Wednesday, July 16, 2014

Why idiots succeed

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/07/why-idiots-succeed.html

July 15, 2014

••• sometimes, organizations and markets can actually favour incompetence. There are (at least) eight mechanisms through which this can happen.

1. The wet bed. If a man has pissed the bed, you don't ask someone else to sleep in it. ...

2. A disposition effect. Every bad employee is a bad hire. However, a combination of ego involvement ("this was my decision so it must be a good one") and the endowment effect ("we've got him so he must be good") stops hirers from immediately realizing their error. Just as stock market investors tend to hold onto bad stocks, because of their refusal to admit error, so employers hang onto bad staff.

3. Noise vs signal. In many contexts, feedback about performance is noisy. Ran Spiegler shows (pdf), this can create a market for quacks. For example, if you would have recovered from some ailment anyway but take a homeopathic treatment before the recovery, you can easily convince yourself that the treatment worked. And you'll tell others. ...

4. The devil you know. In many jobs, a worker's ability can only be assessed after he has done it. As Marko Tervio has shown, this alone can generate adverse selection; the mediocrity who has a track record that is just adequate will be preferred to the unproven man of potentially greater ability. ...

5. Survival of the unfittest. Bjorn-Christopher Witte describes how, sometimes, competition between fund managers can encourage reckless risk-taking with the result that lucky chancers rather than the genuinely skilled will thrive. ...

during the tech bubble money flowed to those managers who thought boo.com and Baltimire Technologies were good stocks, whilst sceptical fund managers such as Tony Dye were fired.

6. Desperation. If people are desperate for a very high pay-off, they'll be attracted to incompetents and fraudsters, as only these are stupid or criminal enough to offer such rewards. As Laurie has said, "sometimes when you’re dying of thirst, you have to drink the Kool-Aid." This is why con-artists often prey upon the terminally ill or bereaved. But it also lies behind what I've called the Bonnie Tyler syndrome - the urge (often on the left) for a great hero.

7. Product differentiation. In a wonderful paper (pdf) on the persistence of the market for quack medicines in the 19th century, Werner Troesken points out that the manufacturers of such remedies spent fortunes on advertising and product differentiation. In this way, the failure of one medicine did not discredit the industry, but merely shifted demand to other quacks. ...

8. Like hires like. Senior managers like to hire people like themselves not just because they want yes-men, but because (say) financial people find it easier to assess finance skills and engineers find it easier to assess other engineers. ...


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