time, I had learned enough to know that, no matter how attractive, such matters [great business opportunities] by themselves were not sufficient to assure great success.  The quality of the people involved in a company was just as critical.  I use the word quality to encompass two quite different characteristics.  One of these is business ability.  Business ability can be further broken down into two very different types of skills.  One of these is handling the day-to-day tasks of business with above-average efficiency.  In the day-to-day tasks I include a hundred and one matters, varying all the way from constantly seeking and finding better ways to produce more efficiently to watching receivables with sufficient closeness.  In other words, operating skill implies above-average handling of many things that have to do with the near term operation of the business.

However, in the business world, top-notch managerial ability also calls for another skill that is quite different.  This is the ability to look ahead and make long-range plans that will produce significant future growth for the business without at the same time running financial risks that may invite disaster.  Many companies contain managements that are very good at one or the other of these skills.  However, for real success, both are necessary.

Business ability is only one of the two “people” traits that I believe is absolutely essential for a truly worthwhile investment.  The other falls under the general term of integrity and ecompasses both the honesty and the personal decency of those who are running a company.

Like the previous passage, it sounds like common sense.  But, if it is common sense, then why is it so difficult to find in practice?  Why aren’t more companies trying to ensure they have good operations, good strategy and highly trusted people?

This can apply to any organization.  Look at sports.  Are these qualities not present in many organizations that achieve long-term success?  Which of these qualities are lacking in the not-so-successful franchises?  There’s usually at least one.  Sometimes it’s operations, sometimes it’s strategy and sometimes it’s integrity and sometimes its a combination. 

For anyone looking for a good investment or management book, I highly recommend Philip Fisher’s Common Stocks and Uncommon Profits and Other Writings.

How to run a business

Events at my work of late have sparked memories of a book I read awhile ago.  The next few posts are from Common Stocks and Uncommon Profits and Other Writings by Philip Fisher.  Phil was an investment savant and father of Kenneth Fisher, who’s the most unconventional and interesting investment guy that I read.  I read him because he makes me money.

This passage from Conservatives Investors Sleep Well section of the book (p. 188):

Here is an indication of the heart of the second dimension of a truly conservative investment: a corporate chief executive dedicated to long-range growth who has surrounded himself with and delegated considerable authority to an extremely competent team in charge of the various divisions and functions of the company.  These people must be engaged not in an endless internal struggle for power but instead should be working together toward clearly outlined corporate goals.  One of these goals, which is absolutely essential if an investment is to be a truly successful one, is that top management take the time to identify and train qualified and motivated juniors to succeed senior management whenever a replacement is necessary.  In turn, at each level down through the chain of command, detailed attention should be paid to whether those at this level are doing the same thing for those one level below them.

Seems almost too obvious, huh?  But, years in the business world have me made realize how rare such an arrangement truly is.  You’d have almost as much luck re-creating the band U2.

First, many CEOs are insecure.  They simply won’t hire competent people.  Then they may have to compete to keep their position.  So, they hire people they can control and since they aren’t competent, they can’t delegate considerable authority, not that they would anyway.  Then, who has time training the juniors in firm?  When you have a bunch of incompetent micromanagers running the place, you’ll always be busy responding to the latest crisis.

This an excellent checklist of management to feel out if your are an investment analyst or if you are interviewing for a job.  If management doesn’t meet this model, it’s just a matter of when things will start to go really wrong.

Super Delegate Hypocrisy

Many of my Democratic/liberal friends and family members have expressed support for the idea of getting rid of the Electoral College (although none of them have given me good rationale based on my earlier post on the subject).

I wonder what they think about the Super Delegate  - Delegate structure used by the Democratic party to select a Presidential candidate?

Treat your employees right

Howard Schultz, the guy responsible for astounding growth of Starbucks, believes in treating his employees right.  This is an excerpt from his book, Pour Your Heart Into It (p. 57), after describing how early Starbucks employees voted to unionize:

The incident taught me an important lesson: There is no more precious commodity than the relationship of trust and confidence a company has with its employees.  If people believe management is not fairly sharing the rewards, they will feel alienated.  Once they start distrusting management, the company’s future is compromised.

I worked for one company where I was initially impressed at its engaged workforce. 

The workers felt the company took care of them, so they reciprocated.  They worked beyond their standard 40, they took initiative to bring innovative, time saving, productivity enhancing, safety creating suggestions to light.  They were usually helpful and respectful to eachother.  

But, over the next few years I witnessed numb skull MBAs snuff out that energy.  There were not material changes to pay or benefits.  The only material changes was the messages coming from the executive floor.

Execs eager to control compensation costs caught onto the management fad of market-based labor pricing.  They  “benchmarked” pay against similar positions locally to “ensure they weren’t overpaying for talent.”  The message received by workers: management thinks you’re an easily replaceable commodity.    

The transformation was slow and subtle, but damaging nevertheless.  Once satisfied employees turned into grumpy clockwatchers.  They didn’t put in extra time.  They weren’t as helpful.  They didn’t work as hard to improve things. They were no longer engaged.  The place lost its soul. 

The income statement leads bad managers to make damaging decisions.  Most managers haven’t given much thought to the income statement beyond their basic corporate accounting class in b-school.  The way the income statement is nicely organized into line items of income and expenses leads lesser managers to the view the business as, well, individual line items to be managed. 

Their fixation on the income statement prevents them from seeing the business as a whole.  The truth is that all of the lines on the income statement are intricately related.  Make dumb cuts in labor for the sake of controlling that line item and revenue and productivity will suffer.  Associates stop working the free extra 5 hours a week.  They aren’t as nice to customers.  They don’t care much about sharing improvement ideas. 

The income statement is more like a recipe than a grocery list.  Miss a couple items on your grocery list and you’ll make it.  Miss a couple key ingredients to a recipe and you’re hosed. 

Many managers lose their jobs because they leave the yeast out of the bread dough.  The really sad thing is that those managers nor the ones doing the firing ever even realize that.