VenChar

Decision making biases

I recently heard Malcolm Gladwell (he of Tipping Point fame) give a talk about his upcoming book - Blink.  For those who have not heard him before, he is a fantastic speaker who is able to light up a room with his deep intellect and fascinating factoids.   Blink is about decision making in various situations and in his talk he focused on decision making around hiring.

He started his talk with an anecdote about Abbie Conant.  For those who don't know her, this is a fascinating story.  Abbie was the first female trombonist ever in a major orchestra.  The Munich Philharmonic (which is one of the oldest and prestigious orchestra in Europe) had an opening for a lead trombonist and decided to hold an open audition.  Abbie applied for the audition and due to a typographic error was cataloged as "Applicant #16 - Herr Conant" rather than Abbie Conant.  In an another twist of fate, the selection committee for the philharmonic decided for the first time to institute a black screen between the auditioning musicians and themselves.  This was done because one of the folks auditioning for the spot was related to a senior musician in the orchestra and the selection committee wanted to avoid any suspicion of bias in their decision.  Even though Abbie did not feel she did that well in the audition, the selection committee overwhelmingly felt that she was the best trombonist and offered candidate #16 - "Herr Conant" - the job.  All hell broke loose when they discovered that "Herr Conant" was actually a woman.  And that began a saga of almost 13 years where the philharmonic did everything they could to get rid of her even though she was the best trombonist.  The enduring legacy of Abbie however is that more and more orchestra's started to do blind auditions after this episode and ratio of male to female orchestra players which was 95:5 prior to Abbie is now close to 50:50. 

Couple of insights from this anecdote:

a. People have no idea of the extent of their biases: most orchestra conductors prior to this event claimed that they are just looking for the best musicians and that men are just naturally better musicians than women.  Most of them honestly did not feel they were biased in any way.

b. People start making their mind very early - Contrary to the notion that people would make up their mind on the quality of a musician after he/she starts playing, the reality is that they were making up their mind as early as just noticing the gender of the person.

Another interesting statistic that Malcolm offered is that more than 25% of Fortune 500 CEO are taller than 6' 4".  Only a quarter percent of the male population in America is over 6' 4"!!! Are taller men just better CEO's or are CEO selection committees biased towards height?  What does height have to do with their ability to be a good CEO?

These biases raise some challenging dilemmas for people like me (VC's).  A very high factor in doing diligence in management and founders are:

a. Do I know them personally?
b. Do I know someone who knows them personally and can vouch for them?

VC's take pride in saying that they never do deals that come in over the transom or work with folks
who did not come to them by means for a referral.  Is there a danger that by applying these arbitrary criterion's that we are missing out on a whole section of society e.g. minorities and women?  How relevant is the fact that they were referred to me to the trait of being a successful entrepreneur?

I don't have any answers but I am definitely thinking more about these questions . . .

Eliyon Technologies

Eliyon Technologies is an interesting startup in a search vertical doing web mining and information extraction through natural language processing to create an extensive database of executives at various companies to aid in executive search, sales prospecting, business development, competitive intelligence, etc.

Eliyon has over 21MM individuals in a searchable database that's reportedly growing by 0.5MM monthly. For each individual, Eliyon creates a profile that includes title, bio, educational background, past employment history, other affiliations including board memberships, etc. Information is drawn from such sources as press releases, corporate websites, SEC filings, etc. They appear to have been cash-flow profitable for the last seven quarters and added 230 customers this last quarter. They just raised an institutional round from Venrock.

Structural holes in social networks

The NYT has this piece profiling the work of Ronald Burt that suggests that new ideas tend to come from people whose social networks span "structural holes" and link different social/workplace networks. The thesis that new ideas emerge at the interface between functional areas makes intuitive sense.

It turned out that the highest-ranked ideas came from managers who had contacts outside their immediate work group. The reason, Mr. Burt said, is that their contacts span what he calls "structural holes," the gaps between discrete groups of people. "People who live in the intersection of social worlds," Mr. Burt writes, "are at higher risk of having good ideas."

People with cohesive social networks, whether offices, cliques or industries, tend to think and act the same, he explains. In the long run, this homogeneity deadens creativity. As Mr. Burt's research has repeatedly shown, people who reach outside their social network not only are often the first to learn about new and useful information, but they are also able to see how different kinds of groups solve similar problems.

Paul DePodesta

Paul DePodesta (remember MoneyBall?) of the Oakland A's gave a talk at the CSFB Thought Leader Forum on 'The Genesis, Implementation, and Management of New Systems'. Really good talk - definitely worth a read (link via Joho the Blog). Here he points out the importance of asking the naive question:

The A's like everybody else in baseball had ceased to do one very critical thing—to ask the naïve question: “If we weren't already doing it this way, is this the way we would start?” Management guru Peter Drucker introduced this simple test decades ago and yet our public and private institutions are replete with things as they are because that's pretty much the way things have always been. Why is the workday 9—5? Why do we have the Electoral College? In baseball, why do people still believe that trying to bunt and steal bases helps in scoring runs?

Jim Pinkerton wrote a book called What Comes Next, and in it he wrote, “It's human nature to stick with traditional beliefs, even after they outlast any conceivable utility.” It was as if he were writing this specifically for baseball... Pinkerton also wrote, “systems of any kind tend to degrade over time. Bugs accumulate, people figure out how to cut corners, and eventually they go through the motions and a lowest-common-denominator mentality prevails. And as the original purpose is forgotten, reflexive self-perpetuation becomes the only goal.” This is the world of player evaluation in three sentences.

He also has some interesting thoughts on the myopia that results from outcome-based thinking and how he was able to put this cognitive bias to use - in selling his system:

Many of us share a common psychological deficiency. We judge decisions based on the outcome instead of the time and the circumstances under which they were made. This happens all the time in baseball. They make trades and say things like, “we'll see in three or four years if it was a good decision.” That doesn't work for me because you can't go back and learn from the decisions because of all the variables that occurred in the intervening time. It makes replication of an outcome impossible.

I was in Las Vegas for a weekend playing blackjack. A person at the table to my right had 17 and said they wanted a hit. The whole table stopped and even the dealer asked if he was sure he wanted a hit. Finally he said he wanted a hit. The dealer deals the card and of course it was a four. What did the dealer say? “Nice hit.” But I'm thinking, you're kidding me. It was a terrible hit. Even though it ended up working out, it wasn't a good decision.

Outcome-based myopia actually gave us an opportunity in selling our concept that we could take advantage of. I realized that all we really needed to do was win some games and find a way to get into the playoffs. Then we could leverage this success by introducing all of these changes in our systems. We wouldn't need to go into in-depth analysis of how we came to all of our conclusions. If we won, people would buy into it. This is how the game had operated for 100 years.

He concludes with:

Being innovative doesn't mean searching for upgrades over inefficient systems. It means searching for entirely new ways of doing things. We don't spend a lot of energy tweaking current systems that are inefficient. Thomas Kuhn wrote, “the proliferation of competing articulations, the willingness to try anything, the expression of explicit discontent, the recourse to philosophy and to debate over fundamentals, all these are symptoms of a transition from normal to extraordinary research.”

Update: CSFB pulled the piece from their website, but it's archived and available at kottke.org here.

Interview with Michael Dell

Interview with Michael Dell in Chief Executive (emphases mine). Excerpts:

Q. Now you've got Kevin Rollins as president and COO after having him as a vice chairman. That title implies someone who's useful and who makes a contribution, but not someone who's central to running the business.
A. I would tell you that he was just as essential then. It's just that we used the title as sort of a catch-all. We've used the president's title in the past and for a variety of reasons it wasn't appropriate. When you have a company this large and this complex, it's truly important to have a very strong team. Kevin and I share the responsibilities of leading the company, developing the strategy and the execution. He does the hard stuff. I do the easy stuff.
We share everything. He's been associated with the company in one form or another for many years, since arriving as a consultant in 1992. If you think about essentially every major decision that's been made for the past 10 years, Kevin has been right at the center of it. He's obviously key to the leadership of the company.

Q. Do you now consider Kevin to be a co-CEO with you?
A. Yeah, you could say that. We don't use that title. But you could certainly say that.

Q. Some CEOs would say, "I'm the CEO, and I'm not sharing that title with anyone. I'm the guy."
A. Quite frankly, I'm not really concerned about that. I'm concerned about, "What do we have to get done to be successful?" There's way too much to get done to have a proprietary interest in who's going to do it, or even worse, who's going to get credit for it. There's no reason not to tell it like it is. Kevin is doing this right alongside me.

Q. Is it possible that running a $40 billion-a-year company is just too complex for one person?
A. It depends on whether you're trying to do everything yourself. I don't think it's possible. Kevin and I don't necessarily run the whole company. We have a series of businesses with general managers in them and those folks are CEOs unto themselves, running $5 billion, $8 billion, $10 billion businesses. They have the final accountability and responsibility and strategies. Yeah, the overall strategy of the company is pretty tightly held, for good reason. Kevin, I and our global executive management team spend a lot of time on that. But the guy who's running Asia doesn't call us back and ask, "Now what do I do?" He knows what to do. He's got a strategy and he's executing to it. Same for our folks who run our businesses in the United States and Europe.

Q. Aside from Microsoft, we've seen other cases where the founder of a technology company decides to become a chief technology officer and concentrate on doing what they enjoy doing most. They let someone else come in and really run the mechanics of the company. Is that how you're thinking?
A. Well, I'm pretty fast to step out of something if I'm not really good at it. But I also think that if you want to be involved with a company like this, you have to stay operationally in tune with what's going on or else you quickly become not very useful. Our business is about technology, yes. But it's also about operations and customer relationships. There are a lot of things that go into creating success. I don't like to do just the things I like to do. I like to do things that cause the company to succeed. I don't spend a lot of time doing my favorite activities.
We sit around and say, "Well who is the best person to get this done?" If it's Kevin, he'll go do it. If it's me, I'll go do it. If neither of us, how about Jim Schneider our CFO?

Textbook example of Level 5 leadership - a focus on execution, a high level of personal humility, willingness to attribute credit where it's due. Refreshing and inspiring.