Process & Iteration

As some of you know, I really admire Charles Munger, Warren Buffet’s partner. The clarity of his thinking, personal story, and professional success are worthy of study.

I recently read Poor Charlie’s Almanac, The Wit and Wisdom of Charles T. Munger. The book is a fabulous collection of his thoughts, speeches, writings, mental models, and commentary on Charlie by Warren Buffet, Bill Gates, Bill Gross (Pimco), and others.

I particularly enjoyed the speech he gave at his son’s high school reunion.

The speech borrowed from an earlier commencement address by Johnny Carson. Carson told the students that he could not tell the graduating class how to be happy, but he could them from personal experience how to guarantee misery! Carson’s prescriptions for sure misery included:

1. ingesting chemicals in an effort to alter mood or perception
2. envy; and
3. resentment

Munger goes on to add that if you desire misery that Johnny’s suggestions were spot on. He adds four more certain ways to guarantee a miserable life to the mix…

1. be unreliable
1. do no faithfully do what you have engaged to do.
2. if you like being distrusted and excluded from the best human contribution and company, this prescription is for you
2. learn everything you possibly can from your own personal experience, minimizing what you can learn from the good and bad experience of others, living and dead
1. the idea is to become as non-educated as you reasonably can
2. do not stand on the shoulders of giants, who needs them
3. go down and stay down when you get your first, second, and third severe reverse in the battle of life
1. given the abundance of adversity in life…this will ensure that you will permanently mired in misery
4. ignore disconforming evidence and remain certain in your views
1. be one of those people who early achieve and later intensify a tendency to process new and disconforming information so that any original conclusion remains intact

Both Carson and Munger inverted the traditional graduation speech - they pursued the study of how to create X by turning the question backward and instead studying how to create non-X. Munger quotes the algebraist, Jacobi, who said, “invert, always invert.” Many hard problems are best solved only when they are addressed backward.

Following all seven prescriptions will help ensure a life of non-felicity and abject misery. “Invert, always invert.”

The airwaves today are filled with contrasting visions for the future of government. Obama is arguing for greater resource allocation to government in order to safeguard the middle class and to restore jobs, while Romney is arguing for less capital allocation to government via lower taxes and the ability for the free market to allocate resources to their highest and best use.  More government! More free enterprise!

One camp appears to have no qualms with massive public organizations while the other no qualms with massive private organizations.

Like many debates, such a view is too simplistic and in fact the actual villain may well be size of organization and monopoly power. Be it government agencies (DMV, USPS), banks too big too fail, United Airlines, Novell or MSFT - a common model of failure is the absolute size of the organization.  

It seems axiomatic to me that monopolies and massive organizations are prone to waste, terrible customer satisfaction, and too big too fail syndrome whereby the political process is vested in the propagation of the too large entity in question - bailing out Citibank, the USPS, the Osprey - and blindly supporting continued funding of such entities independent of reason.  What scares me most about monolithic organizations is they appear impervious to the concerns of people vs the concerns of the organization and its own idiosyncrasies. 

Go the DMV and then ask do you want a single-payer system? Get on a 1800 Large Company help line and then ask if you want too-big too fail?

Silicon Valley is tied to Schumpeter’s vision of creative destruction and Clay Christensen’s Innovator’s Dilemma.

Organizations appear to fail once they reach a certain size, drift away from original mandate, and destroy capital. And…importantly this failure is viewed as both a necessary and good thing. Human, financial, and physical capital is freed from the constraints of too-big, too-slowness and flows to smaller, newer, more rewarding entities.

I suppose the piling of talent out of Facebook (ex Path) and Twitter (Square, Medium) is just an example of human capital flowing to the next small new new thing.  The movie Something Ventured chronicles the serial connection of talent from Shockley, to Fairchild Semiconductor, to Apple…and on. 

The market does serve a vital force in allowing such a flow to happen - ie in the Valley financial and customer capital seems to follow human capital. However, in banking, government, automotive, etc - there appear to be constraints to end of lifing things that are too big.

Clearly, not all government is per se bad (man on the moon, DARPA Internet, etc), but there appears to be a point when government orgs, like Citibank and its private brethren, grow too big to evaluate, manage, understand, and, therefore, to be able to reasonably decide whether to continue to fund.

In many ways, the core question of this campaign may not be public vs private but instead a question of size, quality of output, and tolerance for eliminating non-performing and failed programs.

Moreover, the biggest organizations then rig the system for capital and resource allocation, frustrating the “failure” process to return us to equilibrium.

As an example, in let’s look at the growth in the Department of Education

• 1965 $1.5bn
• 2000 $33bn
• 2008 $68bn

How do we feel about size rather than public vs private as a more nuanced debate?

Are our organizations architected to allow failure?

In my mind too big to fail is as important a discussion vis a vis government as it is our banking system. 

How do we build a smaller, more nimble, shorter lived set of entities that we can count on for energy, results, and human-centric execution? How to explain failure is the expected state of being versus a symptom of national decline?

Government needs to tolerate failure and reallocate the massive capital to better uses, while too big to fail private enterprise should be viewed with equal suspicion.

I recently noted the book Fierce Conversations as a very useful read.

One gem is the book is the decision tree model of delegation. Nothing is more damaging to moral than starving employees from autonomy and accountability. The challenge is how to draw clear boundaries around the areas where the team can act autonomously versus areas where management approval is required.  In banking, credit limits serve as boundaries, junior bankers can extend $5m loans, senior officers $10m, and corporate approvals for >$10m.

The Fierce Model Decision Tree Follows:

• Leaf Decisions - make the decision, act on it. do not need to report on action you took.
• Branch Decisions - make the decision, act on it, report the action you took on a calendar basis.
• Trunk Decisions - make the decision, report the decision BEFORE you take action
• Root Decisions - make the decision jointly, with input from many people.

reposted from something I wrote in 2006

Over Thanksgiving, I reread Free to Choose in honor of Milton Friedman. The book, first published in 1980, is a classic that lays out a systematic argument for free markets, the tyranny of controls, and the benefits of cooperation through voluntary exchange.

26 years ago, Friedman wrote of the perils of unfunded social security obligations, the sorry state of public education, and of the battle over the definition of equality; i.e, is the goal equality of opportunity or equality of outcome?

Today, his diagnoses of our societal ills remain more valid than ever. In an era marked by the growing power of the Federal government and corresponding erosion of personal freedoms, expanded benefits programs and bureaucracies, and the evergreen debates over the merits of free trade, it is instructive to read Friedman’s admonition that increases in government power and control come at great cost to individual and economic freedoms.

Perhaps the most tragic insight is how often good intentions produce deplorable results when government is the middleman. He cites a Theory of Bureaucratic Displacement that helps us understand the juxtaposition between ever growing government budgets, ear marks, and appropriations and the state of public health, education, and welfare. The theory argues that, “in a bureaucratic system increases in expenditure will be matched byfalls in production…Such systems will act rather like black holes in the economic universe, simultaneously sucking in resources, and shrinking in terms of emitted production.” Education is an excellent example - resources and cost per student continue to go up, while the “production” of well-educated students continues to go down. Poor results lead to increased spending and a vicious cycle is spawned and capital destroyed.

There is no party today that bases its vision on Friedman’s work. It is hard to get elected when one argues against the minimum wage and rent control, for school vouchers, against social security where the next generation funds the state’s pension guarantees to the prior generation, for self-funded retirement programs, against welfare programs…While politicians opportunistically claim Friedman as their patron saint, it is clear that neither party is willing to follow his precepts for good government.

Laissez-faire arguments that government controls - where someone else spends someone else’s money for someone else’s benefit - limit freedom and prosperity appear cruel and indifferent to the suffering of hard working people. They are easily dismissed as anti-worker, pro-rich, and impractical. Perhaps more than anyone else in recent history, he helps provide the analysis and human touch that makes free market arguments tangible, while explaining the pernicious impact of government interference of voluntary exchange and collaboration.

Silicon Valley is perhaps the most clear example of the innovation, wealth, and job creation possible when individuals freely cooperate to promote their separate interests. All of us benefit by a system that encourages individuals to pursue their dreams rather than a system that prescribes what jobs we may hold, who we may hire, and what we may work on.

As you read the following, it is hard to imagine a more cogent analysis of our society’s condition. Remember this was written in 1979.

Despite massive increases in public spending and the attendant bureaucracy…