Author Topic: The Boss is no longer the Expert  (Read 1504 times)

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_JS

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The Boss is no longer the Expert
« on: January 25, 2008, 07:01:54 PM »
This sounds like the call to begin reorganizing into a co-operative organizational model. (highlights are mine)

From The Times

January 25, 2008

?4.9 billion? They wouldn't notice

The SocGen fraud reflects today's workplace, where workers often know as much as bosses
Chris Dillow

"French bank loses money? is a headline that inspires Schadenfreude in many Englishmen. But the ?4.9 billion (?3.7 billion) loss to fraud by a single trader give us more than a good laugh. There are some lessons to learn from it.

One is that trading in financial assets is not rocket science. Emotions matter. SocGen's rogue trader, Jer?me Kerviel, was not a criminal mastermind. What probably happened is that he first lost a small sum. Then, rather than own up and face a few embarrassing meetings and loss of a bonus, he tried the simple strategy known to every member of Gamblers Anonymous: double or quits. And when he lost on that, he hid his losses while trying to recoup them. But the losses just grew.

This is just an extreme manifestation of some errors that investors and traders commonly make. One is to fail to learn from experience. Often, if a share falls after we've bought it we infer not that we were wrong, but that we were merely unlucky. So we hold on to it in the expectation that we'll be proved right. We fail to heed W.C. Fields's advice: ?If at first you don't succeed, give up. There's no point being a damn fool about it.?

Also, our ego intrudes. We hate facing up to losses not just because they make us poorer but because they force us to acknowledge that we weren't as clever as we thought. SocGen's troubles show how far men will go to avoid facing this truth.

These errors contribute to what Meir Statman, of Santa Clara University, California, called the ?disposition effect?: investors are disposed to hold on to falling stocks in the hope they'll turn around and get even.

These biases can affect share prices. Because some investors fail to sell falling stocks, prices of them don't immediately fall as far as they should. And, for similar reasons, prices of rising shares don't immediately rise as far as they should. The result is that momentum investing - buying past winners and selling past losers - can produce good profits.

A second lesson of SocGen's fraud is that it's amazing what doesn't trouble stock markets. On the day SocGen announced its loss, and an intention to raise ?5.5 billion from the stock market, France's CAC-40 index leapt almost 4 per cent while SocGen's price fell less than 5 per cent - buttons in these markets.

Why is the market so relaxed? One reason is that there is lots of money sloshing around the global economy, much of it in the hands of Chinese and Arab sovereign wealth funds. These were quick to plug the holes in the balance sheets of Merrill Lynch and Citigroup. Markets are hoping they will do the same for SocGen.

But perhaps stock markets shouldn't be relaxed. The third lesson of SocGen is that top bosses cannot know everything that goes on in their organisations. The division in which SocGen suffered its fraud - equity futures hedging - is, by the standards of modern banking, a simple business. But it still had enough dark holes for a trader to hide huge losses. When you consider the countless other businesses that banks have - many of which make equity futures look like the Teletubbies - how many other ways are there for individuals to hide losses?

This is one of the threats still hanging over stock markets. It's quite possible that even now banks haven't yet announced the full extent of the losses they have made from holding US mortgage-backed assets. This isn't because rogue traders may be fraudulently hiding losses. It's because honest traders have lots of ways of pricing complicated illiquid assets and can fudge on the optimistic side. Unless a boss is more expert than his traders on multivariate copulas - the mathematical methods used to price such assets - he'll not see through their fudges.

And the boss won't be more expert. Why buy a dog and bark yourself? The division of labour that makes companies efficient - in so far as they are - is also a division of knowledge. It's just impossible for a bank boss to continually know more than every employee does. Ignorance, therefore, isn't a failing of a particular individual but an ineliminable fact about any organisation.
 
This highlights a curious paradox about modern organisations. Their hierarchical structure is much the same as that of the first factories of the industrial revolution. But one of the conditions that made hierarchy work back then is no longer present. That condition is that bosses know more than workers. In the first factories, bosses knew everything about production processes - men such as Arkwright and Watt had invented them - while workers knew little; they were illiterates and children. It was therefore sensible for information to flow up the hierarchy and orders to flow down.

But in today's firms, knowledge is spread throughout the business. Bosses aren't, and can't be, the know-alls that early factory owners were. Yet organisations are structured as if they are.

Perhaps we exaggerate the extent of management expertise. What looks like bosses' competence is in fact the skill and goodwill of their employees. Without this, they are like one-legged ducks. They might look calm and assured on the surface, but underneath they are paddling frantically without much idea where they are heading.


Luckily, financial markets give us a simple solution. Thanks to the easy availability of funds that track the stock market, ordinary investors don't need to worry about particular companies. We can back the field, rather than particular horses.

But voters don't have such an easy answer. SocGen shows us that big organisations can't always be run effectively, even when managed by highly intelligent and diligent people. So why should politicians pretend the opposite can be true of the State?


Chris Dillow is a columnist for

Investors Chronicle

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Universe Prince

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Re: The Boss is no longer the Expert
« Reply #1 on: January 25, 2008, 07:12:31 PM »

This sounds like the call to begin reorganizing into a co-operative organizational model.


Does it?

Quote

SocGen shows us that big organisations can't always be run effectively, even when managed by highly intelligent and diligent people. So why should politicians pretend the opposite can be true of the State?


Sounds like the call to less central control, more decentralization. Which seems more like my ideology than yours.
Your reality, sir, is lies and balderdash and I'm delighted to say that I have no grasp of it whatsoever.
--Hieronymus Karl Frederick Baron von Munchausen ("The Adventures of Baron Munchausen" [1988])--

_JS

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Re: The Boss is no longer the Expert
« Reply #2 on: January 25, 2008, 07:22:43 PM »

This sounds like the call to begin reorganizing into a co-operative organizational model.


Does it?

Quote

SocGen shows us that big organisations can't always be run effectively, even when managed by highly intelligent and diligent people. So why should politicians pretend the opposite can be true of the State?


Sounds like the call to less central control, more decentralization. Which seems more like my ideology than yours.

That's because you believe I want a massive central government.

I don't.

Notice that companies don't seem to work well on that scale either. ;)

Decentralization sounds good to me. Co-operatives and Workers Councils are the future.  ;)


I smell something burning, hope it's just my brains.
They're only dropping peppermints and daisy-chains
   So stuff my nose with garlic
   Coat my eyes with butter
   Fill my ears with silver
   Stick my legs in plaster
   Tell me lies about Vietnam.

Universe Prince

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Re: The Boss is no longer the Expert
« Reply #3 on: January 25, 2008, 07:40:14 PM »

Decentralization sounds good to me. Co-operatives and Workers Councils are the future.


I guess I'm unclear as to how workers councils would be decentralized control.
Your reality, sir, is lies and balderdash and I'm delighted to say that I have no grasp of it whatsoever.
--Hieronymus Karl Frederick Baron von Munchausen ("The Adventures of Baron Munchausen" [1988])--

Amianthus

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Re: The Boss is no longer the Expert
« Reply #4 on: January 25, 2008, 08:51:22 PM »
In banks, the "Risk Management" department is in charge of making sure that things like this don't happen. This particular employee had worked for the bank's risk management dept., so he know how to get around their safeguards.
Do not anticipate trouble, or worry about what may never happen. Keep in the sunlight. (Benjamin Franklin)

The_Professor

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Re: The Boss is no longer the Expert
« Reply #5 on: January 25, 2008, 09:05:41 PM »

This sounds like the call to begin reorganizing into a co-operative organizational model.


Does it?

Quote

SocGen shows us that big organisations can't always be run effectively, even when managed by highly intelligent and diligent people. So why should politicians pretend the opposite can be true of the State?


Sounds like the call to less central control, more decentralization. Which seems more like my ideology than yours.

That's because you believe I want a massive central government.

I don't.

Notice that companies don't seem to work well on that scale either. ;)

Decentralization sounds good to me. Co-operatives and Workers Councils are the future.  ;)




However, JS, wouldn't your view of socialized government require a large government bureaucracy to administer all these benefits like national health insurance and on and on?
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The_Professor

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Re: The Boss is no longer the Expert
« Reply #6 on: January 25, 2008, 09:35:27 PM »
To follow up, JS:

The modern notion that the State can fix all problems comes, I believe, from Mussolini and the fascists. "Everything for the State. Nothing against the State. Nothing outside the State." What Chesterton called "our little platoons" in which we get on with our potty little lives vanished under H. G. Wells and the Fabians -- but it was the Italian Socialists, and Mussolini, who first tried to implement forced unity of all the social classes. The Marxists thought the only solution to class warfare was the elimination of the classes and the domination of the proletariat. Everyone would be reduced to equality, and none would stand out; and thus would there be harmony.

Mussolini and the Corporate State -- Fascism -- thought that social classes were inevitable, and that there would always be conflicts; but by having the State as the overarching power, the classes could be persuaded -- or if need be coerced -- into working together to the greater glory of the New Rome. It is not generally remembered that Mussolini began as a leader of the Italian Socialist Party (did you know this, JS? Weird...), and parted with them only on the issue of the Great War. He opposed Hitler's Anschluss with Austria and actually prevented it for some time; but the Communist strategy of the Popular Front excluded Mussolini from the Allies, and he made the fatal mistake of joining the Axis. Had the Allies been a little less contemptuous of him and had he been a little wiser, he would probably be considered an heroic figure today -- among Liberals. Even you? :-)

Today both parties seem to subscribe to the notion that we have social problems -- lack of medical insurance, bad education -- that can be fixed by the Federal Government. Yes, I said BOTH parties. The notion of local control and states rights, transparency and responsibility, the idea that the people most affected by policies ought to have some control (such as local school boards controlling both education and its finance) is pretty well considered ludicrous by nearly every academic intellectual and political leader in the nation. Fascism has prevailed, and we hardly notice it. Or, do we? Or, do those with the Power see?
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kimba1

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Re: The Boss is no longer the Expert
« Reply #7 on: January 25, 2008, 09:37:42 PM »
investors are disposed to hold on to falling stocks in the hope they'll turn around and get even.

wrong
they will hold till it double or more rarely even


_JS

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Re: The Boss is no longer the Expert
« Reply #8 on: January 25, 2008, 09:49:15 PM »

This sounds like the call to begin reorganizing into a co-operative organizational model.


Does it?

Quote

SocGen shows us that big organisations can't always be run effectively, even when managed by highly intelligent and diligent people. So why should politicians pretend the opposite can be true of the State?


Sounds like the call to less central control, more decentralization. Which seems more like my ideology than yours.

That's because you believe I want a massive central government.

I don't.

Notice that companies don't seem to work well on that scale either. ;)

Decentralization sounds good to me. Co-operatives and Workers Councils are the future.  ;)




However, JS, wouldn't your view of socialized government require a large government bureaucracy to administer all these benefits like national health insurance and on and on?

Why?

Hospitals would be co-operatives, why would they require a central government to do anything?
I smell something burning, hope it's just my brains.
They're only dropping peppermints and daisy-chains
   So stuff my nose with garlic
   Coat my eyes with butter
   Fill my ears with silver
   Stick my legs in plaster
   Tell me lies about Vietnam.

The_Professor

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Re: The Boss is no longer the Expert
« Reply #9 on: January 25, 2008, 09:54:45 PM »
If history proves to form, more bureaucracy will need to be created in order to assure it is all working smoothly, aka a bureaucracy on top of the hospitals. And another one to audit that bureaucracy. And reports to be written by everyone to justify their actions and....
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Amianthus

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Re: The Boss is no longer the Expert
« Reply #10 on: January 25, 2008, 10:04:08 PM »
Why?

Hospitals would be co-operatives, why would they require a central government to do anything?

Who makes sure that the quality of care you get is the same as the quality of care I get?
Do not anticipate trouble, or worry about what may never happen. Keep in the sunlight. (Benjamin Franklin)

_JS

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Re: The Boss is no longer the Expert
« Reply #11 on: January 25, 2008, 10:07:48 PM »
To follow up, JS:

The modern notion that the State can fix all problems comes, I believe, from Mussolini and the fascists. "Everything for the State. Nothing against the State. Nothing outside the State." What Chesterton called "our little platoons" in which we get on with our potty little lives vanished under H. G. Wells and the Fabians -- but it was the Italian Socialists, and Mussolini, who first tried to implement forced unity of all the social classes. The Marxists thought the only solution to class warfare was the elimination of the classes and the domination of the proletariat. Everyone would be reduced to equality, and none would stand out; and thus would there be harmony.

Mussolini and the Corporate State -- Fascism -- thought that social classes were inevitable, and that there would always be conflicts; but by having the State as the overarching power, the classes could be persuaded -- or if need be coerced -- into working together to the greater glory of the New Rome. It is not generally remembered that Mussolini began as a leader of the Italian Socialist Party (did you know this, JS? Weird...), and parted with them only on the issue of the Great War. He opposed Hitler's Anschluss with Austria and actually prevented it for some time; but the Communist strategy of the Popular Front excluded Mussolini from the Allies, and he made the fatal mistake of joining the Axis. Had the Allies been a little less contemptuous of him and had he been a little wiser, he would probably be considered an heroic figure today -- among Liberals. Even you? :-)

Today both parties seem to subscribe to the notion that we have social problems -- lack of medical insurance, bad education -- that can be fixed by the Federal Government. Yes, I said BOTH parties. The notion of local control and states rights, transparency and responsibility, the idea that the people most affected by policies ought to have some control (such as local school boards controlling both education and its finance) is pretty well considered ludicrous by nearly every academic intellectual and political leader in the nation. Fascism has prevailed, and we hardly notice it. Or, do we? Or, do those with the Power see?


There are quite a few problems with this view.

Part of what was said is true. Fascism was an attempt to remove class struggle and even class identity through two means: 1. corporatism, which is ruling through combining government, corporations, and trade unions and 2. nationalism, which is bringing unity through national symbolism, jingoism, and militarism.

Socialism does not promote corporatism, but generally stands with the Trade Unions (not to be confused with a government run by Trade Unions which is a special kind of socialism known as syndicalism). Socialism also recognizes class struggle. I personally do not acknowledge anyone as a socialist if he or she does not acknowledge class struggle. (Off on a tangent, apologies)

I don't think that Mussolini invented the idea that government provides solutions or that government is more important than the individual. If we're honest this notion has been around for centuries. The Spartans, for example, certainly believed that the individual was subordinate to the state. They would immediately kill an infant with any deformities because they would not become good warriors for the state (or produce good warriors in the case of females). This was accepted practice.

Hegel certainly believed that the individual was subordinate to the greater glory of the state (and history as well).

I did know that Mussolini was an Italian Socialist at first. One of the areas that really bothered him was the loss of the Italians to the Ethiopians when they tried to expand from the Italian colony of Eritrea into "Abyssinia." It was a humiliating loss by an European "Empire" to an indigenous people. He made it a goal of his Fascists to destroy the Ethiopians. He enacted one of the most racist (even by European colonial standards) colonial regimes in both Eritrea and Ethiopia.

There's a very good book on Eritrea by Michela Wrong if you want a resource. Brilliantly written and a remarkable insight into the nation and people of both Eritrea and Ethiopia.
I smell something burning, hope it's just my brains.
They're only dropping peppermints and daisy-chains
   So stuff my nose with garlic
   Coat my eyes with butter
   Fill my ears with silver
   Stick my legs in plaster
   Tell me lies about Vietnam.

_JS

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Re: The Boss is no longer the Expert
« Reply #12 on: January 25, 2008, 10:09:02 PM »
If history proves to form, more bureaucracy will need to be created in order to assure it is all working smoothly, aka a bureaucracy on top of the hospitals. And another one to audit that bureaucracy. And reports to be written by everyone to justify their actions and....

Because you have a lot of historical data on co-operative hospitals?
I smell something burning, hope it's just my brains.
They're only dropping peppermints and daisy-chains
   So stuff my nose with garlic
   Coat my eyes with butter
   Fill my ears with silver
   Stick my legs in plaster
   Tell me lies about Vietnam.

_JS

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Re: The Boss is no longer the Expert
« Reply #13 on: January 25, 2008, 10:09:56 PM »
Why?

Hospitals would be co-operatives, why would they require a central government to do anything?

Who makes sure that the quality of care you get is the same as the quality of care I get?

Your local Works Council will make sure that everyone in the region gets the same quality care.
I smell something burning, hope it's just my brains.
They're only dropping peppermints and daisy-chains
   So stuff my nose with garlic
   Coat my eyes with butter
   Fill my ears with silver
   Stick my legs in plaster
   Tell me lies about Vietnam.

modestyblase

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Re: The Boss is no longer the Expert
« Reply #14 on: January 26, 2008, 02:36:31 AM »
You may be interested in this fellow and his company. His name is Ricardo Semler, links follow:

Quote
Ricardo Semler (born 1959 in S?o Paulo) is the CEO and majority owner of Semco SA, a Brazilian company best known for its radical form of industrial democracy and corporate re-engineering. Under his ownership, revenue has grown from $4 million US in 1982 to $212 million in 2003 and his innovative business management policies have attracted widespread interest around the world. TIME featured him among its Global 100 young leaders profile series published in 1994 while the World Economic Forum also nominated him. The Wall Street Journal America Economia, the Wall Street Journal's Latin American magazine, named him Latin American businessman of the year in 1990 and he was named Brazilian businessman of the year in 1990 and 1992. Virando a Pr?pria Mesa ("Turning Your Own Table"), his first book, became the bestselling non-fiction book in the history of Brazil. He has since written two books in English on the transformation of Semco and workplace re-engineering: Maverick, an English version of "Turning Your Own Table" published in 1993 and an international bestseller, and The Seven Day Weekend in 2003.

-from : http://en.wikipedia.org/wiki/Ricardo_Semler

http://www.cioinsight.com/c/a/Expert-Voices/Ricardo-Semler-Set-Them-Free/
http://mitworld.mit.edu/video/308/  <-EXCELLENT seminar

His Books:
http://www.amazon.com/The-Seven-Day-Weekend/dp/B000PDYVXE/ref=sr_1_3?ie=UTF8&s=books&qid=1201329176&sr=8-3
http://www.amazon.com/Maverick-Success-Behind-Unusual-Workplace/dp/0446670553/ref=sr_1_1?ie=UTF8&s=books&qid=1201329240&sr=1-1

I've been interested in his approach for some time. His hiring practices alone determine his company hires those with ambition and integrity. I wouldn't trust very many people to honestly look at themselves and determine what they are worth in their career, and further to trust them to continually educate themselves, stay abreast of career/industry trends, analyze their job p[erformance, etc.