Monitor Group

Monitor Group, co-founded by Michael Porter, filed for bankruptcy a couple of months ago. That bankruptcy was somewhat puzzling. Like a few financial companies, ones that are expected to know how to manage assets, went bankrupt in 2008, Monitor Group preaching other businesses on strategy and competition, sadly struggled to manage its own strategy and lost to its competitors. While certainly other factors played their roles in Monitor Group bankruptcy, there is an obvious general question – why does division of labor fails here. How much should we trust a consulting company and believe the consulting company is competent enough? In my opinion, that largely depends on how much of moral hazard is involved. If that’s true, consulting as a form of business will become very tricky until consultants take more responsibility for their actions and consequences of those actions.

Today Deloitte has acquired Monitor Group. I hope Deloitte will make better decisions based on Porter’s framework, which I still believe is good, but not as sufficient to achieve success.

JPMorgan Loss Paradox. Human Made Crises Fractal

I am having difficulty understanding the outrage against JPMorgan. Well, I understand the story and what media is trying to say. But that is not the whole story. More importantly, if any measures are taken and they are based on incomplete information lead to unintended results, ironically, similar to JPMorgan loss, again. That is, the “monster” replicates itself over and over again.

Let me clarify my point.

1. JPMorgan made bad decisions.
2. JPMorgan lost the money.
3. Other parties made the money – no one bothers even to suggest who made the money. I do not even mention suggesting why other parties made a good decision. But it is clear, wealth does not disappear that easy.
4. The government wants to introduce more regulation based on incomplete information. Sadly enough, that regulation would apply to those who make bad decisions and those who make good decisions, but would cost almost equally for many market participants.
5. If regulation is based on incomplete information, it leads to unintended results.
6. Like I already said, the situation repeats.

So I do not understand why it is okay for other investors to loose money and not okay for JPMorgan and why it is okay for JPMorgan to profit and not okay for other investors.

Occupy Wall Street Is a Failed Revolution

News about the Occupy Wall Street protests and their clones are still in the media and we will continue to hear them, but I think not for too long.

The Occupy Wall Street movement likens itself to the Arab Spring, calls that it represents 99% of all population of the United States. But like it or not, this is a big stretch. I believe that the movement will fail to deliver anything for a few reasons that distinguish it from the Arab Spring.

1. Demographics. For some reason, the media does not talk about this much, but I believe this is the primary reason. If you look at the median age of the population where protests took place, you will see that it mainly varies from 18 to 32 years. That is a half of the population is younger than 18-32 years old. As people get older they are getting wiser and tend to play safe.
2. Wealth. Obviously, youth does not have much to loose. Especially in poor countries in the Middle East and North Africa. In the United States the median age is above 36 years. Now, take into account the number of baby-boomers in spite of all recessions and financial crises accumulated enough money to be concerned about any calamity that could evaporate all their retirement savings. If you subtract baby-boomers (and children, of course), it is roughly 50% (around 140 million people of age 18 – 50 out of a bit over 300 million people of the entire population). So 99% is an overstatement.
3. Goals. Protesters in the Arab Spring countries had a clear goal. The Occupy Wall Street movement does not have a clear goal. Anger is justified, but misdirected. Any meaningful discussions about goals would break up the movement.
4. Climate. The winter is around the corner. Obviously, it is colder than to the South and East of the Mediterranean Sea and it will not get warmer for a few more months.

In essence, this is mostly about getting enough support to gain a critical mass.

The situation can change rapidly if retirement savings do evaporate due to a political or economic gridlock.

Double Standards

There are some things that raise your eyebrows. If you hear news here and there and do not relate them, they are just news. But when you relate them, this is a different story. Like this one.

This summer-fall Apple was trying to convince the government to spend more on research and development projects saying that many great things came out of defense projects (I guess, they liked Siri). Let me say it this way. Apple asks the government to spend more money on research and development hoping to get some benefits. A few weeks later Apple, Google, and Cisco (yes, no fight there, full agreement) tries to press the government for a 1 trillion tax holiday (or roughly $3.3K per capita). What is wrong in this picture? The companies want to get benefits from the government spending on research and they do not want to pay for this. Guess, who is going to pay for this? You, taxpayer.

How about spending your own money on research? Should I mention that Apple, if it were a hedge fund, would be the largest one? Apple has more money to spend than the US government. And this is a company (along with others though) that asks the government to spend on research and $1T tax holiday???

Disclaimer: I am not one of the Occupiers.

HBR.org: Thin Men Get Lower Pay than Average-Weight Men

Last Friday Harvard Business Review in its “The Daily Stat” series quoted some results of research done by Timothy A. Judge of the University of Florida and Daniel M. Cable of London Business School. Researchers found that a man in the U.S. whose weight is 25 pounds below the mean earns $210,925 less, on average, across a 25-year career than a man whose weight is at the mean a woman who is 25 pounds below the mean earns $389,300 more across the same time span than an average-weight woman. Based on this researchers concluded that rewards people for meeting gender-role expectations on weight.

While I find the results a bit amusing, the researches may have come to a wrong conclusion that lower/higher weight is one of causes of higher/lower pay. It looks like they disregarded the fact that lower/higher pay may drive choices that lead to lower/higher pay. That is, in this case it is not very clear what the cause is and what the effect is.

Global Risks 2011 Report from WEF and Interactive Risk Interconnection Map

The 2011 Report (6th) is out. WEF improved the Data Explorer a bit, but still the links are bi-directional. WEF no longer gives any numbers for likelihood estimation; uses the “unlikely, likely, and very likely” scale.

This year highlights:

• The most impactful is Fiscal crisis (impact about 1T USD, very likely)
• The most likely is Storm and cyclones (about 250B USD, very likely)
• The most likely and impactful is Climate change (about 900B USD, very likely)
• The least likely and impactful is Space security (about 60B USD, very unlikely)
• The last year leader, Asset price collapse, is assessed at about 700B USD, likely. Far away from the leaders and laggers.

Here is my post about the previous report. The link to the last year map does not work anymore.

Consumer Behavior Paradox

I have just received the October issue of Harvard Business Review. Here is one teaser I found entertaining. Gavan J. Fitzsimons of Duke University and Donald R. Lehmann of Columbia University found that 71% of people selected a product they favored after reading a positive review and 93% of people selected a product after reading a negative review. It is easy to come to a counter-intuitive conclusion: the better product review is, the less likely the product is selected. There is still space for misinterpretation of the results since events are not really mutually exclusive and the order how reviews were presented matter.

Misusing Statistics

Last Friday Harvard Business Review in its “The Daily Stat” series published that the vast majority of business fraudsters had no prior offenses referring to a report prepared by the Association of Certified Fraud Examiners (ACFE). ACFE argues that criminal background checks may have limited effect since only 7% of the fraud perpetrators in their study had been previously convicted of a fraud-related offense.

This is one of examples where statistics may lead to wrong conclusions when misused. In fact, in this case criminal background checks may deter fraudsters from getting into the industry in the first place.

A Few Charts

I came across a few interesting charts (from Gordon T. Long).

First, BP’s death spiral (click to view):

Second, financial markets death spiral:

In fact, this is a simplified view of the Interactive Risk Interconnection Map from the World Economic Forum.

Gold Selloff

I find it interesting that one of my predictions comes true. The situation is not that bad yet, but the trend has started. Are you still wondering why we are still in a recession and see very few jobs available?