Archive for October, 2004

The Boston Red Sox, one of the top teams in major league US baseball won the World Series this week–the first time in 86 years. The questions are: did they have a run of extreme bad luck? can we identify any extraordinary skill that led to their win or was such a reversal of fortune inevitable? Would it be fairer to say that, at some point in time, whether the team was good or bad on the day, given their overall calibre, that duck over 86 years would be broken some time, by some manager, without any magic ingredients to analyse.

Harvard Business School’s Mary Ross Kantor has done a study of winning and losing streaks in business and sport and is confident enough to draw some conclusions in a book, and recent lecture to the UK’s Economic and Social Research Council. That she cites the overconfident (and now failed) Greg Dyke’s adventure at the BBC as an example of a successful turnaround should make us a little skeptical. However…

I’m not a baseball fan. When I’ve watched it, I’ve found it hard to follow, but unlike most sports it does contain a high degree of drama because, it seems to be a game designed to create more than its fair share of luck, both good and bad. As a consequence, it seems to be more intensely psychological.

This last factor may explain how the Red Sox run of bad luck could be so consistent and last for so long. It was not confined to just World Series failure. The club has a record of bottling it in a lot of crucial matches. Confidence may be the most crucial factor. As for the World Series, the superstitious have blamed failure on the curse of Babe Ruth, the greatest player of all time, who was sold to the Yankees, and since when the run of bad luck began.

Another interesting factor may be that the team was owned by the same family trust for 69 years. Noone has owned a major league team that long without winning a championship. Finally the team was sold in 2002.

If nerves can play a greater than usual part in a game, then the notion of such a curse can have a powerful and lasting impact, through the concept of the “self-fulfilling prophecy.” When confidence is lost in this way, a self-reinforcing process exerts itself and in business, this can lead to disaster. Reversing it is not at all easy.

Interesting points to note about the Red Sox are that coach Terry Francona was new to the club this year. He was an unsuccessful player for Philadelphia in the 1980s, suggesting an understanding of what an underperforming player needs to get out of a trough and become inspired. He stood up to belligerent players. It seems to be a team of mavericks both in behaviour and appearance. This kind of talent could easily wreck a team, so it would be very easy for a manager to exclude them. Francona supported the mediocre players when they hit a soft patch mid-season, a time that many teams might have desolved into recrimination.

Another interesting vignette is that the general manager Theo Epstein (grandson of the screen writer of Casablanca) is the youngest GM in the league (ever I think). He was a star pupil who sidelined in baseball management while at college, working 70-hour weeks with the San Diego Padres as he studied there at Law School. According to the London Times, Epstein subscribes to the Sabermetrics school of baseball management, made famous by the Oakland ‘As’ in a book by Michael Lewis called Moneyball, author of Liar’s Poker. More on that when I’ve read it.

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Identifying key moments in the creation of a business, particularly where a significant stroke of luck may be involved, is very unusual these days. The announcement today of the death of John Peel, veteran UK disc jockey, brings to mind one related to Virgin boss Richard Branson. Although the Virgin brand now encompasses everything from mobile phones to trains, the original Virgin company was an independent record label. Although it is customary for people to say that someone like Branson would have been successful come what may, the ebullient boss has in the past impressed me for significantly attributing the origin of his success to luck.

The key moment for him, he said, was that John Peel decided to play Mike Oldfield’s Tubular Bells on his eponymous radio show in the early 1970s. The show has a reputation for having discovered most of the major serious British rock music acts for nearly four decades and a great many more. That consistency on Peel’s part may itself mean his own decision reflected some kind of judgement, and yet there are of course plenty of acts Peel played that went nowhere. Perhaps this is Branson’s insight. The initial play ignited the phenomenon that led from one record to many more and to a business. Would Branson have survived long enough had the cash not started coming in on the back of that airplay? Examples of contemporary failures who lacked such lucky breaks are unlikely even to be footnotes to this history. Without such information, judgement of why a company like Branson prospered will normally suffer from what we call the “survivorship bias,” where we define success factors on the basis of the survivors without knowing if similar factors were common to other companies who failed for the sake of unlucky timing or the lack of a similar break to Branson’s. Failure goes away.

The interesting point is that, whatever might be said about the nature of the Virgin brand and how it has been developed over time, replicating the success model may not be possible without the lucky first spark. It is important for business managers and entrepreneurs to understand how lucky they may be if they have an existing cashflow (however acquired) on which to build new business and take risks, how difficult it may be to create a cashflow from scratch if they are so inclined to start a business, and how random can be the creation of new competitors that may come and eat their lunch. Of course this leaves investors at an even more significant disadvantage, except in their ability to look for overconfidence in said executives.

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Recent proposals to introduce new teenage examinations that would abolish A-levels were attacked today by Lord May, President of the Royal Society. In particular, the Tomlinson proposals lacked any explicit commitment to science teaching, which Lord May argues should be continued up to age 19, as a way of ensuring students emerge from school with an understanding of the scientific method, and the very specific approach to problem solving that it engenders.

There can be absolutely no argument with that, and yet it is astonishing, given our aging society’s increasing dependence on the generation of school age children who will be affected by these changes, that there has not been more such qualitative discussion of these proposals, rather than the predictable discussion about standards and what it will mean for employers and universities in terms of recruitment.

To tie it into another running theme here, the debate on gambling has been equally sterile, even though the Economist argues (wrongly) that the government has been attacked on all sides. I have not seen it argued that an extension of gambling opportunities may produce a more general weakening of the understanding of risk and reward, which is essential to the prudent financial education other pundits have been advocating.

The speculative fervour that has accompanied the financial markets and now the housing market in recent years may have some of its origins in the spread of lotteries and gambling opportunities as Yale Professor Robert Shiller argues in Irrational Exuberance.

Perhaps the two could be brought back together by hypothecating a tax on gambling to fund the kind of education Lord May envisages. Specifically, if risk is to be better understood, no child should leave education without some significant knowledge of statistics and probability. As the science of probability was invented to better understand gambling odds, there could be no neater proposal.

Perhaps the casinos themselves could sponsor such educational initiatives now that they employ such academics themselves. Ed Thorp, author of Beat the Dealer, who was banned from Vegas after devising the first blackjack card counting system in the ’50s, suggested last year at the annual Wilmott quantitative finance conference that the casinos lost a lot of money in the late ’60s by banning card counters and changing the rules after he published his system. They were slow to reason first: that they should employ mathematicians themselves to understand their own risks, and second: that they would drive people from the tables by making themselves look defensive, rapacious and unfair. Thorp argues that very few punters were likely to have sufficient discipline to learn his system and win consistently. He argues that the idea that you could beat the dealer would have attracted more hapless hopefuls, so the casinos really had little to fear from him and perhaps more to gain.

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Adrian Binks, Managing Director of Argus Media, and someone I knew years ago from OPEC meetings and oil market jamborees, argues cogently in the FT that, unlike previous supply-driven oil market crises, the current problem is one of demand, citing (as I did earlier) the strong demand from China. Although he speaks of the need for a painful adjustment by the world economy to the longer-term higher price of oil, it seems reasonable to speculate that (necessity being the mother of invention) higher oil prices will accelerate the development of alternative energy forms. There are some doubters that information technology is the great leap forward that it appears to us now, but there is no doubt that it is a great facilitator, and should enable scientists and engineers in their quests for engineering and technology solutions to the fuel crisis, provided the potential returns are attractive enough.

Compared with previous crises, a demand driven crisis may well persist for longer. This increases the prospect that major investments in alternatives to petroleum, such as hydrogen fuel cells, will deliver a larger return and sooner, so encouraging their backers.

IT seems to be bogged down these days in an excess of communication and information, particularly and dangerously at the consumer level. It has probably also drawn a disproportionate amount of investment, much of which has created huge overcapacity and waste. I am personally attracted to the idea that a real technological breakthrough that has a stronger physical impact, as opposed to the virtual impact of the Internet, will be much more transformational.

IT, and our inability to distinguish good information from bad is making us more stupid, at the same time as making us feel smarter. If the fuel crisis delivers a new technological outcome, we might indeed see something more tangible and genuinely distracting than computer games, text messaging and endless reams of mediocre content and communication.

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The Royal Institute of Chartered Surveyors latest housing market survey shows reports of price declines not seen in nearly 10 years. This the FT, like one of Pavlov’s dogs, says will ease the pressure for a rise in interest rates. Of course, the Bank of England did indeed raise interest rates partly in an attempt to cool the housing market. But the FT, and other commentators always do this with such reports. One set of data about one inflation factor do not alter the argument for the direction of interest rates. The world economy is highly unstable at this time, let alone our domestic economy.

The lowering of interest rates after the dot.com collapse and 9/11 fed global asset price inflation in the form of rising house prices. We have had surging demand for oil, a consequence of rapid Chinese economic expansion, whose cheap goods the western consumer, flush with his sense of housing wealth, as bought eagerly.

At this point, it is unknown if the authorities’ response to the economic catastrophes of 2000-1 were wrong, sufficient, or overdone, although economists are always very certain about such things. The prospect that rates have remained too low for too long leading to surging consumer price inflation should not yet be discounted just because house prices have retrenched a little, and the western economies are slowing again. There is enough coverage (even in the FT itself) to remind reporters that, just as in the 1970s, it is possible to have a lack of growth, stagnant or falling house prices, and rising inflation, and therefore pressure on interest rates. It is just called stagflation.

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