The Frontal Cortex

Business Books

In the Boston Globe Ideas section, Drake Bennett has a typically excellent article on the logical fallacies underlying best-selling business books, such as In Search of Excellence or Good to Great :

While the particulars vary, the basic idea underlying the literature is the same: that the secrets of success can be divined by careful study of the institutional habits of the world’s business all-stars – companies that set the standard for their industries, that thrive in tough times, companies that win the war for talent, companies that are built to last. In the imperturbable focus on core values of Hewlett-Packard or the restless innovativeness of Google or the ruthless accountability of GE, there are lessons for us all.

At their most ambitious, these books purport to elevate the study of excellence to a science, its nuggets culled from exhaustive research and refined by painstaking analysis. Jim Collins, coauthor of “Built to Last” and author of “Good to Great,” likens what he does to physics. Readers of his books, he writes, have their eyes opened to the “immutable laws of organized human performance.”

But a few consultants and business school professors have begun to argue that much of this literature is, in fact, useless. Far from a science, they argue, the success literature is made up of little more than just-so stories in which authors use dramatic anecdotes – often drawn from previously published magazine profiles or interviews with the very executives whose performance is being examined – as evidence for “secrets” that amount to little more than warmed-over homilies. The critics accuse the success gurus of cherry-picking their evidence, of doing little to double-check their results, of circular reasoning, and of making elementary statistical errors.

This is the corporate version of a very well studied psychological mistake known as the Fundamental Attribution Error (FAE). (This is sometimes referred to as the “correspondence bias”.) Simply put, the FAE occurs when people overestimate the importance of supposedly “fundamental” personality traits and underestimate the importance of variables like context. For instance, when subjects were given a series of pro-Fidel Castro and anti-Castro essays to read, they naturally assumed that the pro-Fidel authors were more sympathetic to the Communist cause. So far, so obvious: people write what they believe. However, this assumption persisted even when subjects were told that the position of the writers was determined by a random coin toss. Why? Because we naturally overlook the “situational constraints” placed on people.

The same thing happens when you meet someone in a bar and assume they are always talkative and outgoing. What you’ve failed to consider is the four beers and two shots that preceded your conversation. The drunk extrovert might be shy in a different and more sober situation.

What does this have to do with business books? These influential authors assume that their “successful” companies (many of which are now out of business) are fundamentally better than less successful companies. Thus, they spend lots of ink trying to reverse-engineer the ingredients of corporate success, the traits that lead to high profit margins and stock prices. But what if those ingredients are contextual? What if success is a matter of luck and good timing? What if the temporary rise of a stock doesn’t mean anything?

The larger point, of course, is that humans are terrible at acknowledging the (omni)presence of contingency and chance. We like explanations that cut across situations and aren’t subject to randomness, and so we psychoanalyze personalities and come up with elaborate theories of personality. Alas, these explanations often get the causality of behavior exactly backwards – who we are and what we’re like often depends on where we are and what we are doing. I’ve always loved this short quote from Richard Rorty: “Freedom is the recognition of contingency.”

Comments

  1. #1 dbuddah
    April 13, 2009

    Reminds me of the Texas Sharpshooter fallacy. Great Rorty quote. How about this: Ignorance is the new free will!

  2. #2 Steve
    April 13, 2009

    Having toiled in the vineyards of management consulting myself, I know that this is absolutely true. Beyond books, this is the scam around the general approach of “best practices”. It works like this: I’m a consultant who has worked with your competitors as well as “leading companies” in other industries, so I know what “best practices” work. So I will sell that knowledge to you so you can have best practices too.

    Of course, what the best practices consist of is the advice I gave my last client, unproven and usually unimplemented, so I don’t even have to change my powerpoints very much!

    (And the net effect, by the way, is that everyone regresses to the mean, and best practices become business as usual, conferring no competitive advantage whatsoever.)

    In addition to the FAE, other biases are exploited in this approach, including the availability heuristic, the representativeness heuristic, and the vividness bias.

    Another brilliant book that is relevant here is Nassim Taleb’s Fooled by Randomness. Put a hundred monkeys in a room and one of them will be performing at the 99th percentile at any given point in time. Write a book about him, call him a genius and visionary, and call what he does best practices. Your book is almost certain to make money, and isn’t that the point?

    … becoming engulfed by cynicism … must stop now

  3. #3 Michael
    April 13, 2009

    Malcolm Gladwell’s book, Outliers, discusses FAE (not explicitly) in terms of people’s histories. For example, we look at the amazing success of Bill Gates and try to figure what is so great about this guy. Besides the fact that ate, slept, and breathed computers, he also had access to computers in high school circa 1967!

    Stephen Jay Gould’s book, Wonderful Life, is an eloquent look at fossil evidence from the Cambrian explosion. In it, he argues that if you rewound and re-ran the natural selection process, the chances of human creation as a result would be slim (ignoring the influence of a human-creating God, of course).

    The point: Chance and context matter!

  4. #4 Bruce
    April 13, 2009

    John Micklethwait wrote an excellent book a few years back, “The Witch Doctors”, in which he deconstructed the business gurus of the day (not sure they’ve changed much since then, either.) As I recall, the only one he could find who brought real analytical insight to the party was Drucker. The rest fit into the mode described above by Steve. Sadly.

  5. #5 OftenWrongTed
    April 13, 2009

    “The Ultimate Drucker”, is a compilation of some of Professor Peter Drucker’s’ wonderful writing, and it reconfirms the observation posted by Bruce

  6. #6 Harry Beckwith
    April 13, 2009

    Collin’s identified just 11 great companies.

    One of the 11 was Circuit City. RIP.

    Another was Fannie Mae. Since Collins wrote the book, the stock had gone from over 87 dollars to under 87 cents a share.

    A third was Pitney Bowes. It’s decline over 70 percent since 1999.

    Those are the only three whose results checked, but would you expect three of the first three great companies to have underperformed the market by that much?

    I’d be interested in measuring the performance for a hypothetical mutual fund comprising equal shares of Collins’s 11 great companies. Do you begin to suspect that an apparent contrarian strategy of shorting Collin’s 11 stocks might not have reaped huge rewards.

  7. #7 Jordan
    April 13, 2009

    I’m a minister, first time writer, short time follower. Thanks Jonah for your insights.

    I don’t follow the business world really at all, but I found that a lot of the books on “church growth” pillage all the books on business growth and success, repackage it and put Jesus in it.

    “We like explanations that cut across situations and aren’t subject to randomness, and so we psychoanalyze personalities and come up with elaborate theories of personality.”

    I realize I’m probably the only preacher that reads your blog, but being that my role at my church is to develop and lead a church through change, cast vision, and set the example for others…what’s a guy to do now that he learns that “business guru’s” aren’t doing their research, and the successes are merely situational?

    That really makes the testimony of what gets printed for preachers even more watered down. Unbelievable! (Sarcasm intended)

    I wish some “Church Growth” guru’s would catch on, and realize that the individual situations, and the leadership that is in place has more to do with the growth, than the actual “10 steps” or whatever their slogan is.

    We do all want a generalized step to success. Especially in the times we are in. It all seems a matter of pride really. And there are plenty of people in the world who want to capitalize on that desire, and make some Benjamins in the process. It doesn’t matter what corporation (or a lot of churches for that matter) success is the “high”, and “knowledge” the drug. And when people start saying they know how to give success, whether it’s true or not, contextual or not, they sell it, package it, and make you feel all warm inside like an afternoon with Dr. Phil or Oprah. (whatever drug it is you prefer)

  8. #8 Nigel
    April 13, 2009

    This “fundamental attribution error” is significant in the business world far beyond its effects on management books. It is also what enables people to rationalize the obscenely high rewards paid to business executives. (No it is not “compensation”! These guys do not have nastier, harder jobs than your local garbage-man, and they do not take greater “risks” than construction workers or coal miners.) We are constantly being told that businesses “need” to pay these obscene salaries and bonuses to attract the “top talent,” when the only available indicator that anyone actually has this indefinable and unmeasurable talent is that they have had success in running some business, at some time, in some particular circumstances (which might, for all anyone knows, have been circumstances in which almost any reasonably intelligent person could have made a success of things). What is worse, the reputation for being “top talent,” once acquired, often seems to cling to these people even after they have had a string of failures, as they move from one company to another, bidding their remuneration level up each time.

    To be fair, their failures, like their successes, probably also generally owe more to circumstances than any particular personal qualities they may have. In fact, the notion that the personal level of “business acumen” of the CEO is normally the main, or even a very significant, factor in determining a business’s level of success, is ludicrous once you think about it a bit. But, for obvious reasons, it suits the interest of the people who get (not “make”!) these huge amounts of money to get us to believe (or even to half-believe) that it is so, and of course they have the resources to push the idea at us.

  9. #9 Natalia Roca
    April 14, 2009

    This article really struck a chord as I have been collecting information for the past 6 months about the fundamental methodological and cognitive flaws in books like Good to Great and Built to Last. In the spirit of full disclosure, I was actually one of the critical readers of the Good to Great manuscript and had been working with Jim Collins for a couple of months prior to it’s being published. As a trained market researcher-I had always had issues with Jim’s methodology–in particular was the way in which he interviewed his subjects.He asked his “great” company executives to recall events that happened over 10 years ago and as Jonah has written in a previous post–our brains are wired for revisionism–and recall bias is sure to have an enormous effect on those results. There are a host of other issues with the findings of the book and Phil Rosenzweig’s excellent book “The Halo Effect” covers them quite well but I have another question. Even though the findings are riddled with issue-the book nonetheless has struck a chord both in the business community and in the social sector. Why is that? Why has Good to Great been so well recieved? It’s been the pursuit of the answer to that question that has gotten me curious and would love to hear Jonah’s and his readers thoughts on this.

  10. #10 suzi orman
    April 14, 2009

    The elimination of taxes on businesses could result in earnings returning much faster, and even if not, the speculation by investors about the grwoth potential in a tax free environment could create enough demand to drive up the value of the indexes. Too many variables exist to use this article’s historical information as a future predictor. I like the idea though. Hey, if the future could be predicted easily everyone would be doing it .

  11. #11 Alan
    April 14, 2009

    In his book, “The Halo Effect,” business professor Phil Rosenzweig systematically goes through some prominent business books and convincingly argues that what counts for analysis and prognosis are mostly based on delusions. His is a beautifully and clearly written book. Too bad it hasn’t received a wider readership.

  12. #12 Jerry
    April 15, 2009

    Business books written for a popular audience contain more story than science. Definitely true. True also for books on any specialist subject written for a popular audience.

    But this is a problem of writing for a popular audience, not of business advice as a whole–as I think Jonah understands, but perhaps the consultant in #2 does not. Better management and business process techniques are invented or discovered, these are usually in somebody’s head (or a group of peoples’ heads). These ideas gradually diffuse to other firms, making all firms more efficient. (And the fact that all firms eventually incorporate these new discoveries may mean, as #2 says, that none has a sustainable competitive advantage, but the increased efficiency is still a great benefit to the firms and to society.)

    Popular business books may not be the best way to spread new business methods (just as Taleb’s books may not be the best way to teach people about Knightian uncertainty) but that doesn’t mean there is nothing to teach. There is ample advice from sociology and economics (and just from observing how the world works) about how this can be done and its importance, from Jane Jacobs’ The Economy of Cities to Richard Florida’s work to Krugman’s work on economic geography to Paul Romer’s work on the new growth theory. And if this knowledge is transferable, there is no reason to think it can’t be transferred through books. Rather than give up on books, perhaps we should simply demand better books.

  13. #13 ron
    April 15, 2009

    Of course, the most recent and highly related tome is ‘The Black Swan’ by Taleb that shows how much the human mind loves to create links that become stories which soon become treatises to be gawked over.

  14. #14 Ellen
    April 16, 2009

    “it’s better to be lucky than good”, right?

    FAE reminds me another truism: that consultants are often paid to develop biased studies to support the position of the person hiring them, not to give objective, researched opinions.

  15. #15 Marco Lugon
    April 16, 2009

    The book mentioned above: The Halo Effect, should be required reading for every MBA program.

    Re. Malcom Gladwell’s book Outliers, I actually find that it suffers from surviorship bias … after all, what is an outlier, if not a survivor?

  16. #16 Nick Desbarats
    April 16, 2009

    As some who is in the business world, I think a bit of clarification is needed…

    I won’t try to defend the scientific validity of most “success literature” books -it’s indefensible. I would, however, defend these books’ effectiveness at increasing many business people’s rates of success, since most of them commit the same truly basic business mistakes over and over again. If these books stop them from failing to plan, or not performing some basic market research, etc., they deliver net benefit.

    If painting it as science makes it stick, well, maybe the end justifies the means in this case…

  17. #17 David
    April 17, 2009

    Speaking to Nick’s comment above, I think he’s correct. The term “best practices” gets to this idea of identifying problems and corresponding solutions that occur again and again and again in business settings (or any setting for that matter) and laying them out on the table–typically captured in books–for others to read and implement. What I have noticed, however, is that most read scantly and implement little, if anything.

    Great quote from Rorty, btw.

  18. #18 Hydraulic valves
    May 8, 2009

    In fact, the notion that the personal level of “business acumen” of the CEO is normally the main, or even a very significant, factor in determining a business’s level of success, is ludicrous once you think about it a bit.