In response to my article about motivation systems, Ray Fletcher posted an interesting (and flattering, thanks Ray!) response that included a fascinating link.
It’s a Wall Street Journal piece by Al Gore and David Blood.
They list five actions that, I think, illustrate both some real insight and some of the big problems with the way public figures think (if I can use the word in this context) about people.
Point four is to “Align compensation structures with long-term sustainable performance”. Great, I’d go along with that.
Point five, “Incentivize long-term investing with loyalty-driven securities” and point three “End the default practice of issuing quarterly earnings guidance” also work pretty well.
These link to the “don’t read the daily news” idea in this Mindful Money article. It ties in with what I recommend for health (and wealth), based on what Warren Buffet says about getting daily market updates, and all the research (such as Barber and Odean and all the psychological principles. Basically, people who look at the prices too often get their focus wrong, trade too often, lose money etc. (Google Barber and Odean) and they are generally more tense, less happy, and are inclined to make worse decisions than those who do the worrying and analysis first, make the investments, then leave them alone.
So it’s a great idea, but it does require putting a stop to the promotion of constant analysis of trends, prices etc. 24 hours a day. Companies quoting quarterly is just a facet of that, you need the overall system to change in quite a big way. And with Gore and Blood being Directors of an investment firm, are they going to go for that?
However, so far, so good. But it is the other two points and the overall thrust that I find problematical.
They make the statement:
“Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.”
That’s fine, but it is just a label.
The intention is lovely, but isn’t everybody against sin?
The key question is how you “reform the markets”, what you set the metrics at and how you get the people in power (who won’t then be able to use both hands to grab everything they can, but will need one hand to hang onto the label of “sustainability”) to give up their position of power?
For example, in the second point, mandate integrated reporting, they mourn that:
“Despite an increase in the volume and frequency of information made available by companies, access to more data for public equity investors has not necessarily translated into more comprehensive insight into companies. Integrated reporting addresses this problem by encouraging companies to integrate both their financial and ESG performance into one report that includes only the most salient or material metrics.”
But we know that more information won’t “necessarily translate into more comprehensive insights” because giving people more information never does. Psychologists know this, but politicians (which Mr. Gore used to be) still have it to learn.
That’s why the FSA’s misguided rules about giving personal investors 17 pages of pre-sales information and making them sign it doesn’t – in 99 cases out of 100 – make any difference. If people wanted to read or could understand all the information they wouldn’t use the advisor in the first place. If you give people three choices they’ll almost invariably take the middle one and if you give them more than three they mostly can’t decide. Giving people masses of information doesn’t help, there was plenty of information available to tell people that Enron was a con, everybody now says that the crash was “inevitable” but even with all the information that showed this, who actually read all the documents and worked it out so that they could predict it in advance?
So how much value has another rain forest-worth of paper giving information going to have?
Which leads to the first point, Identify and incorporate risk from stranded assets.
In this context they define “Stranded assets” as “those whose value would dramatically change, either positively or negatively, when large externalities are taken into account—for example, by attributing a reasonable price to carbon or water.”
Well, of course only using “the most salient or material metrics” assumes you know what those are. So if we think about “stranded assets”, is detail on carbon emissions salient? Who knows? Who knows what externalities might become important? I know Al Gore is confident of the reality of Global Warming but what is the actual “value” of that externality and is it important in reality, apart from in Mr. Gore’s head?
Of course, Gore and Blood do have a vested interest as investment “professionals” so they have a good incentive to promote whatever they are pursuing as an investment policy as “the best” policy. I’m not saying it’s not, it’s certainly better than most of the others that I’ve seen.
But it’s still rooted in analysis of the past and total ignorance of human behaviour (including their own motivations) so it focuses on setting rules and regulations that people are supposed to follow because it will benefit all. But that just means people don’t want to follow the rules because they won’t do as well, so being altruistic is what we want to achieve, but for the individuals, being selfish pays better.
I’d prefer it if they suggested a method that made people want to obey the rules by making them better off if they did, and worse off if they even attempted to subvert the rules (not reward them if they break the rules and get away with it).
One other problem with their idea is that it relies so strongly on the “expert”. What are the “stranded assets” what are their “values”, what information is “salient”?
I’d prefer something that actually used the findings of science a bit better (for example, this interesting point, also from Ray, about the “Wisdom of Crowds”)
So instead of writing the rules and ignoring the motivations and the human behaviour, why don’t we set out the motivational framework first?
Instead of trying to decide how and what, and impose that, why don’t we look at why – and then allow people to work out the how and what for themselves within the framework?
After all, Ray made a final point about being unsure whether he subscribed to Theory X or Theory Y.
For those who don’t know, they are basically theories about people – X says people are basically selfish and lazy and have to be forced to work, Y says they are talented and given their head will work hard.
Like all theories, they fit some of the people, some of the time. But people are all unique, and react to situations differently. Basically, both are wrong. People aren’t angels and they’re not devils. They do what seems best to them in the situation.
If they are going to achieve what they really want (power, status, love, security etc.) they will probably justify to themselves whatever they do to get it, even if they feel a bit uncomfortable about what they have to do. If they can get it by doing things that benefit lots of other people as well, then it will be a lot easier for them to do it and they’ll feel a lot better doing it.
Instead of trying to work out rules to force people to do things (which they’ll spend a lot of energy and brainpower trying to break), maybe we could look at why they do them, and think about a framework that would benefit everybody and with which people would want to comply.
To receive our free email newsletter sign up here.