The danger: humans are more easily persuaded by 1 clear and concrete anecdote than by big data and expert statistical analysis.
“My friend’s brother bought a house in downtown Barcelona 2 years ago and is now selling it at twice the price!”
This statement has far more impact on me as a human than: “the real estate market in Barcelona metropolitan area has an undersupply of mid-range housing and this scarcity will result in an acceleration of asset prices”
An anecdote is a one off. It is not data. It is not science. It is dangerous.
In statistics this is called a Type I error. In slang: “a false positive”. More simply stated, a type I error is detecting an effect that is not present, while a type II error is failing to detect an effect that is present (Wikipedia on Type I and Type II errors)
Success Literature and Type I Errors
I just read a blog post that reported lessons from the lives of 13 billionaires. It reported that each billionaire had built their empire based on a product that they had wanted as a consumer.
I suspect if you interview 2,000 failed and bankrupt entrepreneurs, the majority would also say that they had build their companies around a product that they had wanted as a consumer.
So often, success is luck and failure is luck. However, those that succeed sell their story as a systematic managed process of step by step success, and those that fail sell their story as a perfectly executed plan blown to bits by a black swan event (I tell people I failed because of the failure of Lehman brothers and the collapse of the financial markets during 2008-2010).
I suspect that the recipe of success is “try something, if it works, do it again… if it doesn’t work, try something else… and keep going until you succeed” The determination to succeed combined with the commitment to really learn from each setback is the root of all success. Luck will adjust whether the success comes at age 25, 25 or 75.
Be careful of anecdotes. One man’s good deal is not a sustainable marketplace.
I was watching a few Charlie Munger speeches recently – Warren Buffett’s partner in leading Berkshire Hathaway.
Charlie talks a lot about “Inverse Thinking”…
The Inverse Thinking Process
What is Inverse Thinking? Charlie says it is helpful to turn a question on its head. If you want to know what would improve the situation of India, ask what would make India worse? You can apply this to most situations: If you want to know what would improve your life, ask what would make your life worse? If you want to know what would improve schools, ask what would make schools worse?
Charlie does provide his answer to how to make life worse.
Charlie’s Recipe for a Miserable Life
His answer: The perfect path to a miserable failure of a life is combining:
Another of Charlie’s particular questions he asks himself is how to keep from fanatical ideology? He sees that human beings are so open to self-deception that we must (yes even you) all be on the lookout for our own beliefs that have become fanatical.
Charlie’s Recipe to Keep From Fanaticism
Can you state the arguments against your position as well as your opposition? If you can state the arguments against your position as effectively as the opposing camp, then you can allow yourself to feel that you are not being fanatical.
Charlie on the Danger of Perverse Incentives
Be careful about being in situations that motivate unhappy behaviour. Are the incentives in the systems in which you operate motivating behaviours that make you a better person, or a worse person. Be careful if you think your answer is “neutral”…
Charlie on the Danger of Perverse People
Don’t work for those who you do not admire.
It will damage you.
Charlie Munger speaking at USC Graduation
There is one random quote that stuck with me from Charlie:
“Hope is not necessary to persevere” Frederick the Great
There… those are my thoughts for this Sunday afternoon 😉 It is now time to head to the Camp Nou for FC Barcelona’s game against Espanyol… key for the league, and the Barcelona derby!
When I was 14 years old, my grandfather told me that “Success is earning more than your father.” This talk shares how my definition of success has changed over the next 3 decades of my life. My definition today… listen at the end of the speech.
Who is the first person that comes to your mind when you think about success? Who is that person? What is about them that makes you think of them?
Does it surprise you which person comes to your mind?
Re-sharing an old article of mine…
I wrote an article for myself in 2009 when I had faced 2 major setbacks. This was to remind me of what is important. I’ll share the article again here below:
17 Daily Habits for a Fulfilling Life
Conor Neill, February 2009
This is a compilation of habits that I have seen in the lives of people who have achieved things and felt satisfied and fulfilled with the way their life has progressed. I often get asked the question “is this for a book?”. I don’t know. I teach MBAs and often am asked over a coffee “what should I do with my life?” or “how can I be a success?” to which my answers are often in the form of questions – but this project hopefully will move me towards a better answer when asked these questions.
An entrepreneur friend recently commented to me an early conversation he had with a mentor “Alex, you have great potential”. “Thanks.” “Do you know what great potential means? You ain’t don’t nothing yet”. What does it take to turn potential into fulfilment?
I look forward to your comments, reflections, disagreements, personal experiences and outright criticisms.
Goal setting, Dreams – Goals – Actions
We know what we need to do to be successful, but why do so few people manage to sustain the habits of regularly dedicating time to the activities that will bring them success? Why do we sabotage ourselves?
A nice thought about something you might like to have is a dream. A dream written down and clearly visualised is a goal. A tangible, measurable step written down and committed to is an action. You will not achieve a dream if you don’t systematically work through the actions that lead to the goals that lead to the dream. Dream – have a book published. Goal – complete first draft of book by 31/1/2010. Action – write 1000 words on goal setting.
A writer is somebody who finds writing harder than anybody else. My brother Aidan – set a goal 60 weeks ago – publish a blog article every Monday before 9:00am – and has consistently met it except for 2 weeks – the week his son was born and the week his son was in hospital with a worrying stomach condition. How? He made a verbal commitment to many of his friends. He said to his wife that he would give her €100 every time he failed to publish by 9:00am. He has paid 3 times (once he published the blog 20 minutes late).
We need accountability partners (sadly we are less likely to cheat on our goals if committed to a friend than just to ourself). The top performers all have coaches; it is too difficult to sustain high performance without help.
Malcolm Gladwell in the book Outliers made popular the idea that becoming excellent requires 10,000 hours of practice. Your genes, your natural talent, luck becomes irrelevant when you achieve 10,000 hours. In what will you spend the next 5 years accumulating your 10,000 hours of practice?
Most people never accrue 10,000 hours in anything. Will you make the commitment to excellence, the commitment to mastery?
“We must all suffer from one of two pains: the pain of discipline or the pain of regret” Jim Rohn
Routine sets you free. Routines can break the tendency to procrastination (“quieting the lizard brain” Seth Godin).
Pomodoro technique – get a timer that clearly counts down 25 minute intervals. Take your to-do list. Prioritise number 1 important item. Estimate number of 25 minute intervals. Set the timer and work on the first timer. Any interruption, reset the timer to 25. At the end of a pomodoro take a proper 7 minute break. After 4 take a 25 minute break. How many pomodoros can you achieve in a day?
Self discipline has been shown to be an “expendable” resource. In order to have the greatest ability to maintain self discipline, we need to get enough sleep, face our anxieties, take time out to relax as well.
Fit mind and body (Energy)
Survey of centurions (people who live to 100) – two things in common:
they exercise every day and
they have a project which they must survive in order to complete.
“Sharpen the saw” Steven Covey
You only have one body – take time for repairs. Take time to strengthen it. Take time to rest it. Keep fit, play sport, enjoy walking, don’t wait for the heart attack to let you know that you need to eat healthy, keep fit.
“What on Earth am I here for?” Wrong Question – meaning is not to be found inside ourselves – “What do my parents, friends, family, society need from me? How can I best help others?
Jesus Christ once said, “Self-help is no help at all. Self-sacrifice is the way, my way, to finding yourself, your true self.”
What drives you? Guilt? Resentment? Fear? Materialism? Approval? Social comparison?
The Arbinger Institute distinguish between two forms of emotional living – “In the box” vs “Out of the box”. “In the box” is reactive – your emotions are reactions to world and people around you. If someone is late to your meeting, you are angry. Out of the Box is that you are proactive about emotion – you choose the emotion that best serves the current moment. You don’t react to people, but seek to understand what is happening in their life, what they are seeking, what they are lacking.
Henry David Thoreau observed that people live lives of “quiet desperation,” but today a better description is aimless distraction. Many people are like gyroscopes, spinning around at a frantic pace but never going anywhere.
We are products of our past, but do not have to be prisoners of it.
George Bernard Shaw wrote, “This is the true joy of life: the being used up for a purpose recognised by yourself as a mighty one; being a force of nature instead of a feverish, selfish little clot of ailments and grievances, complaining that the world will not devote itself to making you happy.”
Do you have a clear understanding of your values? Have you spent some time reflecting on what is important to you? Who are your role models that have lived these values in a strong way?
Why do many cancer survivors look back on the cancer as a gift? – they live the rest of their lives with a true understanding of how short a time we have and what is really important in the time we have. The unimportant drops away and leaves a powerful clarity and focus.
Communication in concise terms of your personal, company, project, goal vision. You are always selling. People sign up for vision, fun and principle.
“We die”. What will you do the last hour? Who will be there? Who will you want to speak to? What would you say?
In the book “Superfreakonomics” there is a chapter that shows a high correlation with the arrival of television and an increase in crime. The authors examine various hypothesis, but essentially find no link except a speculation that the arrival of TV also was the arrival of powerful advertisement campaigns that transmit the idea that “buy this product” = “get this life”. The purchase of a €2 coca cola is not the purchase of sugar, water and some cola flavour in a red can… No, it is access to a life full of exciting friends, fun parties and meaningful interaction. The purchase of a car is not the purchase of a vehicle to get from A to B, it is access to a lifestyle. You are not happy now, but the mere purchase of the right set of goods will transform your life into one of fulfilment. This leads to frustrated people. We believe the ads, but they are selling falsehood. No thing, no object, no achievement will fundamentally change how you feel about yourself – only you can decide to change how you feel about life.
Integrity – build trust, reliability (“Its a small world”)
Are values worthwhile because they provide a ROI or are they valuable only in that they allow you to sleep well every night? Warren Buffett – why is Integrity his number 1 criteria for selecting people in whom to invest?
Aristotle believed that if an individual did not internalise an ethical value system before the age of 12 they would never really “feel” the need to live their values.
Finances in Order
Delayed gratification is necessary. Nobody soaked in debt will ever be able to generate the focus to deliver impact in the important areas of their life.
The test that has most correlation with success in life is a simple test devised by psychologists. They bring a child into a room and sit them down. The child is presented with a sweet. The adult then says that they need to leave the room. The child is most welcome to eat the sweet, but if it is still there when the adult returns, the child will receive 2 sweets. 50% of children cannot resist temptation and eat the one sweet, losing the opportunity to double their outcomes. The children that don’t eat the sweet do not sit there staring at it – they have learnt to avoid looking at the temptation, they have learnt strategies to manage themselves.
Accumulate education => Accumulate capital => Generate income => Grow expenses inside the limit of passive income. Freedom = passive income > expenses. Slave = 90% income as salary. Keep expenses low, generate assets.
Balanced, enriching social life
Choose your friends. You will become who you spend most time with.
What is the most satisfying thing you can do for:
Happiness: It is all about shared experiences + intentional giving.
Unhappiness: it is all about comparing yourself to others, what you have, what you don’t have. What would you rescue from your house if you could only save one thing? (95% choose photos). Not plasma TV, not furniture.
Strong close relationships – Marriage, Family, Kids
Quality time vs time in the same room. Intimacy. Requires work to deepen relationships and maintain powerful connections. It does not happen automatically – we are not genetically prepared to establish deep intimate relationships.
Resilience (Head in the sky, Feet on the ground)
Healthy balance between Principles and Pragmatism. Get good at ignoring the little things. Don’t wrestle with pigs. You will get dirty, you will lose and the pig enjoys it.
Self Motivation, Self Esteem, Self Belief
You see what you are looking for. Ask the right questions. Change “why does this happen to me?” to “What am I grateful for today?”
Get good at motivating yourself. We are not computers – we are neurons floating in a sea of hormones and we need to be careful what hormones we let flood our brain – it will change what we see and believe.
“The only source of good knowledge is bad experience” Tom Peters
Climbing Everest, you will not always be going uphill. Sometimes there are periods of downhill, but it is a necessary part of the journey. Farmers don’t blame the winter – they accept that it will always come around and prepare to plant seeds in Spring.
Survive => Thrive. We are first generation that survival is guaranteed. We are first generation where thrive is the aim – and we don’t have any history or knowledge or family role models that can guide us in a world where you really can avoid most hardships.
The person who says “poor me” has clearly got low self esteem. The person who says “I am the greatest” is also likely to have low self esteem.
You are the best you in the world. You will be a terrible somebody else.
“The reward for conformity is that everybody likes you except yourself” Rita Mae Brown
It is only in the tough times that you reach into yourself and truly see what is important to you. In the easy times you lose yourself as you compare to everybody else – and lose clarity of what you will know is important when death is imminent. The sharpest steel is forged in the hottest furnaces.
Life is too short to not laugh regularly.
Be accessible and approachable.
Mentors and Advisors (Life Strategy)
Have a list. Find your way to ask them. Nick Luckock – “Apax doesn’t invest in first time entrepreneurs – they don’t yet know how much help they will need from others and how they can ask for it”.
The ideal mentor is someone who you respect, can connect with on a personal level, and who is willing to impart their knowledge. But don’t expect them to solve all your problems.
“A mentor’s role is to help you to make sense of your own experiences” Professor D Megginson
Talking to someone who’s been through a similar experience or has achieved something that you would like to achieve will be constructive.
Coach (Accountability and Balance)
Cormac and his personal trainer: “I only work with the best”.
“I have no time for people not prepared to do the hard work.” All Great Coaches…
Permission to hold me accountable for my own actions.
Tiger Woods, Roger Federer, Steve Jobs, Michael Dell all have two things in common – they have been leaders of their respective fields, and they each have a coach. The best in the world have coaches. Is it coincidence? We are not strong enough mentally to keep up the hard work and discipline over the long haul to reach excellence. We need people around us who hold us accountable and push us to stretch. Tony Nadal, the coach of Rafa Nadal, says that his role is to ensure “Effort and Commitment” – not tennis skills, not better strokes, not how to get fit.
Auschwitz – 1 in 30 survived the camp. Victor Frankl was one. Why did some survive and others not? It was not random. The prisoners received bread rations only sufficient to keep them barely alive, yet some prisoners would take half of their bread and give it to someone that they saw needed it more than them. Those that ate all of their bread survived a time. Those that shared their meagre ration of bread were able to truly live. You can take everything away from a man except his ability to choose his response to any given situation.
Victor Frankl developed the Logotherapy process to help people find the ultimate meaning for their life, to find “a why that can overcome any how”. There are three types of ultimate meaning:
A Unique Contribution
Finding Meaning in the Suffering Itself
Giving with intention, giving what is special to you.
“We make a living by what we get, we make a life by what we give” Winston Churchill
Getting others to do stuff for you
“Leadership is Vision with bullying” Professor Brian Leggett
A vision without execution is idealism. Execution without vision is bullying.
Volunteer for charities, clubs. It is here that you will learn to lead. Create change = upset someone, connect people, lead people.
Reflection, Time to Think (Separation of Now and Future) “What have we learnt?”
Incremental improvement almost always wins.
Meditation – why? Does it really provide the impact that many of its proponents suggest? Commit to 10 days of self development activity every year.
“We’ll pluck significance from the least consequential happenstance if it suits us and happily ignore the most flagrantly obvious symmetry between separate aspects of our lives if it threatens some cherished prejudice or cosily comforting belief; we are blindest to precisely whatever might be most illuminating”. Iain Banks, Transition, Patient 8262.
A fulfilling life?
Impact = Self Understanding + Personal Habits + Social Systems
Life = Work + Social + Relationship + Logos (Meaning/Spiritual)
Success = Impact + Luck
Why worry? It should all come together in the end shouldn’t it? Life should naturally turn out well. I don’t like exactly where I am right now, but in a few years it will be better. Doesn’t it just happen like that?
I read Captain Corelli’s Mandolin by Louis de Bernieres when I was 23 years old. It changed an idea I had about life. It scared me greatly.
The book tells the story of an lieutenant that is stationed on a Greek Island as part of the Italian occupation during the second world war. He gets to know the locals and falls in love with the daughter of a villager. They enjoy happy times together. The Allied forces take back control of Greece, and the Italian army beats a hasty retreat. Our lieutenant has to depart but he and the Greek girl promise that he will return after the war. Three years later, the war ends, peace arrives and our lieutenant, after years in camps and on the run, finally can make his way back to the Greek island. He travels to Greece, catches the ferry to island and walks towards the village. He reaches the village in the late afternoon and is walking up the final stretch of hill up towards the centre of the village. He sees a woman in the square, his Greek girl. She is holding a baby in her arms. The lieutenant turns and walks away, never returning. He travels the world. Each Christmas the girl receives a postcard from some spot in the world – always anonymous and with no return address.
After many, many years, the man decides that he cannot live without seeing the girl at least one more time. He is now in his 60s. He makes his way to Greece, catches the ferry and repeats his journey of 35 years before. He walks to the village. He is walking up the hill towards the square and meets a young local boy. He asks “does Pelagia still live here?”. The boy says “I don’t know any Ioanna”. The man reflects and thinks. “She will be old now, 60. She was the daughter of Iannis”. The boy responds “that bitter old woman? She lives slightly outside the village” and indicates the house. Our lieutenant gets to the door and knocks. When the door opens, the girl who is now an old woman stands for a few seconds in shock and then hits him with all of her force and slams the door shut. He knocks and knocks and finally she opens. “Why did you do this to me? Why did you abandon me?”. “I saw you with a baby, I thought you had a baby, thought you had married, had found someone else… I didn’t want to stir up…” “Why? Why didn’t you ask? It was my sister’s baby. I was babysitting”.
Before I read this book I had the idea that life was like a 10 pin bowling alley when it is set up for a kid’s party. They put foam into the gutters so that all of the balls will reach the end and take down at least a pin or two. After reading the story, I realised that life does not have this foam protection. Life has big gutters, and it is quite possible to put my life into the gutter and not hit a single pin.
Never too Late to start
The positive thing is that it is never too late to start living the life we want. Life’s gutters are all in my mind. The past is gone Today I can decide to head a new direction, and the final destination changes. I only need change course by one degree and I may make a massive change in the new destination that I will reach and what will happen on the journey.
Jim Rohn says “It is possible to design and live an extraordinary life”. We measure life in hours, days, weeks and years – but this is not the right measure. Life is experiences. There are people that live 200 years of experiences in 40 years of life, and there are people who don’t live even a single year of experiences in 90 years of clock time.
“We die”. This is how the Cluetrain manifesto begins.
The human lifespan is 650,000 hours. One of those hours is your last hour. One of those days is your last day. This is an inevitability of life. We all will die. In that last moment, what will we have with us? Nothing. What will we leave? What will we remember? What will flash through our minds? What will it take so that in that moment, God turns and looks and says “now there is someone who really used the opportunity I gave her”?
Steven Covey says “Begin with the End in Mind”. Our end is a day where we face the end. No more opportunities. Our obituary will be written. What will it say?
Alfred Nobel had a unique view of his obituary while alive. He was one of three brothers. When Alfred was 55, one of his brother’s died. The newspapers confused the brothers and the next day’s edition came out with an obituary of Alfred. He had the unique opportunity of reading his own obituary at the age of 55; and he really did not like it. He was the inventor and mass producer of dynamite. Reading his obituary was the inspiration to change his life and leave a different legacy. Today we have the Nobel peace prize – because Alfred was so gutted to see that his legacy was going to be death and destruction that he spent the rest of his life creating the greatest current symbol of peace.
Aristotle said “we are what we habitually do”. If something is important, you must do it every day. If you say, “I will take some time next year and do that” – you will never do it. If something is important and will be part of our legacy it needs to be done every day and become routine.
“Carpe Diem. Momento Mori.” Seize the day. Remember we must die.
In ancient Rome, the words “Carpe Diem. Momento Mori” are believed to have been used on the occasions when a Roman general was parading through the streets during a victory triumph. Standing behind the victorious general was his slave, who was tasked to remind the general that, though his highness was at his peak today, tomorrow he could fall or be more likely brought down. The servant conveyed this by telling the general that he should remember, “Memento mori.” This finds ritual expression in the Catholic rites of Ash Wednesday when ashes are placed upon the worshipers’ heads with the words “Remember Man that you are dust and unto dust you shall return.”
If life’s journey is like a bus ride: there are drivers, and there are passengers.
(there are also conductors, there are navigators, there are engineers…)
There are a lot more passengers on the bus than drivers.
What does it take to be a driver?
The drivers are people that passengers can believe in. Who do we believe in? I am reminded of the Trust Equation. Trust is made up of 4 elements – credibility, reliability, intimacy and other-orientation.
Sometimes I am a passenger on the journey: I am seeking validation of my ideas, my projects and my life.
Great teachers know how to balance enough validation with enough allowance for the development of self-validation capacity. The best teachers are mature enough to avoid giving me the explicit validation that I think I want, but they know that if they give it, I will become an addict to their validation, not to building my own inner capacity to self-validate.
…and my next question for today:
Whats the difference between a rockstar and a guy with a guitar in his bedroom?
‘We choose our spouses. We choose our bosses. We choose our friends. We choose the people who work with us. We choose our nannies. We choose our lawyers. We choose our doctors. It is definitely worthwhile investing in learning, because this is not rocket science, but it requires discipline.’ Claudio Fernández-Aráoz
Claudio Fernández-Aráoz has spend his entire adult life in the business of identifying talent. He has interviewed over 20,000 executives. What has he learnt about seeing talent in people?
Jim Rohn says we will become the average of the 5 people that we spend most time with. A successful life depends greatly on attracting and identifying those people. How much time have you dedicated to crafting your ability to identify talent?
His First Lesson: People Lie
We lie. It is not malicious, it is natural. Some people lie more, some people lie less; but we all have a tendency to see an optimistic perspective on our actions. In an interview, you have to understand that two people are selling to each other – one selling themselves, one selling the job.
BusinessWeek asked 2000 senior executives: within your own organisation in your own level, are you in the top ten percent, yes or no? 90% believed they were in the top ten 10%. That’s why you need to check references!
Finding Your Top Executives: The Four Key Attributes
So when it comes to key leadership assets, what should you be looking for? Claudio has signposted four values common to all high-potential executives:
Curiosity – asking questions, taking genuine interest, and seeking new knowledge and experience
Insight – making innovative connections between existing concepts, offering fresh perspectives
Engagement – the ability to use emotion and logic to communicate a persuasive vision and connect people
Determination – the commitment to persevering in spite of adversity
I know plenty of financial advisors who would love to spend a few hours reviewing my investments, cash position, investment goals and helping me make a realistic plan.
I know how much I spent on food, travel, housing, school in the last month, year and if I did the sums I could calculate a rough lifetime spend.
You can always earn more money.
Organisations spend small fortunes developing capital expenditure budgets and operational budgets and auditing the cash of the business.
My time, in contrast, goes un-managed. Most organisations have no systematic procedure to eliminate time wasters. They place clear objectives for the use of every dollar, but no barriers on the expenditure of another hour.
My first girlfriend used to tell me that time is like money but with one major difference – at the end of every day, everything you have left unspent is taken away from you. Imagine if you started every day with €240 and you knew that at midnight, any left unspent will be taken away.
Imagine Managing Time Like Companies Budget Capital
Imagine if every month, instead of receiving a bank statement, I received a time-statement: a detailed breakdown of where my hours have been put, how many were invested and how many just dripped through the cracks.
Would it change how I spend my time? Would it reduce facebook and increase playing with my daughter? Would it reduce email and increase face-to-face meetings? How would the measurement change me?
At dinner last night, I was talking with my father about my sense that we have had a collapse of trust in the institutions of the western democracies over the last decade.
A good society has a sense of fairness. I feel that this sense of fairness has been lost. There is a widespread intensifying of the sense of injustice around me in Spain where I live, in Ireland where my family live, and in each of the countries I visit on vacation and work (UK, USA). I have a feeling that some segments of society have been punished while other groups have got away with grand scale corruption.
The big question at dinner last night was why have no bankers gone to jail? There have been some massive fines payed by almost all of the major investment banks – big numbers – but not a single individual banker is at risk of time behind bars. How can this be?
The Straw that broke the Camel’s Back
In the case of the financial wrongdoings of Bernie Madoff, we had a clear case of one single individual breaking clear laws over a 35 year timeframe. He was clearly guilty and went to jail.
The Financial Crisis has complex causes that remind me of the fable “the straw that breaks the camel’s back”. Imagine a camel loaded with straw. There are a team of people loading the camel. They keep adding straw to the camel’s back. One piece is added, the camel is ok. Another piece is added, the camel is ok. A third piece is added, the camel collapses. Who is to blame? The person who placed the final piece of straw? The government who did not set a clear weight limit for camels? The transport company who owns the camels?
In the Financial Crisis, we have a similar situation. One bit of deregulation didn’t break the camel. One poorly underwritten mortgage didn’t break the camel. One innovative but complex new financial product didn’t break the camel. The camel was broken by the combination.
Causes of the Financial Crisis
The financial crisis that began in 2007-8 with the collapse of the mortgage-backed securities has caused enormous stresses on governments and people’s living standards. The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007 to 2010. U.S. bank losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth. (source http://en.wikipedia.org/wiki/Financial_crisis_of_2007–08)
What caused the crisis? There are 7 major factors that drove the financial system towards the crisis of 2007-2008:
Growth of sub-prime lending – lending to people without stable income or liquid assets increased massively between 2004-2008; they went from 10% of all mortgage operations in 2004 to over 20% of mortgage operations in 2007.
Housing price bubble – Between 1998 and 2006, the price of the typical American house increased by 124%.
Easy credit – From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%
Weak underwriting practices (and fraudulent in many cases) – by the final years of the U.S. housing bubble (2006–2007), the collapse of mortgage underwriting standards was endemic.
Deregulation – Allowing for creation of derivatives (mortgage-backed securities) and off-balance sheet financing. Warren Buffett famously referred to derivatives as “financial weapons of mass destruction” in early 2003. Financial institutions in the shadow banking system are not subject to the same regulation as depository banks, allowing them to assume additional debt obligations relative to their financial cushion or capital base.
Over leveraged consumers and institutions – USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. In 1981, U.S. private debt was 123% of GDP; by the third quarter of 2008, it was 290%
Financial Innovation – which added massive complexity to the system. FT columnist Martin Wolf said that “…an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the ‘shadow banking system’ itself – was to find a way round regulation.”
It was Countrywide Financial that led the subprime boom – the process of selling mortgages to anyone – no matter their collateral, no matter the value of the underlying assets – and then packaging them up into groups of thousands of mortgages, getting them “rated” as investment grade.
Were banks guilty of criminal activity?
I think the key three factors under banker control are weak underwriting practices, over leveraging and financial innovation.
In the case of over-leveraging, even the Fed chairman Alan Greenspan believed that the world had entered into a new, safer era where central bankers had achieved control over inflation. The world view of all bankers and economists was that major volatility was removed from the financial system. In this situation, higher leverage would be a rational strategy. This was not criminal activity, purely a rational response to a widespread belief about volatility.
In the case of weak underwriting practices – this was something that was clearly allowed to happen by management, but no senior banker seems to have actively promoted this practice. I still think that a leadership responsibility is to be aware of how the results are being achieved – it seems many senior bankers were happy with the results and asked few questions about the process. There is little provable criminal activity at leadership ranks; however this is profoundly poor leadership. In the military, senior officers would have no option except to resign if soldiers regularly ignored rules and regulations.
In the case of financial innovation, it seems that many of the innovations were not designed to deliver a product that was better suited to the customer needs – they were innovations deliberately structured to sidestep regulation. There was a deliberate strategy to create mechanisms to avoid the regulator. This is a crime. Individual bankers created and sold these new innovative products.
Were individual bankers responsible for these practices?
In the case of the Financial Crisis, we have a much more complex and interconnected set of actions that in their combination led to the crisis. If a person with a house and a mortgage loses his job and cannot pay the mortgage, this is not criminal action. The person and his bank realistically believed that he would receive a salary long enough to make his obligatory payments on the loan. In some ways, the banks were surprised by the major collapse in house values – something that was not predicted and had a massive impact on the viability of their business model. If it were this alone, then the bankers were not guilty of any crime.
However, major fines have been paid by most of the major investment banks. Why have they paid financially, but not with individual loss of freedom? How can a corporation be guilty if no single individual has done wrong? A corporation is legally separate from a person, but it represents the actions of people.
Why have no bankers gone to jail? “Plausible Deniability” Our courts assume innocence until proof of guilt. This requires criminal action to take place, have witnesses and be under the responsibility of an individual. Bankers and lawyers are able to build good stories that muddy the waters of individual responsibility. The fact that no bankers are in jail is not because the world’s criminal prosecution services have a love of banks – I bet any number of middle ranking prosecution lawyers were looking to make a career out of nailing a big name banker. If they haven’t nailed a banker, it is not through a lack of prosecution effort to build a case.
Boris Johnson, mayor of London and future candidate for Conservative Prime Minister of the UK has proposed this week a change in the law regarding British Citizens who travel to Syria, Iraq. Instead of the prosecution having to show without reasonable doubt that the purpose of their trip was to commit criminal activity with the Islamic State; the individuals would be required to show that their trip was clearly not to participate in any criminal action. It worries me the idea that individuals could lose the right to presumed innocence. However, there needs to be some areas of life where it is not enough to put the onus on the other side to prove guilt, there should be some onus to show that you are fully responsible for your, and your team’s actions. If someone is a leader at a major bank or if someone takes a trip this month to Syria – I think there should be a balance toward that leader or that traveller needing to document that they have proactively been fully responsible for the consequences of their actions.
Leadership responsibility needs to include a responsibility to audit the actions of your subordinates. This is a value system problem rather than a regulation problem. We cannot regulate trustworthiness.
I’ll leave it to a future post to explore the systemic actions that can rebuild trust between people, and trust in major institutions.
There are 3 objections that must be overcome to get somebody to buy:
1. why buy anything
2. why buy from me
3. why buy now
Why buy anything?
The first objection is showing that not taking action is not a viable option. The problem must be made explicit and brought to the full attention of the man with the money.
Why buy from me?
So, pain is clear. I want a cure. Now, I need to know that you truly understand my situation and that your motives as a salesman are about helping me, not helping yourself to the commission.
Why buy now?
My MacBook Pro has been dying for the last 2 years. It has been getting slower and slower and ssssllllllooooowwwwweeeeerrrrr… In fact I need to watch someone else use my laptop to realize how truly clunky the machine has become. In all this time I have had many moments where I knew I needed to take action… But I didn’t. Until now. My battery has less than 10 minutes of autonomy. I bought a new MacBook Pro this week.
Why did I wait so long? It is normal. We don’t act until we have to. We will not buy until we have to. As a salesman I have seen this so many times. My potential client has a problem. We have a decent relationship. We have a proposal on the table. It looks good. But no signature. “After the summer”, “when everybody gets back”, “we have an urgent priority at the moment”…
It is only when the battery dies that I replace my slowly dying computer.
I was out at a dinner with a large group of friends recently. At the end of the night I overheard two people talking about a local beach party. One said “these beach parties are a big thing here in Spain.” The other said “yeah, I heard.”
The conversation then went “Do you want to go?”
“I don’t know, I’m tired.”
They pulled in another friend: “Hey Jim, do you want to go to the beach party?”
Jim replied: “Are you guys going? If you are going then maybe I could join for a drink.”
Pretty soon the whole group was trading “I’ll go if you guys are going” comments and they were all set to go to the beach party.
Now, this blog is not about whether beach parties are good or bad, just a reflection on how this group ended up deciding to do something that no single individual started out with a desire to do. They may have had an awesome night. They may have arrived and found it a complete waste of money.
As an observer, it really struck me how the idea went from a throw-away comment between two people to a fully-fledged plan within a few minutes.
Speaking to my friend Verne Harnish the next day, he said “Oh, you’re talking about the Abilene Paradox”.
On a hot afternoon visiting in Coleman, Texas, the family is comfortably playing dominoes on a porch, until the father-in-law suggests that they take a trip to Abilene [53 miles north] for dinner. The wife says, “Sounds like a great idea.” The husband, despite having reservations because the drive is long and hot, thinks that his preferences must be out-of-step with the group and says, “Sounds good to me. I just hope your mother wants to go.” The mother-in-law then says, “Of course I want to go. I haven’t been to Abilene in a long time.”
The drive is hot, dusty, and long. When they arrive at the cafeteria, the food is as bad as the drive. They arrive back home four hours later, exhausted.
One of them dishonestly says, “It was a great trip, wasn’t it?” The mother-in-law says that, actually, she would rather have stayed home, but went along since the other three were so enthusiastic. The husband says, “I wasn’t delighted to be doing what we were doing. I only went to satisfy the rest of you.” The wife says, “I just went along to keep you happy. I would have had to be crazy to want to go out in the heat like that.” The father-in-law then says that he only suggested it because he thought the others might be bored.
The group sits back, perplexed that they together decided to take a trip which none of them wanted. They each would have preferred to sit comfortably, but did not admit to it when they still had time to enjoy the afternoon.
This is basic groupthink.
A bad decision driven by nice people trying to be nice to each other. I, personally, fear “nice” people. I fear people who say what they think the other wants them to say, rather than directly expressing what their own interest and desire is.
I like people who genuinely care about others, but clearly have a sense of who they are and what they stand for.
So, my friend, do you want to go to Abilene? 😉
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