On Only The Paranoid Survive

I recently finished reading Only The Paranoid Survive by Andrew S. Grove.

Below are excerpts from the book that summarize the key points presented by the author:

1- “Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another until there is nothing left. I believe that the prime responsibility of a manager is to guard constantly against other people’s attacks and to inculcate this guardian attitude in the people under his or her management.”

2- “We all need to expose ourselves to the winds of change. We need to expose ourselves to our customers, both the ones who are staying with us as well as those that we may lose by sticking to the past. We need to expose ourselves to lower-level employees, who, when encouraged, will tell us a lot that we need to know. We must invite comments even from people whose job it is to constantly evaluate us and critique us, such as journalist and members of the financial community. Turn the tables and ask them some questions: about competitors, trends in the industry and what they think we should be most concerned with. As we throw ourselves into raw action, our senses and instincts will rapidly be honed again.”

3- “A strategic inflection point is when the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the new. Before the strategic inflection point, the industry simply was more like the old. After it, it is more like the new. It is a point where the curve has subtly but profoundly changed, never to change back again.”

4- “Of all the changes in the forces of competition, the most difficult one to deal with is when one of the forces become so strong that it transforms the very essence of how business is conducted in an industry.”

5- “When an industry goes through a strategic inflection point, the practitioners of the old art may have trouble. On the other hand, the new landscape provides an opportunity for people, some of whom may not even be participants in the industry in question, to join and become part of the action.”

6- “When a strategic infection point sweeps through the industry, the more successful a participant was in the old industry structure, the more threatened it is by change and the more reluctant it is to adapt to it. Second, whereas the cost to enter a given industry in the face of well-entrenched participants can be very high, when the structure breaks, the cost to enter may become trivially small.”

7- “I suspect that the people coming in are probably no better managers or leaders than the people they are replacing. they have only one advantage…the new managers come unencumbered by such emotional involvement and therefore are capable of applying an impersonal logic to the situation.”

8- “As these questions to attempt to distinguish signal from noise: 1) Is your key competitor about to change? 2) Is your key complementor about to change? 3) Do people seem to be “losing it” around you?”

9- “I call the divergence between actions and statements strategic dissonance. It is one of the surest indications that a company is struggling with a strategic inflection point.”

10- “Ideally, the fear of a new environment sneaking up on us should keep us on our toes. Our sense of urgency should be aided by our judgement, instincts and observations that have been honed by decades spent in the business world. The fact is, because of our experience, very often we managers know that we need to do something. We even know what we should be doing. But we don’t trust our instincts or don’t act on them early enough to take advantage of the benign business bubble. We must discipline ourselves to overcome our tendency to do too little too late.”

Regards,

Omar Halabieh

Only The Paranoid Survive

On Irrational Exuberance

I recently finished reading Irrational Exuberance by Robert J. Schiller.

This book serves as an awakening call from “the present…whiff of extravagant expectation, if not irrational exuberance, in the air. People are optimistic about the stock market. There is a lack of sobriety about its downside and the consequences that would ensue as a result.” The author advances that “we need to know if the price level of the stock market today, tomorrow, or any other day is a sensible reflection of economic reality, just as we need to know as individuals what we have in our bank accounts.” That being said, the purpose of the book is to advance “a better understanding of the forces that shape the long-run outlook for the market.”

This book covers a myriad of factors ranging from technology, to cultural to psychological that aid the formation and reinforcement of speculative bubbles. It ends with a section on implication of these findings on the various members of society whether individuals, institutions or government.

Below are key excerpts that I found particularly insightful:

1- “Many of the foregoing factors (that are candidates for causing a market boom) have  a self-fulfilling aspect to them, and they are thus difficult, if not impossible, to capture in predictive scientific explanations.”

2- “There are many ultimate causes for this exuberance…and the effect of these causes can be amplified by a feedback loop, a speculative bubble, as we have seen in his chapter. As prices continue to rise, the level of exuberance is enhanced by the price rise itself…The changes in thought patterns infect the entire culture and they operate not only directly from past price increases but also from auxiliary cultural changes that the past price increases helped generate.”

3- “The role of the news media in the stock market is not, as commonly believed, simply as a convenient tool for investors who are reacting directly to the economically significant news itself…The news media are fundamental propagators of speculative price movements through their efforts to make news interesting to their audience. “

4- “Ends of new eras seem to be periods when the national focus of debate can no longer be upbeat. At such time, a public speaker may still think that it would be good business to extol a vision of a brilliant future for our nation’s economy, but it is simply not credible to do so. One could, at such times, present a case that the economy must recover, as it always has, and that the stock market is underpriced and should go up, but public speakers who make such a case cannot achieve the command of public attention they do after a major stock run-up and economic boom. There are times when an audience is receptive to optimistic statements and times when it is not.”

5- “We have explored the justification people have given, at various points in history, for changing market valuations, and we have seen evidence of the transitory nature of these cultural factors. Ultimately, however, the conclusions we draw from such evidence depend on our view of human nature and the extent of human abilities to produce consistent and independent judgements.”

6- “Two kinds of psychological anchors will be considered here: quantitative anchors, which themselves give indications for the appropriate levels of the market that some people use as indications of whether the market is over-or underpriced and whether it is a good time to buy, and moral anchors, which operate by determining the strengths of the reason that compels people to buy stocks, a reason that they must weigh against their other uses for the wealth which they already have (or could have) invested in the market.”

7- “The effects of new stories on the stock market sometimes have more to do with discovery of how we feel about the news than with any logical reaction to the news. We can make decisions then that would have been impossible before the news was known. It is partly for this reason that the breaking off of a psychological anchor can be so unpredictable: people discover things about themselves, about their own emotions and inclinations, only after price change occur. Psychological anchors for the market hook themselves on the strangest things along the muddy bottom of our consciousness.”

8- “Rationale response to public information is not the only reason that people think similarly, nor is the use of that public information always appropriate or well reasoned.”

9- “Policies that interfere with markets by shutting them down or limiting them, although under some very specific circumstances apparently useful, probably should not be high on our list of solutions to the problems caused by speculative bubbles. Speculative markets perform critical resource-allocation functions, and any interference with markets to tame bubbles interferes with these functions…Most of the thrust of our national policies to deal with speculative bubbles should take the form of facilitating more free trade, as well as greater opportunities for people to take positions in more freer markets. A good outcome can be achieved by designing better forms of social insurance and creating better financial institutions to allow the real risks to be managed more effectively. The most important thing to keep in mind as we are experiencing a speculative bubble in the stock market today is that we should not let it distract us from such important tasks.”

Regards,

Omar Halabieh

Irrational Exuberance

On Reinventing the Bazaar

I recently finished reading Reinventing the Bazaar – A Natural History of Markets – by John McMillan. Below are key excerpts from the book that I found particularly insightful:

1- “A definition of a market transaction, then, is an exchange that is voluntary: each party can veto it, and (subject to the rules of the marketplace) each freely agrees to the terms. A market is a forum for carrying out such exchange.”

2- “Markets are too important to be left to the ideologues. In fact, markets are the most effective means we have of improving people’s well-being. For poor countries they offer the most reliable path away from poverty. For affluent countries they are part of what is needed to sustain their living standards.”

3- “The key feature of markets of all kinds is brought home when we look at the growth of new market mechanisms. Benefiting both buyer and seller, any transaction creates value. Buying and selling is therefore a form of creation. Elementary at this point is, its importance cannot be overstated. There are gains from trade, and people are relentless in finding ways to realize them.”

4- “Two kinds of market frictions arise from the uneven supply of information. There are search costs: the time, effort, and money spent learning what is available where for how much. And there are evaluation costs, arising from the difficulties buyers have in assessing quality. A successful market has mechanisms that hold down the costs of transacting that come from the dispersion of information.”

5- “Well-designed markets have a variety of mechanisms, formal and informal, to ensure there is indeed money in being honest. marketplace confidence rests on rules and customs that give even unscrupulous people reason to keep their word…Contracting rests not only on the courts but also on informal devices based on reputation. Information must flow in reputational incentives are to work.”

6- “Some externalities can be corrected by defining and enforcing property rights. In other cases the harmful activity can be taxed. In extreme cases the only solution is to ban it.”

7- “A workable platform for markets has five elements: information flows smoothly; people can be trusted to live up to their promises; competition is fostered; property rights are protected but not overprotected; and side effects on third parties are curtailed.”

8- “Governments sometimes conspire to undermine markets. Corruption cuts into productivity because firms that fear they will be at the mercy of bribe-takers are reluctant to invest. Price-fixing also cuts into productivity by preventing the price system from doing its job of allocating resources. Constructive government actions are needed…to help the market system work as it is supposed to. But there is a risk that government intervention will be perverted in counterproductive directions.”

9- “Well-functioning markets rely on a judicious mix of formal and informal controls. While the government helps to set the rules for the market, so do that market participants. an economy cannot be designed from above. If it were possible to plan the reforms, if would have been possible to plan the economy.”

10- “Those on the far left of the political spectrum, who abhor poverty, espouse policies that would entrench it. The fervent proponents of laissez-faire, who esteem market, advocate a system that would trigger their collapse.”

11- “The market system is like democracy. It is the worst form of economy, except for all the others that have been tried from time to time. It succeeds because, precisely as in Forster’s view of democracy, it admits variety and permits criticism. We should cheer it because it solves some all-but-intractable problems, which have been tackled by none of the alternative forms of economic organization. It generates wealth. It alleviates poverty. But it has its limits. There are things it cannot do. It does not necessarily do even what it is supposed to; it works well only if it is well designed. Two cheers are enough.”

Regards,

Omar Halabieh

Reinventing the Bazaar

On The Four Pillar of Investing

I recently finished reading The Four Pillars of Investing – Lessons for Building a Winning Portfolio –  by William Bernstein.

As the title suggests, the author presents within this book four essential pillars of successful investing. Each section of the book is then dedicated to investigating and detailing each of these pillars and they are: 1) Theory 2) History 3) Psychology and 4) Business. The first section on theory, is one which the author calls “the most important part of the book”. In his words it “surveys the awesome body of theory and data relevant to everyday investing”. This section centers itself around the “fundamental characteristic of any investment is that its return and risk go hand in hand.” The second section on History postulates that “an understanding of financial history provides an additional dimension of expertise.” The third section, Psychology,  is one in which the author surveys the area of “behavioral finance”. Where one “learns how to avoid the most common behavioral  mistakes and to confront your own dysfunctional investment behavior.” Last but not least the last section – Business – exposes how “the modern financial services industry is designed solely to serve itself.”

What sets this book apart from other investing books is the breadth of areas covered, and also the writing style which is both “understandable and entertaining”. A highly recommended read for any investor regardless of level.

Below are key excerpts from the book, that I found particularly insightful:

1) “The highest returns are obtained by shouldering prudent risk when things look the bleakest.”

2) “Most small investors naturally assume that good companies are good stocks, when the opposite is usually true.”

3) “Sine you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy. because it is the only factor affecting your investment risk and return that you can control.”

4) “Bubbles occur whenever investors begin buying stocks simply because they have been going up.”

5) “Buying assets that everyone else has been running from takes more fortitude than most investors can manage. But if you are equal to the task, you will be rewarded.”

6) “There are really two behavioral errors operating in the overconfidence playground. The first is the “compartmentalization” of success and failure. We tend to remember those activities, or areas of our portfolios, in which we succeeded an forget about those areas where we didn’t…The second is that its far more agreeable to ascribe success to skill than to luck.”

7) “By indexing, you are tapping into the most powerful intelligence in the world of finance – the collective wisdom of the market itself.”

8) “Rebalancing forces you to be a contrarian – someone who does the opposite of what everyone else is doing. Financial contrarians tend to be wealthier than folks who like to simply follow the crowd.”

9) “Risk and return are inextricably enmeshed. Do not expect high returns without frightening risks, and if you desire safety, you must accept low returns.”

10) “This book should be seen as a framework to which you’ll be continuously adding knowledge.”

11) “The overarching message of this book is at once powerful and simple: With relatively little effort, you can design and assemble an investment portfolio that, because of its wide diversification and minimal expense, will prove superior to most professionally managed accounts.”

Regards,

Omar Halabieh

The Four Pillars of Investing

On The Halo Effect

I recently finished reading The Halo Effect…and the Eight Other Business Delusions That Deceive Managers by Phil Rosenzweig.

As best summarized by the author: “The central idea in this book is that our thinking about business is shaped by a number of delusions…More recently, cognitive psychologists have identified biases that affect the way individuals make decisions under uncertainty. this book is about a different set of delusions, the ones that distort our understanding of company performance, that make it difficult to know why one company succeeds and another fails. These errors of thinking pervade much that we read about business, whether in leading magazines or scholarly journals or management bestsellers. They cloud our ability to think clearly and critically about the nature of success in business.”

The book then goes on to present the nine delusions excerpted below:

“Delusion One: The Halo Effect – The tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. In fact, many things we commonly claim drive performance are simply attributions based on prior performance.

Delusion Two: The Delusion of Correlation and Causality – Two things may be correlated, but we may not know which one causes which. Does employee satisfaction lead to high performance? The evidence suggests it’s mainly the other way around – company success has a stronger impact on employee satisfaction.

Delusion Three: The Delusion of Single Explanation – Many studies show that a particular factor  - strong company culture of customer focus or great leadership – leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.

Delusion Four: The Delusion of Connecting the Winning Dots – If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

Delusion Five: The Delusion of Rigorous Research – If the data aren’t good quality, it doesn’t matter how much we have gathered or how sophisticated our research methods appears to be.

Delusion Six: The Delusion of Lasting Success – Almost all high performing companies regress over time. The promise of a blueprint for lasting success is attractive but not realistic.

Delusion Seven: The Delusion of Absolute Performance – Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

Delusion Eight: The Delusion of the Wrong End of the Stick – It may be true that successful companies often pursued a highly focused strategy, but that doesn’t mean highly focused strategies often lead to success.

Delusion Nine: The Delusion of Organizational Physics – Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science – despite our desire for certainty and order.”

Every now and then one comes across a book, that makes its reader take a step back and re-assess his views, experiences and readings. The Halo Effect is one of these books. It delivers both on account of the content and also of the numerous corporate examples and references to leading work in the leadership/management space to illustrate the concepts presented. A very refreshing and highly recommended read!

Below are excerpts from the book that I found particularly insightful:

1- “In fact, for all the secrets and formulas, for all the self-proclaimed thought leadership, success in business is as elusive as ever.”

2- “…There was talk, over and over, about customer orientation and leadership and organizational efficiency, but these things are hard to measure objectively, so we tend to make attributions about them based on things we do feel certain about – revenues and profits and share price. We may not really know what leads to high performance, so we reach for simple phrases to make sense of what happened.”

3- “If we start with the full data set and look objectively at many years of company performance, we find the dominant pattern is not one of enduring performance at all, but one of rise and fall, of growth and decline. Foster and Kaplan conclude: “…Managing for survival, even among the best and most revered corporations does not guarantee strong long term performance for shareholders. In fact, just the opposite is true. In the long run, the markets always win”.”

4- “March and Sutton explain: “In its efforts to satisfy these often conflicting demands, the organizational research community sometimes responds by saying that inferences about the causes of performance cannot be made from the data available, and simultaneously goes ahead to make such inference.”"

5- “We can’t turn back the clock, change one variable, and then run the experiment again…It’s easy to blame one man for a company woe’s, but these sorts of attributions, while appealing for their simplicity, may not provide the best basis on which to manage a company.”

6- “…An organization isn’t a system of mechanical parts, interchangeable and replaceable. It’s better understood as a sociotechnical system, a combination of mean and machines, of people and things, of hardware and software, but also of ideas and attitudes. Some technical elements can often be copied and applied with predictable results…but when we begin to examine how those technical systems interact with social systems, with people and values and attitudes and expectations, the results are harder to predict.”

7- “Managers quite naturally find it easier to keep the attention on execution, which everyone will always agree can be done better.”

8- “What leads to high performance?…we’re left with two broad categories: strategic choice and execution…In spite of our desire for simple steps, the reality of management is much more uncertain that we would often like to admit – and much more so that our comforting stories would have us believe.”

9- “As Tom Peters observed: “To be excellent, you have to be consistent. When you’re consistent, you’re vulnerable to attach. Yes, it’s a paradox. Now deal with it.”"

Regards,

Omar Halabieh

The Halo Effect

On The Six Sigma Way

I recently finished reading The Six Sigma Way – How GE, Motorola, And Other Top Companies Are Honing Their Performance by Peter S. Pande, Robert P. Neuman, and Roland R. Cavanagh.

This book is THE reference on Six Sigma. The authors define it as “A comprehensive and flexible system for achieving, sustaining and maximizing business success. Six Sigma is uniquely driven by close understanding of customer needs, disciplined use of facts, data, and statistical analysis, and diligent attention to managing, improving, and reinventing business processes.”

This work is made up of three major sections. The first part provides an executive summary of this system. The second part focuses on the organizational aspects of adopting this system. The last part, focuses on the actual implementation of Six Sigma including the roadmap and tools. Also included in this book, are numerous appendices that provide further “practical support”.

What sets this book apart is both the breadth and depth in which the topic is discussed. Whether one is a novice or expert, looking to obtain a high level overview or a deep understanding of the subject matter, this book is for you. In addition, the interspersed case studies, examples and tools make it very practical and applicable. After reading this book – one cannot but concur with the authors’ closing remark: ”We believe – and hope you agree – that there are enough essential, powerful, and valuable elements to make the Six Sigma system, in some way, part of every successful business. At the same time, we strongly encourage you to adapt the discipline and methods of Six Sigma to best impact your unique culture, industry, market position, people, and strategy. Our biggest fear is that people will “accept” or “reject” Six Sigma as it it were a thing (falling victim to the Tyranny of the Or) and not use it as a flexible system.”

Below are key excerpts from the book, that I found particularly insightful:

1) “The Benefits of Six Sigma: 1) Generates sustained success…2) Sets a performance goal for everyone…3) Enhances value to customers…4) Accelerates the rate of improvement…5) Promotes learning and “cross pollination”…6) Executes strategic change”

2) “Six Themes of Six Sigma: 1) Genuine Focus on the Customer…2) Data- and Fact-Driven Management…3) Process focus, Management, and Improvement…4) Proactive Management…5) Boundaryless Collaboration…6) Drive for Perfection; Tolerance for Failure”

3) “Six Sigma Improvement and Management Strategies: 1) Process Improvement: Finding Targeted Solutions…2) Process Design/Redesign: Building a Better Business…3) Process Management: The Infrastructure for Six Sigma Leadership”

4) “In the Six Sigma Way, we will use and refer to a five-phase improvement cycle that has become increasingly common in Six Sigma organizations: Define, Measure, Analyze, Improve, and Control – or DMAIC.”

5) “…The ideal roadmap for establishing the Six Sigma system and launching improvements…1) Identify core processes and key customers. 2) Define customer requirements. 3) Measure current performance. 4) Prioritize, analyze, and implement improvements. 5) Expand and integrate the Six Sigma system.”

6) “Five-step measurement implementation model: 1) Select what to measure 2) Develop operational definitions 3) Identify data sources 4) Prepare collection & sampling plan 5) Implement and refine measurement”

7) “We can offer an assessment model, however, based on two major conditions – both of which must be met if process design/redesign is going to work: 1) A major need, threat, or opportunity exists: a) Shifts in customer needs/requirements…b) Demand for greater flexibility…c) New technologies…d) New or changed rules and regulations…e) Competitors are changing…f) Old assumptions (or paradigms) are invalid…g) The current process is “a mess”…2) You’re ready and willing to take on the risk: a) Longer lead-time for change is acceptable…b) Resources and talent are available…c) Leaders, and the organization as a whole, will support the effort…d) The “Risk Profile” is acceptable.”

8) “Process Value Analysis: As processes get more complex, they tend to insulate people from the real reason that customers patronize a business. “Value Analysis” is a way of reemphasizing the key raison d’etre of a business or process by looking at work from the external customer’s point of view. In the analysis, we assign each process step to one of three categories: 1) Value Adding…2) Value Enabling…3) Non-Value-Adding”

9) “Twelve Keys To Success: 1) The Six Sigma Efforts to Business Strategy and Priorities 2) Position Six Sigma as an Improved Way to Manage for Today 3) Keep the Message Simple and Clear 4) Develop Your Own Path to Six Sigma 5) Focus on Short-Term Results 6) Focus on Long-Term Growth and Development 7) Publicize Results, Admit Setbacks, and Learn from Both 8) Make and Investment to Make It Happen 9) Use Six Sigma Tools Wisely 10) Link Customers, Process, Data, and Innovation to Build the Six Sigma System 11) Make Top Leaders Responsible and Accountable 12) Make Learning an Ongoing Activity”

Regards,

Omar Halabieh

The Six Sigma Way

On Fast Food Nation

I recently finished reading Fast Food Nation – The Dark Side of the All-American Meal by Eric Schlosser.

The purpose of this book, about the fast food industry, is best summarized by the author within the introduction: “I do not mean to suggest that fast food is solely responsible for every social problem now haunting the United States. In some cases (such as the malling and sprawling of the West) the fast food industry has been a catalyst and a symptom of larger economic trends. In other cases (such as the rise of franchising and the spread of obesity) fast food has played a more central role. By tracing the diverse influences of fast food I hope to shed light not only on the workings of an important industry, but also on a distinctively American way of viewing the world.”

This book recounts the history behind the uprising of fast food to become a dominant force in our modern society. However, what most of us do not know is : “what lies behind the shiny, happy surface of every fast food transaction”. Eric goes on to investigate every aspect of the fast food industry: people, cattle, vegetables, health etc. The storytelling techniques that he uses throughout the book bring this expose to life. The stories are descriptive, personal and touching.

A very educative and enlightening read, and a rude (much needed) awakening about the food industry in general and the fast food industry in particular.

Below are key excerpts from the book that I found particularly insightful:

“The history of the twentieth century was dominated by the struggle against totalitarian systems of state power. The twenty-first will no doubt be marked by a struggle to curtail excessive corporate power. The great challenge now facing countries throughout the world is how to find a proper balance between the efficiency and the amorality of the market.”

“Today’s fast food industry is the culmination of those larger social and economic trends. The low price of a fast food hamburger does not reflect its real cost – and should. the profits of the fast food chains have been made possible by losses imposed on the rest of society. The annual cost of obesity alone is now twice as large as the fast food industry’s total revenues.”

“The right pressure applied to the fast food industry in the right way could produce change faster than any act of Congress. The United Students Against Sweatshops and other activist groups have brought widespread attention to the child labor, low wages, and hazardous working conditions in Asian factories that make sneakers for Nike.”

“Nobody in the United States is forced to buy fast food. The first steps toward meaningful change is by far the easiest: stop buying it. The executives who run the fast food industry are not bad men. They are businessmen. They will sell free-range, organic, grass-fed hamburgers if you demand it. They will sell whatever sells at a profit. The usefulness of the market, its effectiveness as a tool, cuts both ways.”

“Whatever replaces the fast food industry should be regional, diverse, authentic, unpredictable, sustainable, profitable – and humble. It should know its limits. People can be fed without being fattened or deceived. This new century may bring an impatience with conformity, a refusal to be kept in the dark, less greed, more compassion, less speed, more common sense, a sense of humor about bran essences and loyalties, a view of food as more than just fuel. Things don’t have to be the way they are. Despite all evidence to the contrary, I remain optimistic.”

 

Regards,

Omar Halabieh

Fast Food Nation

Wall Street Demystified

I recently read the book Wall Street – How it works and for whom – by Doug Henwood. This book can be downloaded (for free) from its website.

As the title indicates, this book is an introduction to Wall Street – how it works and for whom. The book is composed of seven chapters as follows:

1- Instruments: This chapter covers the range of instruments traded on Wall Street, such as stocks, bonds, derivatives, currencies etc.

2- Players: This chapter covers the main stakeholders including households, nonfinancial business, financial institutions, the government etc.

3- Ensemble: This chapter discusses how the markets are intertwined, with a focus on credit, finance and the economy, allocation etc. It also includes a sample trading week to put these concepts into action.

4- Market Models: This chapter presents the numerous financial models that have been devised to simulate the market. It also discusses features of these markets, namely efficiency, disinformation, noise, fads, and bubbles.

5- Renegades: This chapter discusses in detail the Keynesian view of the markets, as well as those of Marx.

6- Governance: This chapter is about Corporate Governance, with a section on the relation of Wall Street and the government.

7- What is (not) to be done?: This last chapter includes the author’s thoughts on a number of economic issues such as social security, the Fed, investing socially, taxation, corporate transformation.

The breadth of topics discussed within this book is commendable, backed by a plethora of references for further reading in areas of interest. Chapters 1 and 2, serve as a great introduction and primer on the financial markets. The insight, stories and practical example presented make this book accessible. A final, and important comment to keep in mind, is that the author presents the content of the book (particularly the later chapters) from a leftist perspective.

Regards,

Omar Halabieh

Wall Street

Out of the Crisis

I just finished reading Out of the Crisis by W. Edwards Deming.

Dr. Deming best summarizes the purpose of the book: “This book teaches the transformation that is required for survival, a transformation that can only be accomplished by man. A company can not buy its way into quality – it must be led into quality by top management. A theory of management now exists. Never again may anyone say that there is nothing new in management to teach.”

He then proceeds with outlining and subsequently detailing his “14 points for management”. These fourteen points, he argues, form the basis of the required transformation of the American industry:

“

1. Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs.

2. Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.

3. Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.

4. End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.

5. Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.

6. Institute training on the job.

7. Institute leadership. The aim of supervision should be to help people and machines and gadgets to do a better job. Supervision of management is in need of overhaul, as well as supervision of production workers.

8. Drive out fear, so that everyone may work effectively for the company.

9. Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.

10. Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.

11a. Eliminate work standards (quotas) on the factory floor. Substitute leadership.

11b. Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.

12a. Remove barriers that rob the hourly worker of his right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality.

12b. Remove barriers that rob people in management and in engineering of their right to pride of workmanship. This means, inter alia, abolishment of the annual or merit rating of management by objective.

13. Institute a vigorous program of education and self-improvement.

14. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.

“

While the book may seem dry at points, particularly if being read from cover to cover, it encompasses numerous gems in management. Particularly as it relates to the overall management of and leadership in quality and its importance to re-gain competitive edge.

Below are key excerpts from the book, that I found particularly insightful:

1- “This increase in production led to a new goal. The new goal will create questions and resentment among production workers. Their first thought is that the management is never satisfied. Whatever we do, they ask for more. Here are the fruits of exhortations: 1) Failure to accomplish the goal 2) Increase in variability 3) Increase in proportion defective 4) Increase in costs 5) Demoralization of the work force 6) Disrespect for the management”

2- “The job of management is to replace work standards by knowledgeable and intelligent leadership…Wherever work standards have been thrown out and replaced by leadership, quality and productivity have gone up substantially, and people are happier on the job.”

3- “Incidentally, computation of savings from use of a gadget (automation or robotic machinery) ought to take account of total cost, as an economist would define it. In my experience,  people are seldom able to come through with figures on total cost.”

4- “Quality must be measured by the interaction between three participants: (1) the product itself; (2) the user and how he uses the product, how he installs it, how he takes care of it, what he was led to expect; 3) instructions for use, training of customer and training of repairman, service provided for repairs, availability of parts. The top vertex of the triangle does not by itself determine quality.”

5- “There are two types of quality in any system, whether it be banking or manufacturing. The first is quality of design. These are the specific programs and procedures that promise to produce a saleable service or product: in other words, what the customer requires. The second type is quality of production, achievement of results with the quality promised. Quality control works both with the product and with the design of the product. And it is at this point that quality control begins to differ from the traditional system. To find the mistake is not enough. It is necessary to find the cause behind the mistake, and to build a system that minimizes future mistakes.”

6- “…Good agreement between independent results of two men would only mean they have a system. It would not mean they are both right. There is no right answer except by methods agreed upon by experts.”

7- “Figures on accidents do nothing to reduce the frequency of accidents. The first step in reduction of the frequency of accidents is to determine whether the cause of an accident belongs to the system or to some specific person or set of conditions. Statistical methods provide the only of analysis to serve as a guide to the understanding of accidents and to their reduction.”

Regards,

Omar Halabieh

Out of the Crisis

How Cooperation Emerges

I recently finished reading The Evolution of Cooperation by Robert Axelrod.

As the title indicates this book explores the topic of cooperation, particularly how it can emerge in a decentralized population that seeks individual maximization of self-interest. The book is split into two main sections. The first discusses cooperation through game-theory analysis of  computer tournaments played. This includes the various strategies used, and the ones that enjoyed the most success. The second discusses the implications of the findings from the first section, and real-world applications in the fields of biology, politics, sociology etc. While the first section is somewhat dry and abstract, the second section anchors the concepts and is very applicable and practical.

Below are key excerpts from the book that I found particularly insightful:

1- “The analysis of the data from these tournaments reveals four properties which tend to make a decision rule successful: avoidance of unnecessary conflict by cooperating as long as the other player does, provocability, in the face of an uncalled for defection by the other, forgiveness after responding to a provocation, and clarity of behavior so that the other player can adapt to your pattern of action.”

2- “What accounts for TIT FOR TAT’s robust success is its combination of being nice, retaliatory, forgiving, and clear. Its niceness prevents it from getting into unnecessary trouble. Its retaliation discourages the other side from persisting whenever defection is tried. Its forgiveness helps restore mutual cooperation. And its clarity makes it intelligible to the other player, thereby eliciting long-term cooperation.”

3- “Thus cooperation can emerge even in a world of unconditional defection. The development cannot take place if it is tried only by scattered individuals who have no change to interact with each other. But cooperation can emerge from small clusters of discriminating individuals, as long as these individuals have even a small proportion of their interactions with each other.”

4- “The live-and-let-live system that emerged in the bitter trench warfare of World War I demonstrates that friendship is hardly necessary for cooperation based upon reciprocity to get started. Under suitable circumstances, cooperation can develop even between antagonists.”

5- How to Choose Effectively: “The advice takes the form of four simple suggestions for how to do well in a durable iterated Prisoner’s Dilemma: 1) Don’t be envious. 2) Don’t be the first to defect. 3) Reciprocate both cooperation and defection. 4) Don’t be too clever.”

6-”…not being nice may look promising at first, by in the long run it can destroy the very environment it needs for its own success.”

7- “Keeping one’s intentions hidden is useful in a zero-sum game (e.g Chess) where any inefficiency in the other players behavior wil be to your benefit. But in a non-zero-sum setting it does not always pay to be so clever.”

8- “So to promote cooperation through modification of the payoffs…it is only necessary to make the long-term incentive for mutual cooperation greater than the short-term incentive for defection.”

9- “The ability to recognize the other player from past interactions, is necessary to sustain cooperation. Without these abilities, a player could not use any form of reciprocity and hence could not encourage the other to cooperate.”

10- “The ability to recognize defection when it occurs is not the only requirement for successful cooperation to emerge, but it is certainly an important one.”

11- “This kind of stereotyping has two unfortunate consequences…the obvious consequence is that everyone is doing worse than necessary because  mutual cooperation between the groups could have raised everyone’s core…while both groups suffer from lack of mutual cooperation, the members of the minority group suffer more.”

12- “The trick is to set the stringency of the standard high enough to get most of the social benefits of regulation, and not so high as to prevent the evolution of a stable pattern of voluntary compliance from almost all of the companies.”

13- “In an organizational or business setting, the best way to secure this accountability would be to keep track not only of the person’s success in that position, but also the state in which the position was left to the next occupant.”

14- “The core of the problem on how to achieve rewards from cooperation is that trial and error in learning is slow and painful. The conditions may all be favorable for long-run developments, but we may not have the time to wait for blind processes to move us slowly toward mutually rewarding strategies based upon reciprocity. Perhaps if we understand the process better, we can use our foresight to speed up the evolution of cooperation.”

Regards,

Omar Halabieh

The Evolution of Cooperation