Jeff Pfeffer has, for years now, been remarkably articulate about why some economic theories are often wrong and believing them can be hazardous to organizational health (full disclosure: I am biased as I have written some of these papers with him, but he worked in this area long before I started writing with him and he continues to do so). Jeff has an especially lovely gem over at BNET that reflects his sense of humor, smarts, and persistent penchant to rely on evidence rather than to accept strong assumptions that cloud judgment on the trouble with "efficient market" thinking.
A taste:
You know the joke about two economists walking down the street and
seeing a $20 bill lying on the sidewalk. The first economist says,
“Look at that $20 bill.” The second says, “That can’t really be a $20
bill lying there, because if it were, someone would have picked it up
already.” So they walk on, leaving the $20 bill undisturbed.
The logic — that there are no opportunities for achieving
exceptional returns because if such opportunities existed, they would
be quickly discovered and implemented by almost everyone — underlies
not only the efficient market theory in the world of finance but is
incredibly pervasive in management decisions about all sorts of topics.
I have had people tell me that downsizing must be effective —
notwithstanding lots of empirical evidence to the contrary — because if
it weren’t, companies wouldn’t be doing it. Similarly for individual
pay-for-performance incentive schemes and those pervasive, but
despised, forced-curve performance evaluations that neither managers
nor employees like but companies mandate. Most companies are doing
them, so they must be a good thing to do, again, evidence to the
contrary. Efficient market thinking presumes that not only are crowds
wise — if everyone is doing something it must be optimal — but that, by
inference, doing what everyone else does is the path to success or at
least to avoiding calamity.
We should know better. In fact, we do: Numerous behavioral scientists ranging from Duke University social psychologist Dan Ariely to University of Chicago economist Richard Thaler,
have shown that cognitive biases and irrational behavior are pervasive,
crowds can be foolish as well as wise, and neither asset prices nor
management practices necessarily make sense.
Jeff's arguments (read the rest, it gets even better) for some reason reminds of what one of my friends in college used to say when people were following the herd rather than thinking for themselves or taking a different path: "Eat shit, 10 billion flies can't be wrong."
Leave a Reply