The management bubble
The management bubble
Reminder: The everything bubble includes everything
The everything bubble includes everything, and an integral part of everything is management. Succinctly:
An economic bubble is defined as a situation in which asset prices are much higher than their actual value. Therefore, it is the result of misinformation or misjudgment concerning the value (or quality) of an asset.
Information asymmetry with quality heterogeneity results in a market for lemons. These two conditions hold in general in the job market and in particular in management positions.
A market for lemons, when applied to management positions, does not result in a lower value, but a negative value. Bad managers are not just bad assets, but significant value-destroying liabilities.1
The most valued managers are therefore those who create the greatest delusion of value.2 This is likely to repel the most honest employees, producing a negative selection. The side effect is the destruction of value.
Therefore, the result is twofold. On the one hand, we have a constant erosion of the actual value created by the company, and the value of its most crucial asset: employees. On the other hand, the delusion of value compounds through managerial hard work. This is the situation described as an economic bubble in point 1, Q.E.D.
Today, I am merely joining the dots. Only by not elaborating on what is already explained somewhere else I can cover all these points “succinctly.”3
“If I have seen further, it is by standing on the shoulders of giants.”
— Isaac Newton
Please do not hesitate in following the links of any unclear points you are curious about, and please feel free to ask me for further elaboration if that does not help.
To make the “take-home message” explicit and clear:
Learn how to identify bubbles; understanding the difference or distance between the real value and the delusion of value.
Try to avoid participating in bubbles, as an investor, but also in any other way, e.g. as an employee working for the wrong people. Making mistakes is unavoidable, but when that happens try to detect them and fix them as soon as possible.
PS: On a side note, all the previous points focus on managers that create a delusion of value. Managers that fail at that and are only a burden for employees are likely to find themselves unemployed,4 either because:
They fail at competing with other managers, internally in the company.
The company at large fails at competing with other companies.
As always, notable exceptions apply. Good leadership exists, and managers may not be a burden but a very valuable asset. Good leaders are multipliers of the value created by the teams they lead, by providing direction, insight, and honest and accurate descriptions of the challenges ahead and plans to address them. Especially for the hardest challenges that really require the leaders to give their best. Just do not expect the extraordinary to be the norm; that only results in disappointment and frustration.
The problem with being exceptional is that point 2 takes a long time to fulfill. Companies do not fail to compete while every company is similarly uncompetitive. The small differences may only be noticeable during the hard times of a recession. The people managed by the manager probably knew all along, though.
“Only when the tide goes out do you discover who's been swimming naked.”
— Warren Buffett
For example, a bad manager may choose to manage and direct someone more knowledgeable than themselves, because it is “their job”.
There are myriad ways in which managers may destroy value. It could be an entry in this blog on its own, but such a rant is probably not going to help anyone. A paradoxical example is meetings. Managers love their meetings, and they are costly.
Just be wary of it, and avoid it as much as possible, e.g. with smaller or less hierarchical companies, less PowerPoint, more honesty, more rigorous reports, etc.
“whoever is stupid and industrious must be got rid of, for he is too dangerous.” — Kurt von Hammerstein-Equord
Paradoxically, lazy managers may be less harmful than industrious stupid managers, but industrious managers will be the ones getting promoted.
In fact, contrary to Peter, Dilbert, and Gervais principles, my hypothesis is that most managers reach managerial roles by deluding in the value that they create, i.e. they are not “clueless” but they have awareness of both sides of the reality distortion field, and they are its stewards. People at the top are in fact more “clueless” and disconnected from reality, e.g. dictator trap.
At some point, someone needs to have the doublespeak (even doublethink) to translate between the engineer that mentions “linear regression” and the executive that mentions “advanced AI algorithms”. This doublethink to simultaneously accommodate more and less senior levels in the company is the most salient skill of managers.
In this context, executives and even founders without skin in the game may not be different from managers, e.g. founders grabbing cash from investors in a hopeless startup get rewarded by deluding on the value allegedly created. Only true and responsible ownership of the company implies actually caring about reality.
Similarly, levels of management imply layers of the reality distortion field. The result is that executives are the group most disconnected from reality. With notable exceptions, where that is prevented with skill and effort. This clip (Silicon Valley — Nucleus behind schedule) parodies that:
As a result in some cases, the “best management” provides autonomy and empowers the people that are managed, i.e. “less is more”. This does not imply resting idle, but paying close attention to their layer of the reality distortion field, translating inputs and outputs, avoiding or preventing threats to it, etc.
This is just an unavoidable consequence of the incentives razor and the fact that delusion is a shortcut to get to those incentives, i.e. faking it is easier than making it. The “center of excellence” approach may help against the information asymmetry and with it the impact of lemons, but it may as well create an ivory tower disconnected from any relevant context.
I could cover the five points succinctly by using links but also by cheating with very long footnotes. A wiki or zettelkasten would be much easier to write, but it may similarly be unwieldy to consume. Consequently, I do not consider replacing the entire blog (newsletter) with a different system, but I might consider replacing the footnotes with links to one.
I am not ready to let go of the ideal of self-containment just yet, though.
Creating the delusion of value and getting cash from investors may be enough to keep a company afloat, and all expert delusionists as managers, indefinitely.
“Markets can stay irrational longer than you can stay solvent.”
— John Maynard Keynes