Category Archives: Big Ideas

Follow The Expert

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I’ve been getting grief from a few people about the haphazard manner in which this blog is updated. I couldn’t agree more. Any successful media source relies on creating expectations and then meeting those expectations. So, my New Years Resolution will be to keep this blog updated regularly and full of fresh content.

In the meantime, here’s my latest Big Idea from ROB Magazine.

Wisdom of crowds

In the era of Google and 24-hour news, there is no shortage of expert opinion. Too often, the wrong ones prevail

KEN HUNT

December 16, 2008 at 7:00 AM EST

Things were going amazingly well. In 2007, AIG Inc. was one of the 10 largest companies in the world, and the unri­valled king of insurance. It had over 110,000 employees and operations in 130 countries. But much of the real action was happening in one little office called AIG Financial Products, ensconced in London’s exclusive Mayfair district. The branch had fewer than 400 employees, but between 1999 and 2005 this cabal of hard-core egghead quants took AIGFP from revenues of $737 million to $3.26 billion (all currency in U.S. dollars), largely by issuing credit default swaps on blue-chip corporate debt. Joseph Cassano, the leader of AIGFP at the time, was so confident in their business model that, as late as August, 2007, he was quoted as saying, “It is hard for us, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions”

It wasn’t long after that it all came crashing down. The credit default swaps they issued added up to guarantees on nearly half a trillion dollars worth of debt, and none of that risk was hedged. When the underlying debt started to sour, thanks to a downturn in the housing market, AIG’s business swiftly crumbled and threatened to take down everyone who had purchased their products with them, including many of the world’s largest banks. Within six months of Cassano’s “one dollar” statement, his operation had lost $11 billion and triggered a U.S. government bailout that has since climbed north of $150 billion. So, where did these millionaire geniuses go wrong? Why didn’t they see this coming, and how could Cassano have been so extravagantly confident and oblivious? The answer to these questions lies in the fact that they were working from financial models built by the greatest minds in modern economics. They trusted these models, and everything in them pointed to a safe and steady stream of profits. Those models just happened to be dead wrong.

When Alan Greenspan was called before the House Committee on Oversight and Government Reform to explain the current mess, he pointed directly at the failure of the reigning computer models, saying that some time last summer, the whole modern risk management paradigm simply collapsed. “I was shocked,” Greenspan said, “because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.” Common sense, however, should have tipped off the financial world that the party couldn’t last forever: Housing prices had been known to crash before, lending standards on many subprime mortgages were absurd, and the notion that anyone could make billions of dollars a year risk-free sounds as naive as a Nigerian e-mail scam. The manner in which financial wizards were blindly trusting their risk models was akin to the truck drivers who had become so reliant on their GPS systems that they followed them into rivers and through farmers’ fields. Harvard Business School professor Niall Ferguson put it best when he wrote: “Those whom the gods want to destroy they first teach math.”

Farhad Manjoo, technology columnist for the online magazine Slate, is curious why we pay attention to some sources of information and blissfully ignore others.
big idea

His book, True Enough: Learning to Live in a Post-Fact Society, explores the way our personal ideology affects the way we interpret the world. According to Manjoo, “facts no longer matter.” These days, we simply decide how we want to see the world and then go out and find experts and evidence that back up our beliefs. Meanwhile, we have a tendency to dismiss those who are not onside, sometimes with devastating consequences.

In the case of AIG, and all the others who contributed to our faltering economy, those who should have known better, who were in the best positions to see the risks of subprime lending and the unfettered and unregulated use of high-risk derivatives, ignored the disease as it was spreading.

In the classic 1972 book Groupthink, Yale psychology professor Irving Janis showed just how a panel of experts can come to a consensus that is wildly incorrect. Experts worry about their status in the community. They fear veering too far away from the others, because if they do, they risk becoming irrelevant. Even the most well-informed or cynical experts can find themselves censoring their viewpoints and even actively changing their deeply held beliefs in order to remain in line with what they perceive to be the beliefs of the group as a whole.

In AIG’s case, it’s not as if there were no experts out there warning of the dangerous direction in which the economy was heading. One YouTube video making the rounds recently shows Peter Schiff, president of Euro Pacific Capital, touring cable television’s financial shows in 2006 and 2007. More than anything else, these appearances show exactly how uncomfortable it can be for a single person to speak up against the consensus of his peer group. On each program, Schiff warned that the economy was headed for a major meltdown, one that would extend far beyond the subprime mortgage market and would eventually cause markets—financial stocks, in particular—to plummet. During one debate on Fox News in May, 2006, four panellists in a row were given the opportunity to summarize their positions toward U.S. housing markets: Each one said, “The worst is over.” Turn to Schiff: “The worst is yet to come.” There were bursts of laughter, followed by assurances that nothing of the sort was likely, or even possible. As he cut to a commercial, Fox News anchor Neil Cavuto segued, “All right, Peter, I wish we had more time with you. I know you want to continue that exposé on Santa Claus.”

Given Schiff’s treatment, it’s little wonder that other experts weren’t lining up to contradict popular opinion. One great thing about the economy, though, is that the truth always comes out eventually. No model is so compelling, no bubble so exuberant, that it can beat market fundamentals in the long run.

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The Dread Pirate Steve Jobs

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I’ve been slacking off on maintaining this blog for the last month. It’s the time of the year where malaise and post-nasal drip seem to colour everything. I have a lot of ideas for posts and have a build-up of interesting stuff that I’ve come across in the last couple of weeks that I’d like to share, I just need a kick-start to get me in the habit of posting here again.

Thankfully, my latest Big Idea is out in Report on Business Magazine today, so reprinting it here gives me an easy way to start posting again. Next month’s Big Idea is about how computer models led to the downfall of AIG.

The Dread Pirate Jobs

What do today’s celebrity CEOs have in common with 17th-century pirates? A fearsome affinity for branding, for one

KEN HUNT

From Friday’s Globe and Mail

November 25, 2008 at 7:00 AM EST

Drawing parallels between pirates and modern business is a popular pastime these days, and not just because a ragtag cast of Somali free-booters lucked into capturing more than two dozen Russian tanks earlier this year. In the past 18 months, a raft of books and articles have emerged arguing that, contrary to the half-crazed sea dogs portrayed by the likes of Johnny Depp, real pirates of the Caribbean made rational, intelligent business decisions, based on their dual goals of maximizing revenues and keeping down costs.

One of the men responsible for this explosion was Peter Leeson, an economist at George Mason University. In The Invisible Hook: The Hidden Economics of Pirates, his new book being released this spring, he contends that the world of 18th-century pirates—their business practices, social contracts and even the mythology that surrounds them—was more sophisticated than anyone previously assumed. Not only were pirates great managers, he says, they were experts at branding, developing some of the strongest and most consistent trademarks of all time.

“They wanted to avoid violence as much as possible,” says Leeson. After all, conflicts were costly. Crew members might be harmed in a fight, their ship could be damaged or, worse, they might destroy the ship they were attacking. “Pirates wanted other ships to give up without a fight. One way to do that is to have a reputation that is so heinous it’s scary.” A great example of this was the Jolly Roger flag, “one of the most memorable corporate logos in history,” says Leeson. That the skull and crossbones persists today, on T-shirts and books and candy bars, “is an incredible testament to the power of pirate branding.” The flag’s message is a simple one: Resist us, and you will be slaughtered.

The pirate brand didn’t stop at a winning logo. We know that pirates like Edward Teach, otherwise known as Blackbeard, actively worked on their personal images. “They looked a certain way and they had a particular reputation, and they cultivated that to the greatest extent possible because they understood the benefits it generated for them,” Leeson says. Blackbeard actively encouraged the worst rumours about his methods of torture and his sanity. He was so universally feared that, to this day, there are no verified accounts of his actually having to resort to murder—most of his victims submitted without a fight.

What does this mean for business today? While corporations can’t resort to threats of violence to get deals done, a reputation for hostility is as valuable as ever. The Recording Industry Association of America is an example of this: Its reputation for aggressive litigation (suing little girls and grandmothers with equal vigour) is designed to discourage illegal file-sharing. Likewise, Wal-Mart’s reputation for undercutting the competition causes many small businesses to simply roll over when it moves into town. Whether the business is privateering or private equity, “consistency is important for a message to become institutionalized,” Leeson notes. To many small business owners, Wal-Mart’s smiling yellow happy face is as scary as the skull and crossbones ever was.

But what happens when a company has so intrinsically linked its fearsome reputation to the personality of its captain? In the case of Apple, the company owes much—if not all—of its talent for bending others to its will to an enfant terrible CEO, Steve Jobs. Even within the company, the notoriously authoritarian chief is viewed as “a terror-inspiring taskmaster who’s forever screaming at his workers,” as Wired editor Leander Kahney wrote in his book Inside Steve’s Brain. How does a company ever crawl out from under that cult of personality?

Maybe it doesn’t have to. In the movie The Princess Bride, the black-clad hero Westley made his fortune by assuming the identity of the Dread Pirate Roberts, the original having long since handed off his mask and retired a wealthy man in Patagonia. Now consider Apple: Rumours surrounding Steve Jobs’s health—fuelled by the fact that Bloomberg accidentally published a draft version of his obituary last October—have investors wondering what might happen to the company if he died. Perhaps Jobs’s persona, black mock turtleneck and all, could be passed on down the line, for the next plucky privateer to play Dread Jobs.

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This is Your Brain on Advertising

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Book cover of

While I was away on vacation, my latest Big Idea column came out in ROB Magazine, this one on neuromarketing.

I remain sceptical about whether technology like fMRI will truly change the world of advertising, product design, etc., but I definitely think that it’s something we’ll be talking about for years to come.

Brand surgery

As long as anyone can remember, marketers have been dying to get inside our heads. What if they really could?

KEN HUNT

Globe and Mail Update

October 31, 2008 at 7:00 AM EST

They were so certain they had a winner. In the early 1980s, Coca-Cola spent $4 million conducting nearly 200,000 taste tests and interviews in an attempt to gauge consumer reaction to a sweeter formulation of its century-old soft drink. The data was unequivocal: Consumers preferred the new formula 8% more than Pepsi and an astonishing 20% more than the original Coca-Cola recipe. But none of that would matter. People simply didn’t want New Coke, and the resulting product quickly became the greatest marketing disaster of all time. Company president Donald Keogh summed it up thusly: “All the time and money and skill poured into consumer research on the new Coca-Cola could not measure or reveal the deep and abiding emotional attachment to the original Coca-Cola felt by so many people.”

That emotional attachment we feel toward certain products and brands is something marketers are dying to understand. They’re forever trying to get inside our heads, and they’ve recently turned to neuroscience for help. Researchers dabbling in “neuromarketing” make use of technology like functional magnetic resonance imaging (fMRI) to delve into our minds like never before. It works like this: By measuring blood flow at more than 100,000 locations in the brain and watching the output on an fMRI scanner, scientists can get a pretty good idea of how your brain is processing information. Just last year, a team from MIT, Stanford and Carnegie Mellon made a real breakthrough when they were able to correctly predict which combinations of products and prices would get their subjects to buy a product. All they had to do was watch a group of neurons in the forebrain called the nucleus accumbens (the same portion of the brain that gets turned on when we anticipate a financial gain) and wait for them to light up on the scanner.

A few companies had already been experimenting with this technology. In 2002, scientists working for DaimlerChrysler found that fMRIs could give them a better understanding of how men reacted to cars. In one study, subjects were presented with images of car grilles, and a part of their brains called the fusiform face area (the portion of the temporal lobe that allows us to recognize faces) was triggered. It was later hypothesized that one of the reasons BMW’s Mini Cooper had been selling so well was that, at least subconsciously, it had an “adorable face.” Furthermore, when drivers were shown pictures of high-performance cars, particularly the Ferrari 360 Modena and the BMW Z8, the areas of the brain associated with concepts of wealth and social dominance were excited. No focus group or survey could ever pick up such a pure and unguarded emotional response.

Martin Lindstrom has spent most of the last 20 years travelling the globe, helping steer the course of such brands as Disney, Pepsi, McDonald’s and American Express. According to him, the problem with traditional market research (that is, surveys) is that it relies on people being honest and accurate in their answers. Why would people lie? Any number of reasons. They may be attempting to appear more affluent, cultured or educated than they really are. They may be trying to please or impress the researcher by giving what they believe to be a “correct” answer, or, quite possibly, they are simply unable to articulate how they really feel about a product.

“Surveys and focus groups force people to pass everything they think and feel through a rational verbalization filter,” says Lindstrom. “Neuromarketing taps into the 85% of our mind that is unconscious. Try asking someone: Why do you love your wife? Give me three bullet-point answers. It’s ridiculous. Yet that is exactly what we’re doing when we ask people why they love their iPod.”

In 2004, Lindstrom directed the largest neuromarketing study ever conducted. The project lasted three years and involved the work of 200 researchers, 10 professors, and over 2,000 subjects in the U.S., England, Germany, Japan and China who volunteered to have their brains scanned. Lindstrom outlines the results of this study in his book, Buyology, released earlier this month. One of the most fascinating chapters details an experiment that underscores just how powerful some brands have become. A group of people who deem themselves devout were shown a series of religious symbols as well as a number of consumer products, ranging from pints of Guinness to Harley-Davidson motorcycles. The products of particularly powerful brands, researchers noted, lit up the same areas of the brain—just as strongly—as the images of crosses, rosary beads, Mother Teresa, the Virgin Mary and the Bible.

The chances that a machine could help a company make a product so good and so satisfying that using it becomes a quasi-religious experience are slim. Still, there are some who feel that having this much insight into the way we think is simply too much power to put in the hands of marketers. CommercialAlert, the consumer protection organization founded by Ralph Nader, calls neuromarketing “Orwellian” and claims that it will lead to ever more marketing-related diseases such as obesity, diabetes and alcoholism. They find it offensive that one of the world’s greatest medical inventions is being used to sell goods, rather than help people.

Martin Lindstrom is unwilling to cede the moral high ground. In his book’s introduction, he writes, “The more companies know about our subconscious needs and desires, the more useful, meaningful products they will bring to market. …Imagine more products that earn more money and satisfy customers at the same time. That’s a nice combo.” Neuromarketing isn’t mind control; it’s market research, and it remains to be seen whether it can help companies avoid disasters like New Coke in the future. After all, the functional MRI is merely a descriptive technology. It’s like the difference between a weather map and a climate model: The map can tell you where it’s raining, but not why it rains. And that’s not going to change any time soon. The brain is still a far more complicated machine than we understand.

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Death of the 8-Hour Workday

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My new column in Report on Business Magazine came out on Friday. It is a look at the revolutionary work environment they have created at Best Buy’s corporate HQ.

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Killing time

Best Buy has embraced an environment where employees may come and go as they please. Will the tyranny of the eight-hour workday finally meet its match?

KEN HUNT
Globe and Mail
September 26, 2008

“The fog of false productivity.” That’s how Scott Jauman describes the aura of busyness that tends to surround people in traditional offices. They appear to be working hard, but when you sit down and look at what they really accomplish in a day, it doesn’t add up to much. At Jauman’s office, “we’ve stopped paying attention to how busy people seem and started looking at what they actually produce,” he says.

Welcome to the world’s first “results-only work environment” (ROWE). Jauman and 4,000 of his co-workers are part of a bold experiment at Best Buy’s corporate headquarters, just outside of Minneapolis, that takes the concept of flextime to an extreme. Employees at all levels, from the CEO down to front-line support staff, are free to come and go as they please (store clerks, of course, don’t yet qualify for the program, although the concept is currently being tested at a number of locations). They can work whenever and wherever they want. There are no mandatory meetings, and no one tracks sick days or even vacation. Everyone’s time is their own to control, as long as they find a way to get their work done.

Before moving over to ROWE, Jauman, a lean Six Sigma Master Black Belt, recalls that with competitors like Target and Wal-Mart constantly breathing down their necks, the culture at Best Buy headquarters was becoming unsustainable. “Marriages were falling apart, people weren’t seeing their kids; it was getting to the point where talented people didn’t want to work here any more. That’s how this began.”

It’s been three years since Cali Ressler and Jody Thompson, two of Best Buy’s human resource managers, started ROWE. It began slowly and quietly, almost as a “guerrilla movement,” they say. Managers were initially skeptical, but as one team after another found they were seeing not only better morale but improved productivity, the concept spread throughout the company. The two women have since written a book about the transformation called Why Work Sucks and How to Fix It, where they claim that their new approach can work for any industry. “Work isn’t someplace you go; it’s something that you do,” says Ressler.

Ressler and Thompson have a raft of numbers to back up the business case for ROWE. At Best Buy, voluntary turnover (quitting, that is) is down 90% in a company that was once losing a lot of young talent, particularly women, who weren’t willing to give up their personal lives in order to do their jobs. Involuntary turnover (getting fired) is up, as workers who were good at playing the system and putting in face time at their desks have been exposed. In some departments, overall productivity is up by as much as 40%. Beyond all the numbers, though, the pair truly believe that workers have the right to control their own schedules, as long as they get their work done.

The concept of the eight-hour workday and the five-day workweek is so deeply ingrained in our society that it’s easy to forget that this, too, was once a radical idea. In the mid-1800s, employers had nearly complete control over the lives of their workers, and 10- to 12-hour workdays were commonplace, six (and often seven) days a week. In fact, one of the most important events in Canadian labour history occurred in 1872, when the Toronto Typographical Union demanded their workdays be limited to nine hours. The resulting strike lasted three weeks and was such a popular cause that John A. Macdonald saw it as an opportunity to win support among the working classes. Not only did typographers get their nine-hour day, but the Tories passed the Trade Union Act, legalizing the labour movement in Canada for the first time.

Workers’ lives were changing, if only gradually. “Eight hours for work, eight hours for rest, and eight hours for what you will!” became a standard rallying cry for unions around the world throughout the late 19th and early 20th century. Business leaders scoffed at the idea, claiming it would lead them to bankruptcy, while priests led sermons decrying that the idle time would result in moral decay. The fact that an eight-hour workday is ubiquitous today is perhaps the single greatest achievement of the labour movement.

Still, a “results-only work environment” may either be viewed as the next great step in workers’ rights, or as a return to an age when companies had near total control over their employees’ lives. Dividing the workday into a timespan that belongs to our employers and one that belongs to ourselves at least lets us know when to put our pencils down. Many of 
the people who have participated in the Best Buy experiment say that one of the most difficult things about ROWE is knowing when to stop working.

There is an old adage called Parkinson’s Law. Coined in the 1950s, it declares that any task will naturally expand to fill the time available in which to accomplish it. In other words, freedom from schedules might merely allow us more time to procrastinate, or work less efficiently, rather than give us more leisure time. As any writer or high school student will tell you, there is something about a deadline that focuses the mind.

In fact, even with his new-found freedom, Scott Jauman still keeps a fairly normal schedule. “I’m not married. I don’t have kids. So I can’t tell you that ROWE saved my marriage,” he says, “but from a business viewpoint, ROWE works. Employees work harder and are happier under this system. That’s what makes it revolutionary.”