12 May You are the Easiest One to Fool
As an active member of the ONRAD management team, an officer of the company, and a 3rd year part-time law student at the University of San Diego School of Law, I have had little time to read the newspaper. That is unfortunate. Well, my law school semester just ended yesterday, and I picked up the Wall Street Journal this morning. I am not sure whether to chalk it up to newspaper deprivation, or if it is real just a brilliant article, but I found a short article on the first page of the business and finance section that I feel may become a new matra in my professional career.
The article is titled “Polishing the Dimon Principle” by Jason Zweig and the topic is related to the recent JP Morgan Chase debacle. For those of you that don’t know (put me in that bucket a few days ago), JP Morgan Chase executives have recently revealed that the company had made a series of bad trades in an attempt to hedge against the impact of the European financial crisis on its investors. These hedge trades were requested by top JP Morgan executives and have resulted in a $2BB loss for its investors, and apparently, the issue has been brewing for some time now, with single day losses in some cases topping $200MM. The issue has brought the argument of increased regulation of the financial industry to light again, and JP Morgan’s CEO, James Dimon, is at the center of this argument as he has been an outspoken supporter of less, not more regulation. In recent statements, he insists that his company would not be in violation of even the stricter proposed regulation- the so-called “Volcker rule” in the pending Dodds-Frank Act, which would prohibit risky speculative investments by banks with their own money, some of which are disguised as well thought-out hedges.
What does the financial services industry have to do with healthcare?
You may ask why this article struck such a chord with me as ONRAD is a healthcare services company, not a financial services company. There are three reasons –
1) The financial industry, like it or not, is the driving force of our economy, and EVERY business relies in some part on this industry for credit markets, retirement plans, general economic welfare- the list goes on and on.
2) The article focuses on how moral principles should drive us in our professional careers and is derived from the famous quote by Nobel Prize winning physicist, Richard Feynman – “You must not fool yourself – and you are the easiest person to fool.” Richard Feynman is a personal hero of mine as my own background is in Physics. However, how true is this observation in each of our lives? How can we really be objective in our decisions when we are not independent from them? How many times have you been put in a position where a decision of yours was in question but you were able to defend or justify it in some way? If you are like me, this has probably already happened to you a few times since breakfast… this does not mean our decisions are wrong, but just that they are inherently biased and we need to understand that when defending them.
3) The financial industry is a parallel to our healthcare industry- it is heavily regulated, and that regulation is changing rapidly under severe economic pressure. In fact, as pointed out in past posts by myself, the healthcare industry represents over 17% of the US gross domestic product and is growing, and there are temptations to cut corners, take the easy road, and make the wrong decision for most of us who operate businesses in the industry.
How do we avoid such temptations when sometimes, when cutting a corner, it is so easy for us to find a justification for our actions? How we react in these tough situations says so much more about us and our integrity than how we react when times are easy. Our customers, investors, colleagues, employees, spouses, friends and family will all respect us for showing true integrigty- they will trust us… how important is it to do the right thing?
Every Bet is a Winner
Two scary observations are pointed out in Zweig’s article that I found shocking:
The first relates to research done on race track betting. Those experiments found that people who bet on the outcome of a race became three times more confident that that outcome would actually occur. I found this same thing happened to most of us who recently bought a lottery ticket when the “Megamillions Lottery” prize was over 1/2 billion dollars- how many of you were like me, thinking how you would spend the money if you won, what kind of yacht you might buy, how you would give some to your family or friends, etc. I actually believed, somewhere in the back of my mind, that I could win. Of course, someone did win- but if you were also like me, you tried running your numbers through the Megamillions web site tool that allows you to see if any of your numbers would have won a prize in any of the Megamillions drawings that has ever occurred since the lottery first started. I found that my 10 sets of numbers would have won me about $150 total, for the entire history of the lottery. While being a statistically accurate outcome, it just seems like I should have been able to win more than that (and no, I didn’t bother to figure out what all those lottery tickets would have actually cost me, but I’m sure it is much more than $150).
Really, all we need for proof of this phenomenon is to look at the sheer long term success of the gambling industry- an entire city exists because of it.
The “Cargo Cult”
The second story Zweig points out is an anecdote from a Feynman commencement address to Cal Tech students in 1974 about the “cargo cult”. The story relates to a group of people who lived in the Pacific islands during World War II. They used to line up along side the runway when US warplanes would land and deliver them food and supplies. The war stopped, the military pulled out, but the people still believed that it was their lining up beside the runway that would bring the planes, so they continued to do it even though the planes stopped coming. How easy is it to fool ourselves?
What can we do to not fool ourselves?
What I really like about Zweig’s article is that it doesn’t just quote some wise, broad principle and point out the evils inherent in the financial industry- it proposes some well-thought out solutions. While the article goes into more detail about these philosophy’s, it is enough to point them out:
1) The riskiest moment is when you are right- so if you win a bet or an investment comes through, you are more likely to “let it ride”. The most successful investors or gamblers know when to pull their money off the table. Setting thresholds before you make a decision that predefines when you need to change course (aka- pull your money off the table) will help you mitigate this risk. I enjoy playing craps in Vegas. If you play craps correctly, it actually has one of the highest odds of winning out of any Vegas game (of course, still not over 50%). However, one of the hardest parts of the game is when a roller really gets hot- I feel the urge to put more money out on the table- a horn bet here, 6’s and 8’s there, 10-the-hard-way, a couple come bets, keep them coming… and then I hear that dealer say the worst two words a person can hear… like a slap in the face, “7 out”. There goes all my money- what happened? I shouldn’t have gotten carried away, I should have played my system, and I should have pulled my money off the table when I had the chance.
2) Compare what you are doing to what other organizations have done successfully. This will give you an objective measuring stick to compare yourself against. This kind of comparison is becoming much easier in our society today with the advent of social media. Most of us are engaged in large virtual networks on sites like Linked In, Facebook, or Google. It is not that hard to actively compare ideas with colleagues- this doesn’t mean you have to give up some secret, but you can ask for general input on a philosophy or ask for insight on what others are doing to confront the same challenges you are facing. You may be surprised at how many responses you get.
3) Monitor yourself over vehemence. I think this one relates to the first of the seven deadly sins – PRIDE. We are all tempted to defend ourselves first when questioned by colleagues. Those of us who welcome a critique and are willing to have a meaningful discussion about it are the ones who will learn the quickest. It is much better to be proven wrong by our friends than by our customers. JP Morgan was losing $200MM a day at times over the last several weeks and all the while, the board was meeting to discuss what was happening, as was a risk committee. However, nobody actually did anything to stop the bleeding. Perhaps accepting a little more criticism internally would have helped find and stopped the problem before it led to a $2BB loss for their investors.
4) Finally, Zweig points out that “pre-mortem” analysis is important. Many of us have been involved in company events where something bad happened, and we have all done the wise thing- a “post mortem” to find out what happened and try to make changes to avoid similar consequences in the future. We all talk about trying to be pro-active. Zweig’s comments, stemming from the philosophy of psychologist Gary Klein, ask us to consider a “pre-mortem”. When making a decision, imagine the worst outcome does happen- then ask your colleagues, advisers, and friends, assuming this bad outcome occurred, to look back to when the decision was made and judge us on the decision. Did we consider the problem properly? What could we have done differently? Were we truly objective? This kind of analysis can help us avoid making uneducated or non-objective decisions. We may not always be right, but at least we can be smarter.
And then- my favorite quote from Zweig: “Remember that the smarter you are, the more easily you can fool yourself.” I hope you all join me in trying not to fool yourself in your business, and personal decisions. I encourage you to read the Zweig article yourself (the link is at the beginning of this post) and I look forward to your response and comments to this post.
-Jesse Salen, CTO, ONRAD, Inc.