Saturday, March 28, 2009

Hyundai Assurance

From the carmaker Hyundai:

A decade ago Hyundai pioneered America’s Best Warranty™. Now we’re providing another kind of confidence. Finance or lease any new Hyundai, and if in the next year you lose your income*, we’ll let you return it. That’s the Hyundai Assurance.

At Hyundai we think it’s easier to find a job when you’ve got a car. That’s why, for a limited time, we expanded Hyundai Assurance, and we’ve added...something extra. A plus, as in Hyundai Assurance Plus. If you lose your income, we’ll make your payments for 3 months while you get back on your feet, and if that’s not enough time to work things out, you can return the car with no impact on your credit.

As a marketing program, I admire Hyundai Assurance for its creative, insurance-like value proposition. If nothing else, it has attracted media attention and gotten people talking about the Hyundai brand. It also recognizes the effect of tough times and lets Hyundai say, “We get it.” Contrast that with the current media image of American auto executives, which is something like:

[Image by Randy Bish of the Pittsburgh Tribune-Review]

Perhaps most interesting is this observation from Rob Walker, writing in the New York Times Magazine:

As of early March, no Hyundai buyer had yet returned a vehicle bought under the Assurance umbrella. This raises the intriguing point about what sort of consumer is being reassured. Probably anybody who is really afraid of losing a job simply isn’t going to buy a car right now. But somebody whose insecurity is more abstract, who perhaps simply needs a rationale for a big-ticket purchase at a moment when the headlines are full of doom — that’s different.

The program started in January 2009, and participants must make at least two monthly payments. So the window has been short for buyers to return a car or miss payments in an allowable way. Still, as of March 23rd, the blog Kicking Tires reported:

[H]yundai spokesman Dan Bedore confirmed that so far no one has used the program. It’s still early in the plan’s lifecycle and final March figures have not come in, but the fact that no buyer has taken advantage of it says that at least the 55,133 people who bought a Hyundai this year probably still have their jobs.

While most automakers’ sales were down in early 2009, Hyundai’s were up.

Sunday, March 22, 2009

Managing by Measuring the Right Things

“If you can’t measure it, you can’t manage it.” This popular business aphorism holds much wisdom. But it should come with a warning: If you manage by what you can measure, you better be measuring the right things.

For example, the computer manufacturer Dell was using “handle time”—how long a representative spent per call—as a key metric in managing its call center. In the quest for efficiency, Dell tried to reduce handle time by compelling reps to make calls shorter. The unintended result? Reps simply transferred the difficult calls around.

From a 2007 BusinessWeek article by Jeff Jarvis:

At Dell’s worst, more than 7,000 of the 400,000 customers calling each week suffered transfers more than seven times....

“It was a real mess,” confesses Dick Hunter, former head of manufacturing and now head of customer service. Dell’s DNA of cost-cutting “got in the way,” Hunter says. “In order to become very efficient, I think we became ineffective.”

Dell changed the key metric to the total minutes necessary to resolve a problem. This change aligned Dell’s and its customers’ interests in minimizing the time to solve problems—as opposed to minimizing any single call’s duration, which was easy to measure but ultimately served nobody’s interest.

Although obvious in retrospect, this kind of issue is hard to see within a company while it is happening. If you don’t believe me, let’s take an example that affects everyone in the United States and, to some extent, the world.

Have you ever thought twice about the “hundred days” yardstick that is routinely applied to new presidents? Made famous by Franklin D. Roosevelt’s flurry of activity upon taking office in 1932, a president’s first hundred days is often seen as a predictor for the president’s subsequent success or failure.

Writing in The Wall Street Journal, David Greenberg, a professor of history and media studies at Rutgers University, argues that the hundred days yardstick is problematic:

It places too much emphasis on easily quantifiable early achievements, directing attention to the number of laws passed. Passing laws isn’t necessarily the best indicator of a strong presidency. When a president’s party controls the Congress, it’s easy for him to sign bills that were queued up before he arrived — something that may hearten his supporters but doesn’t attest to great vision or legislative prowess.

Many things can matter more than laws getting passed. Behind Eisenhower’s lackluster debut — he sent no domestic program to Congress — lay an important bureaucratic reorganization and a review of national security strategy that led to his “New Look” foreign policy....

A president may also have a successful hundred days due to events outside his control. Reagan was struggling to pass his tax cuts when John Hinckley’s bullets landed him in the hospital. The outpouring of sympathy, aided by Reagan’s winning bedside humor, buoyed his popularity and helped him win a big victory. But that success didn’t foreshadow any continued mastery of Congress; his relations with the Democratic House and, later, the Senate would deteriorate.

Greenberg demonstrates that incoming presidents since FDR have been acutely aware of the hundred-days milestone. This awareness can push presidents to run before they walk, trying for legislative wins in the time period when they are least experienced at running the machinery of government.

Granted, some presidents take office when major action is necessary. FDR was the prototype, and Obama faces similar conditions, albeit less extreme. But judging even Roosevelt after a hundred days would have shown he did a lot of things, not whether those things were productive. It also would give no indication of Roosevelt’s ability to lead in the geopolitical context that became World War II—something that contributed to his legacy as much as his response to the Great Depression.

So, while judging the first hundred days has become a tradition, it’s worth asking what we really learn from it, and whether we want our presidents to manage to that milestone, especially when circumstances don’t force quick action.

The larger point: The seeming clarity of managing by measuring can mask the subtleties—or sometimes the outright counterproductivity—of the measurements involved.

Sunday, March 15, 2009

“Stop Talking and Let the Students Learn to Learn”

Recently, I noted an initiative at MIT to use computers and other high-tech equipment to make introductory physics classes less like lectures and more like hands-on experiences. Since then, I came across an additional, more fundamental perspective about technology-assisted learning. A 1986 essay by Robert T. Morrison of New York University, The Lecture System in Teaching Science argues that most teachers have yet to effectively use a 500-year-old technology: the printing press.

Morrison starts by describing the typical college chemistry class, where a professor lectures the entire time, continuously scribbling equations on the chalkboard as the students fill their notebook pages with whatever the professor writes and says.

Just as the bell rings, the lecturer, if he’s a really smooth operator, comes to the end of a sentence, a paragraph, a nice neat unit. He lays down his last piece of chalk — he knows exactly how many pieces the lecture will take — picks up his precious lecture notes, and goes out. The students, tired but happy, rise up and follow after him. Their heads are empty, but their notebooks are full.

Although a caricature, Morrison’s version of science class should be familiar enough. But how did things get this way?

What I’ve heard, and I imagine that this is correct, is that it started a very long time ago, when books were rare and very expensive, and the only way to transmit information was for the teacher, who knew, to tell the students, who did not yet know. And they would write it all down and take it away with them, like a bunch of scribes. Remember, scribes were very big in the Middle Ages.

Morrison goes on to advocate the “Gutenberg Method,” a teaching system that relieves students of scribing so they can focus on learning.

What does the Gutenberg Method involve? Simply this. You assign the students portions of the textbook to study before they come to class. When they come into the classroom, they are already acquainted with the material. You don’t waste your time, and theirs, outlining the course. You don’t waste time telling them that butyric acid smells like rancid butter, and that valeric acid smells like old socks, and other difficult intellectual concepts. The textbook has taken all that drudgery off your hands. You don’t waste your time doing what Frank Lambert calls “presenting a boardful of elegantly organized material with beautiful answers to questions that the students have not asked.”

The students have read the material, they have thought about it, and they have questions to ask about it. You answer these questions, or, better still, try to get them to answer their own questions, or get other students to give the answers. You ask questions. You have a discussion. If they’re slow to come alive, you take up points that you know give students trouble. You lead them through difficult problems. The entire class hour becomes like those few golden moments at the end of an old-fashioned lecture when a few students manage to rise above the system and gather around your desk....

What the Gutenberg Method offers, then, is two things, either of which alone would make it worthwhile. First, you have a better mechanism for the initial transmittal of information, one that is more efficient and more effective. Second, the big bonus and the reason for the Gutenberg Method in the first place is that you gain all that lovely class time for doing what you hardly get to do under the lecture system, and that is teach.

In other words, teaching—by a human rather than a book—is interactive. With interactive discussion, the teacher can probe what students do and don’t understand. The teaching is thus targeted to the gaps that remain after “book learning,” including helping students learn to learn: You learned it once from the book, now let’s make it stick.

This kind of teaching is good for students, but Morrison is writing for fellow teachers when he adds:

I think all of us, to a greater or lesser extent, indulge in wishful thinking. We lecture to students with the belief, the wish that they are learning. But we put off the moment of truth — the moment when we find out whether or not we’re really getting through to them — until the next examination: a week, a month, maybe longer. And even then, we are cushioned against any shocks we might get, such as finding out that a lot of them are not learning. It’s a written examination and, while we may grade the examination, it’s still a matter of marks on pieces of paper, just names and grades. But when you take the plunge into a discussion, you’ve moved from a theater to a swimming pool and you’re sometimes shocked by the cold water of reality. You find out, not next week or next month, but today, eyeball-to-eyeball, that some students have only the fuzziest idea of what you’ve been trying to put across.

If I’m choosing a teacher, I’ll take the one who wants this kind of immediate feedback and accountability, and who’d rather talk with students about a subject than lecture to them.

[The title of this post is the apt title of a paper mentioned in Morrison’s essay, George Adkinson’s “Stop Talking and Let the Students Learn to Learn.”]

Sunday, March 8, 2009

Bubble Fuel

As a postscript to Geeks Bearing Formulas, I liked Semyon Dukach’s explanation of the financial crisis. In summary, there are many ways of goosing near-term returns in exchange for risk of ruin later. Investors will pass if the risk is obvious. However, many investors can’t resist the attraction of higher returns if the extra risk is not obvious. Ponzi schemes have this property because they intentionally hide their unsustainability. This hiding amounts to fraud, and thus Ponzi schemes are illegal.

Whereas a Ponzi scheme has a mastermind who understands the con, the reckless use of credit default swaps emerged by itself. The financial instruments were complex, and their use was largely out of public view. However, they appeared to work legitimately, which was all most participants wanted to know. Even money managers who were uneasy joined the crowd, fearing their own returns would suffer in comparison. Fueled by and feeding back into the housing boom, the party kept heating up and up, until it melted down.

In some respects, this explanation seems like a familiar take on why bubbles occur. The thing that interested me was the necessary role of complexity.

As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting [gimmick], without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

Put another way, credit default swaps were successful as bubble fuel largely because of their inscrutability. This made them easy to abuse because their catastrophic risk was diffused and obscured among a huge web of complex, private trades. With the risk hidden and the returns good, it was easy for the market, as a system, to con itself.

So, going back to the responsibilities of “geeks bearing formulas,” a key responsibility is to know that the market would rather use a formula for bubble fuel than truth. When the latter supposedly correlates with the former, be wary indeed.

[Dukach’s post put this topic in terms of the gambling system called Martingale, in which the gambler keeps doubling down until recovering with a win—that is, until a statistically inevitable string of losses busts the gambler before the recovery win can occur. It’s definitely worth a read for that angle, which I omitted for simplicity.]

Tuesday, March 3, 2009

Geeks Bearing Formulas

Among Warren Buffett’s talents is his quips about investing. “Be fearful when others are greedy, and greedy when others are fearful.” “You only find out who is swimming naked when the tide goes out.” And so on.

One of Buffett’s recent lines is, “Beware of geeks bearing formulas.” It’s a clever soundbite that already has more than a thousand Web pages quoting it, according to Google. But what does it mean? Are geeks with formulas the cause of the financial world’s havoc?

The media have been working this issue too. I’ve already covered The New York Times’ prosecution of Value at Risk, a widely used formula that could roll any collection of a firm’s risks into a single number. Among Value at Risk’s shortcomings was blindness to rare, extremely negative events. It was a known problem, but rather than compensating for it, firms often ignored it or, in some cases, exploited it in ways the geeks had not anticipated. For example, traders would take many positions with small upside in exchange for minuscule risk of massive downside—a move that made their Value at Risk look great, since it hid the small risk of catastrophe in the blind spot. Such positions helped fuel the meltdown when things went bad in 2008.

More recently, Wired magazine featured the Gaussian copula function as a public enemy. This formula was based on the relative value of credit default swaps, a type of financial derivative that emerged with the last housing boom. While times were good it was used to justify (among other things) “tranching” subprime mortgages into AAA assets. However, like Value at Risk, the Gaussian copula function had major sensitivities to negative events in which previously uncorrelated factors all went south together—like all those subprime mortgages blowing up when the housing bubble popped.

Yet for all the guilt by association the New York Times and Wired articles foisted upon the geeks, both articles said the geeks knew and communicated their formulas’ limitations. The problem was, there were few rewards for spoiling the party. The geeks’ formulas greased the rails for new ways of making money, and those betting the money—usually not the geeks—did not want to pull back if others were accelerating. If anything, not being aggressive enough was the main risk on many executives’ minds, since everybody else seemed to be crushing their numbers by pushing harder.

Now, back to Buffett: Although he originally made the “Beware of geeks” comment off-the-cuff in an interview, Buffett has since added context. In his 2009 letter to Berkshire Hathaway shareholders, he said:

Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors. These parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible. They then made this experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford. In short, universe “past” and universe “current” had very different characteristics. But lenders, government and media largely failed to recognize this all-important fact.

Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

That sounds like a fairer assessment, where much of the blame goes to the investors and the middlemen who did not understand the game they were playing—or, in some cases, who cynically milked the game to the point of collapse.

The geeks deserve some of the blame too, but the root cause was the financial system’s tendency to feed on its own success, binging to the point of total disconnection from economic reality. As history has shown with past bubbles, that pattern happens whether or not geeks with fancy formulas are in the mix.