Week 11: Instant Gratification, In and Out of Orgs and Biases

Stanford GSB Sloan Study Notes, Week 1, Autumn quarter

The gearshift to the fall quarter was quite a big one. Going from 13 to 19 units (full schedule here) means days starting at 8am and running straight to 5pm two days a week, leaving slightly more time for prep reading and writing on others. We have been assigned to new study groups (mostly for Strategy, where we need to pick a company and country none of us are familiar with and devise the plans for their entry to that market) and generally get to hang much less with other Sloans due to differing elective schedules.

Pardon for the longest notes yet below. I guess I should become more selective as the courseload goes up? Or maybe not, if the filter remains “write down interesting stuff and aha moments only”… If there is any comfort – there are videos, again.

GSBGEN378 – Decisions About the Future (Dave Hardisty)

Class setup: a smaller, interaction-heavy seminar of mostly Sloans, but also people from journalism, medical school, psychology.

  • Intertemporal choice: decisions that require tradeoff among outcomes that will have their effects at different times. Usually the penalty/reward is smaller in the short term.
    • to get a flu shot or not?
    • (for a pigeon) one food pellet in one second or two pellets in two seconds?
  • A person with a declining discount function for delay F(d) is impatient
    • discount rate – proportional change in F(d) value over a standard period
    • discount factor – proportion of value that remains after delaying an outcome by a standard period
    • the economic gold standard is an exponential discount function, yet hyperbolic functions (impact of a delay period, d to d+1, is greater the shorter the original delay was) appear to be better reflections of actual behaviour
  • Delays are costly in almost every productive activity (e.g a farmer wanting seeds today, not in a year a s production input is rational, not impatient)
  • Instant gratification
    • People who can delay gratification are better off in the long run (experiments with kids, adults, SAT scores, income, education, crime levels, teenage pregnancy, …)
  • Dopamine-releasing, reward-appreciating areas of brain develop faster than risk control
    • uneven development period has a name: teenage years
  • When the prize (Bing “marshmallows”; new car; whatever) is not in front of you, you make more balanced/rational decisions about it
    • Experiments show a picture of the object doesn’t have nearly the same effect than object itself
    • Need to be able to abstract “away”
  • Instant gratification temptation on society level
    • 4-year election cycle (gratification of re-election votes) vs the actual societal benefits of a 50-year environmental program
    • Book recommendation: The Wealth of Nations
  • Intertemporal connectedness
    • if you’re a “different person” in 20 years – why save money for “him”?
    • Sidgwick (1874): it is ethically justifiable to care less about the utility of “others” than about ourselves
    • Stanford Future Self project
      • created a virtual reality “mirror” with an aged avatar of you
      • ppl started allocating double the money to retirement fund after interacting with avatar
  • Regulatory focus: promotion vs prevention
    • be better than others vs avoid failures
  • Regulatory mode: locomotion vs assessment
  • Rational decision maker will make identical choices about the delayed money (in a market with known interest rate)
    • Yet their consumption decisions can be different (e.g impatient one might take less money earlier to buys something, a rational & patient one might lend the less money out to earn more in long-term from interest)

GSBGEN566 – Real-Life Ethics (Mark Leslie, Peter Levine)

Class setup: my first mixed class with MBAs. Very interactive, discussions & spontaneous role-plays (“OK, so you say you would call now the famous VC back to break your promise. I am him: call me now!”). No long pre-reads, but few page “vignettes” shared and read in class. Real life VC/M&A/startup cases with (mostly) obscured real names.

  • when VCs collude, it is called just syndication, not anti-trust 🙂
    • 2+ get together and present a single term-sheet (not just a startup getting a few different investors into a round)
    • raising money you want as many independentterms sheets as possible
      • also helps to bargain the last few nuances better in the offer you prefer anyway
  • end of runway basic options for a startup
    • bridge
    • downround
    • shutdown
  • “Others call them arrogant, they themselves: thoughtful” (on a top VC firm)
  • Common Valley time bomb on term sheet offers is 3 days
    • still possible (not frequent) for VCs to pull out from term sheet
    • -> commitment asymmetry
  • consider all moral stakeholders early
    • Ex: a startup founder with 4 months of runway left can already manage key employees expectations – not waiting until they’ve potentially messed up with raising a new round?
  • consider the effect of how you deliver the bad news (that you are breaking your promise, for example):
    • “Dog ate my homework” (board made me do it, whatever)
    • “I screwed up, I did a wrong thing, I have no excuses”
  • Once you have a term sheet, nothing good can happen. Any surprises, changes, questions are likely bad.
    • sense of urgency: CLOSE
  • The Golden Rule: He who has the gold, rules. (- Matt’s dad)

STRAMGT279 – Global Strategic Management (John Roberts)

  • Books
  • Performance in attacking an Opportunity aligns from the SOE triangle:
    • Strategy: how are we going to win (create value and keep some of it)?
      • goal, scope, competitive advantage + explanation why it will actually be realised
    • Organization: means through which the strategy will be implemented
      • people, architecture, routines, culture
    • Environment: everything outside the org
      • competitors, customers, legal/regulatory, etc etc
  • On China (Case: AT&T entry)
    • has never been an emerging market… but 30-40 of them. Provinces matter so much.
    • was the only country for whom the MSN (Most Favoured Nation) status in US trade was not permanent, but pending regular review
      • mess around Clinton’s election promise to tie the review to human rights (early 90s)
      • review in itself was insulting. insults matter in CN
      • WTO membership = permanent MSN now
    • guanxi – relationship/networking with a powerful person in government
    • public posts are career paths where you get promoted
      • a major of a large city needs to prove as a major of a small city
      • proof comes from
        1. no unrest, legitimacy of the party
        2. growth – where cities/provinces get competitive for foreign investments, tech transfers, etc
    • a very disperse selection of groups can gather for unified front in US on any CN issue
      • left-wing: human rights
      • right-wing: anti-communists, free market proponents
      • religious: anti-abortion, one child policy
      • as a result: any US consumer firm with pro-CN interests faces risk of direct home market backslash (fuelled by local competition of course)
  • Measuring BU success in EVA (income / capital employed) is a very backwards looking measure
  • Frontier graphs:
    • perceived quality VS low cost
    • likewise: initiative VS co-operation
  • BP-s individualism -> co-operation push based on two rules:
    • ask peers (other BUs) for help
    • when asked, send help
    • not measured/incentivized directly
    • culture shift: you’re not in trouble when you’re in trouble, but when you don’t ask for help
  • Companies like AT&T well positioned for US lobby: facilities in every congressional district
  • Reasons for senior management to use their authority/power with discretion & avoid excessive interventions in BUs and conflicts among them
    • will overload center
    • undermines units & their incentives
    • politicizes the organisation
  • Essence of middle managers job is to manage their peers, not up or down
  • When talking about the Principal-Agent (ex: shareholders hire a board to manage on their behalf) problem, conventional references are “she” and “he” respectively
  • The indicators of agent’s actions are often noisy, involving random elements
    • Ex: a sales rep’s results consist of his efforts + many elements out of his control (from macroeconomic situation to weather; that is: noise)
  • Markets are more efficient for simple, easily managed transactions, for complex, difficult transactions, managed organisations are better
    • Think of the transaction cost of a “perfect contract”, trying to predict & cover every single possible contingency situation ahead
    • Advantage of managed orgs: more instruments to affect behaviour and so can give more nuanced, often muted incentives that are appropriate in complex situations
    • Complex products/industries often start inside a single firm
      • electricity, computing, …
      • break up vertically once unknowns/complexities/information asymmetries get sorted out
  • Audits, due diligence, independent reviews are all reactive mitigations to information assymetry in deal making
    • Notice there is no value created, pure transaction cost!
  • Theory on signalling (Mike Spence, former GSB dean & Nobelist)
    • those whose private information is valuable to trading partners have incentives to “signal” in a way that, if correctly interpreted, the potential partners can infer that that party’s information is, indeed, favourable
    • Ex: two sellers of cars, one has good and the other bad cars. First one can offer extended warranty as a credible signal – the bad car seller can’t come along for the fear of high cost
      • in this context just saying “my cars are great” is cheap talk anyone can match, not a credible signal
    • Other examples:
      • paying of dividends (which can signal management’s underlying knowledge about future cash flows)
      • use of low prices to deter entry (because low prices signal low costs and thus that the incumbent is a tough competitor)
      • massive, even if uninformative ad campaign (to signal a strong belief of future cash-flows justifying this spend)
  • A buyer organising their suppliers into an association, encouraging communication between them
    • Ex: japanese carmakers, Caterpillar in US
    • unintuitive: would seem as a call for suppliers to collude?
    • a credible commitment: a company making it harder for themselves to screw particular suppliers
  • Toyota’s trick to create competition for supplier A: create a second supplier B in joint venture with A
    • keeps commitment and relationships intact while mitigating risks (say: a fire in single supplier’s factory)
  • Bringing stuff in-house doesn’t eliminate the transaction costs, just altersthem
    • should the unit be a cost or profit centre?
    • what’s the decision authority? can they also sell outside?
    • much more politics internally than in effective markets
  • “HBS doesn’t like to use other schools’ cases and tends to re-write them. That’s the sincerest form of flattery, of course”

ACCT219 – Financial Accounting (Guttman)

  • Common mistake to consider accounting precise, black’n’white
    • Discretion in methods, estimates, disclosure
  • Alternative “language” for balance sheets:
    • Assets -> Investing
    • Liabilities & equity -> Financing [for that investing]
      • Liabilities -> from creditors
      • Equity -> from owners/investors
  • Gross profit/margin is the only exception in accounting where gross does not mean “before subtractions” (= sales – COGS)
  • Common US financial statement formatting
    • Assets listed in order of liquidity (nearness to cash)
    • Liabilities listed in order of due dates
  • MD&A (managers discussion and analysis) section in SEC reports is notrequired to be GAAP-compliant
    • used to introduce and discuss other, “more relevant’ KPIs about a business
  • Dual reporting of earnings (accrual basis in income statement, cash basis for cash flow statement) only since 1970s?
  • Three sources of cash flow: operating, investing (firm’s resources), financing (from debt and equity)
  • Academic research does notsupport the common view that companies buy back their own shares because “it is undervalued”. Example other reasons potentially at play:
    • when core investors are not selling to buyback, their holding %% increases -> control?
    • reducing float to stabilise price
  • Intangible assets generated in-house is not recognised in financial statements
    • however, when that company gets bought, it’s intangibles (brand, etc) get valued on the buyers balance sheet

OB278 – Organizational Behaviour (Flynn)

  • Fundamental attribution error:
    • overemphasising the person, not context/circumstances
    • ex: no response to email -> “person doesn’t care” vs “he must be busy with other things”
    • ex: food late in restaurant -> “waiter is an idiot” vs “much more tables seem to be full tonight than usual”
  • Biases affecting decision making:
    • confirmation
    • default (pick option given, avoid effort to change)
    • chance (overestimating luck)
    • overconfidence
    • recency and early on (reviewing performance)
      • the “recall curve” is U-shaped
      • first and last 2 weeks matter in yearly review, anchoring a deep “this is what that person is like” attribution error
    • sequencing bias (in a multi-stage hiring process, performance in most recent stage outweighs)
  • Corrective devices to overcome bias
    • Ex: top orchestras audition behind a curtain and ask candidates to remove shoes to avoid detecting gender by the sound of walking
    • Three quick check questions to control for fundamental attribution error (for example: you ask for help and the person declines):
      • What do others do in this situation?
      • What has this person done before in similar situations?
      • What has this person done in different situations?
    • On appraisal forms, ask questions about favourability of the situation next to pure questions about the employee’s performance
  • Key about self-fulfilling prophecies is how people treat, not perceive others
    • Pygmalion effect – the higher the expectations, the better people perform
    • Jane Elliot’s Blue & Brown Eyes experiment:
    • Experiments where measured IQ goes up in “superiorly” treated groups
  • Book recommendation: The Checklist Manifesto: How to Get Things Right
    • Airline mergers have been held up over competing/differing pilot checklists
    • industries asking about checklists today: finance, VC
  • UCSF prof Ekman can lie detect visually with 98.5% accuracy
    • married 3 times 🙂
    • didn’t teach the skill because he hadn’t figured out the ethics of this (until 9/11)
    • can get a novice to 75% accuracy with 2 hour training
  • Statistical relevance of predictors of future job performance
    • 6-7% – job interview performance
    • 42% – test task performance
    • ~50% – IQ
    • other high: references in small world (trusted network)
    • other low: references in large world, handwriting analysis, …
  • Instead of one-off performance appraisals, use of automated diaries
    • a manager gets a ping every month for a quick, fresh data dump on their reports
    • less onerous for the manager
    • compensates for biases
  • In performance reviews: don’t fear anger, but do fear surprise
    • Expectations management: give a blank appraisal form to all new joiners on day 1
  • Social performance management tool Rypple (bought by Salesforce & rebranded to http://www.work.com/)
    • hard to keep an evaluation tool becoming just recognition (90% positive)
  • 360 degree feedback forms have diminishing returns after 5th participant – don’t waste people’s time
  • background checking mechanism: a blast to LinkedIn contacts, asking “anyone want to vouch for this guy?”
    • in a sufficiently solid network, silence to this question is a strong signal in itself
  • People are more harsh in async feedback tools – counterintuitive, as you’re on the record?
  • It hard to describe good performance, ask people to agree/disagree with descriptors instead

CS207 – Software Economics (Wiederhold)

Class setup: the last year Prof Emeritus Wiederhold reads this – “I retired 12 years ago!”. His research interest is more broadly evaluation of intellectual property – consulting US Treasury re: implications of offshoring, about to publish a book on this. Mostly young (undergrad?) CS students and other engineers in class. Full materials public, not hidden in Coursework: https://cs.stanford.edu/wiki/cs207/

  • Consider your obligations as an input to software pricing
    • per-unit sale can translate to as-is (no warranties)
    • revenue share on lifetime revenues could need a full joint venture setup
  • “Hardware is just petrified software” (Lentz)
  • Software engineers are not taught to consider customers in other ways than in the context of functionality
  • US Treasury issue
    • software leaves US, priced low as intellectual property (say, nominal cost on patents)
    • export numbers low, tax income down
    • actual economic activity (turning the IP to products, selling) outside US
    • as a result, further increased motivation for external investments
  • arguments for atom-based production moving around in the world are invalid for IP
  • no real data, as IP created in-house is not in the books (see ACCT219 notes above!)
    • some single case estimates in $20B ballpark
    • VCs have a “second sense” on how to value IP, but it is not formalised (and thus not teachable!)
    • “One day we’ll have a balance sheet line called Information” (Grace Hopper, 1987)
  • “Software wants to be free” is nearly as stupid to say as “corporations are people”
  • Black Duck open source licence management tool: http://www.blackducksoftware.com/
  • Going from a successful PhD thesis to a product based on this IP is 1:5 effort in man yeas

Notes from a leadership chat with a super-successful team sports coach

  • there is no equal opportunity in who gets to take a shot
  • an assistant coach focussed (and very good at) finding good talent
  • 3H: health, heart, hunger
  • team gathers after a game to discuss a shared quote (from Shakerspeare to …)
  • “leadership is like porn: can’t define it, but you know it when you see it”
    • leader is the one most (in)vested in the outcome
    • ringleaders are a cancer to the team
  • in men’s teams every player thinks they are going to top pro league (need to slap them down sometimes), in women’s teams there are problems with those whose for whom things do not go perfectly (depression, eating disorders – need to help them back up)
  • qualifier: is that player’s head in the game when he/she personally is not in the ongoing game at that moment?
  • “players don’t care how much you know, but know how much you care”
  • reason to train players hard physically is not just strength (or even breaking characters) – people fight harder for things they have invested more in
  • OK with hard-working people being selfish. Selfish & lazy combination never works.
  • “I am not as tough as some of the people I hire”
  • sweetspot:
    • your best player
    • is also the hardest worker
    • and the leader
  • create situations in training that are harder than the game
    • loud music and noise
    • much faster repetitions than realistic
  • reasons why convergence (and professionalisation) of young kid’s sports towards just one is a mistake (specialisation should happen 15-16 yr+)
    • boredom
    • injuries

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