Sunday Reads #108: Cargo Cults, Startups, and the Myth of the MBA CEO
plus some link love, industry secrets, and a standard dose of lies with statistics.
Hope you and yours are keeping safe (and sane).
I'm back again with the most thought-provoking articles I've read in the week.
If you’re new here, don’t forget to check out the compilation of my best articles: The best of Jitha.me. I’m sure you’ll find something you like.
And here’s my newsletter from last week: Sunday Reads #107: The #1 thing to do when you onboard a new employee.
This week, we start with Cargo Cults. What a fictional population in a remote island can teach us, about why you can’t succeed by simply copying a playbook (and why hiring a hotshot CEO doesn’t work).
Next, updates from the world of COVID-19. Tim Harford (the Undercover Economist) explains why just “looking at the numbers” isn’t enough to know what to do.
And third, some link love. Intriguing reads on the most innovative athlete in the world, and on the core secrets of several industries.
Here's the deal - Dive as deep as you want. Read my thoughts first. If you find them intriguing, read the main article. If you want to learn more, check out the related articles and books.
[PS. If you like what you see, do forward to your friends. They can sign up with the button below.]
1. Cargo Cults and the Myth of the MBA CEO.
In his 1974 Caltech Commencement Address, Richard Feynman shared a parable about a "cargo cult".
In the South Seas there is a Cargo Cult of people. During the war they saw airplanes land with lots of good materials, and they want the same thing to happen now.
So they’ve arranged to make things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head like headphones and bars of bamboo sticking out like antennas—he’s the controller—and they wait for the airplanes to land.
They’re doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn’t work. No airplanes land.
Those people sound stupid, right?
Yet, we ourselves do this all the time!
We copy the seven habits of the most successful people.
We duplicate the latest hotshot CEO's morning routine.
We replicate the newest unicorn startup's business model in our home country.
We religiously wear masks and maintain social distance in public transport (and we clang dishes and light lamps in our spare time), but we eat at crowded restaurants.
We follow the visible parts of a process, in the hope of copying success.
Now THAT sounds dumb!
In this article, Leo Polovets (VC, Susa Ventures) describes Cargo Cults in action in Silicon Valley, why they happen, and how to heed the warning signs.
There's a similar cargo cult in larger companies - it's the myth of the MBA CEO.
Three decades ago, an influential Harvard Business School professor, Michael Jensen, made the argument that CEO pay should be tied to stock performance. The point was to better align incentives and ensure that corporations were able to attract “the best and brightest individuals” to careers in corporate America.
Sounds logical. Right?
But what if, like the Cargo Cults of the South Seas, these are just "offerings to the Gods"?
What if they don't really make a difference?
That's the case that this article, The MBA Myth and the Cult of the CEO, makes. (Thanks to Shilpa for sharing this with me. Of course, the pleasure of pointing out the futility of an MBA was all hers).
Using a database of 8500 CEOs and companies, the authors set out to test two sets of questions:
Do CEO characteristics predict stock price performance? Do CEOs with MBAs perform better than CEOs without MBAs? Do CEOs with MBAs from the best MBA programs outperform other CEOs? Do CEOs who worked at top consulting firms and investment banks outperform other CEOs? More broadly, are the “best and brightest” better at running companies?
Is CEO performance persistent? If someone was a successful CEO of one company and took over as CEO of a different company, does his or her performance at the first company predict performance at the second company?
As you can guess from the lead up, they came up with exactly nothing. Quoting from the article:
We found no statistically significant alphas — despite testing every possible school with a reasonable sample size. MBA programs simply do not produce CEOs who are better at running companies, if performance is measured by stock price returns.
Neither bankers nor consultants produced statistically significant better performance.
The figures are clear: There is almost no persistence in CEO performance.
There you have it. While CEO compensation at the largest companies has increased 5x-7x (adjusted for inflation) in the last 30 years, it might not have affected outcomes at all.
Hmm.
2. The World of COVID-19.
Tim Harford (the Undercover Economist), published an article this week, Statistics, lies and the virus: five lessons from a pandemic.
The article is a good primer on why just "looking at the numbers" isn't enough to know what to do, as governments (and all of us) struggle to cope with the virus.
Quoting from the article:
Lesson 1: Yes, the numbers do matter.
Without good data, for example, we would have no idea that this infection is 10,000 times deadlier for a 90-year-old than it is for a nine-year-old — even though we are far more likely to read about the deaths of young people than the elderly.
Lesson 2: Don’t take the numbers for granted.
Stamp's Law: "Governments are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from a local official, who just puts down what he damn pleases."
Lesson 3: Even the experts see what they expect to see.
Jonas Olofsson, a psychologist who studies our perceptions of smell, once told me of a classic experiment in the field. Researchers gave people a whiff of scent and asked them for their reactions to it.
In some cases, the experimental subjects were told: “This is the aroma of a gourmet cheese.” Others were told: “This is the smell of armpits.”
In truth, the scent was both: an aromatic molecule present both in runny cheese and in bodily crevices. But the reactions of delight or disgust were shaped dramatically by what people expected.
Lesson 4: The best insights come from combining statistics with personal experience.
For all that we discredit experts, expertise matters. Especially in the early days, when we didn't know enough about the virus, many Ebola epidemiologists called it right.
Lesson 5: Everything can be polarised.
The strangest illustration comes from the Twitter account of the Republican politician Herman Cain, which late in August tweeted: “It looks like the virus is not as deadly as the mainstream media first made it out to be.” Cain, sadly, died of Covid-19 in July — but it seems that political polarisation is a force stronger than death.
Obfuscation is an evergreen strategy. If nobody really knows the truth, then people can believe whatever they want.
Thanks to Jayant for sending me this article.
I also found this article on Taiwan's response to the virus an excellent read. The Taiwanese weren’t "lucky". They were decisive, and they used technology well. And it has paid off huge dividends.
And last, as Wave 2 hits many countries and they go back into lockdown, some of us have one more chance to become work-from-home artisanal chefs.
3. Some Link Love, and a Quality of Life Tip.
Bryson DeChambeau, the most innovative athlete in the world.
David Perell has a great thread on Bryson DeChambeau, who just won the US Open in Golf, by throwing traditions and purism out the window.
A lot of the story around DeChambeau is about his physical transformation - how he bulked up so that he could muscle the ball down the range.
But the truth is more mental. It’s that he's turned the art of golf into a science. A science which he excels at.
Fascinating how he:
uses math to compute how the ball will roll along the grass while putting;
measures every shot he hits on the course; and
uses an active brain training and monitoring system to help him stay calm during stressful, tense periods in the game.
While everyone else brought an "intuitive feel for the course", he got out the big guns and won decisively.
Fun Reddit thread on the secrets of different industries.
What's an industry secret in the field you work in?
My favorite ones:
As a Software Engineer, double your delivery date for a product in anticipation of an over eager Project Manager trying to get promoted.
It costs about $200,000 to put your own book on the top of the New York Times bestseller list. All you have to do is buy a lot of copies yourself. (And if that bestseller status helps you sell more books, you can make that $200,000 back by selling the big stock of books you've collected.)
Vodka is really, really, really cheap to make: the glass bottle costs more than the juice 🤯
(exploding head is mine).
I'm an attorney. The secret is shut the fuck up.
Quality of Life Tip.
You know how irritating it is when a colleague tells you something important on the move, and you have no place to note it down?
There's an amazing, easy solution in reach. *drumroll* - Create a single person group on Whatsapp.
Here’s how you do it:
Create a group with one other person on Whatsapp.
Remove that person from the group. Now, you have a group with just yourself.
Pin this group to the top of your Whatsapp. You can rename it to whatever you want. I call mine "Random Notes"
Voila! Now you have a faithful place to jot down notes, the latest celebrity gossip, etc.
You can also have other such groups - "Stuff to buy" (you're welcome, shopaholics), "Books to read", and so on.
Here's a photo of how it looks in my Whatsapp.
I'll tell you about the magic formula soon 😉.
And to end, remember what I said about life on Venus in last week's newsletter? Yes, there's plenty of reason for alarm. But for now, let's laugh a little.
That's it for this week! Hope you liked the articles. Drop me a line (just hit reply or leave a comment through the button below) and let me know what you think.
See you next week!
Jitha