Tuesday, August 05, 2008

Management Skeptic #3: Detecting Lemons

This series discusses the concept of "management models" from a skeptical viewpoint. In my first post, I raised the question: do "management models" such as PRINCE2 improve a practitioner's ability to manage? In my second post, I discussed a common argument in support of this claim and demonstrated why it doesn't hold up.

This post analyses a second common argument in support of management models, and provides more reasons why a course can be popular without being any good.

Argument #2: Management models must be good, or why would companies buy into them?

In my last post, I discussed how a qualification can be very useful for job applicants without actually achieving anything in itself. Candidates who have been on well-marketed courses like PRINCE2 will often be seen as more competent, regardless of their real proficiency. As a counterexample I presented the "VISCOUNT4" thought experiment: a training course that is deeply popular despite sucking.

But why, one might ask, does this work in the long term? Why would companies hire people with a worthless qualification, and how can they prosper if they do? In short, why doesn't the "natural selection" of capitalism weed out VISCOUNT4-style courses?

From this question, it's easy to start jumping to conclusions. If these companies survive then preferential hiring of PRINCE2 practitioners must be beneficial for a company, so clearly PRINCE2 itself must make managers more effective...

I already discussed one objection to this chain of logic: it's possible that this preferential hiring is doing damage, but that the self-interested interviewers still favour a qualification that many of them possess.

In this post, I will provide another answer. I'd like to draw your attention to one of the most fascinating developments in economics since the young Adam Smith got a summer job at the nail-making factory: the new concept of information asymmetry.

The basic principle is simple. When someone suspects that a purchase isn't worth the asking price, they won't buy it. For example, why is it that the value of a car drops dramatically as soon as it leaves the vendor's turf? Because a small number of cars in any batch will be dodgy - "lemons" - and, by trying to sell your car on so soon, you're signalling to the world that you've been landed with one of them.

This sounds like common sense, but it creates a headache for economists. For example, back when England's currency was based on precious metals, it was well-known that "bad money drives out good". Some coins would be adulterated, forged, and otherwise tampered with in order to extract some of the value from them. Of course, when you found that you'd been landed with one of these lemons, you'd try to palm it off on some other sucker, but you'd keep the good coins safe in your wallet.

After a while, the very fact that you were trying to pay with a coin sent a signal to the vendor that that coin sucked. The value of money declined, which made it even more futile to pay with a good coin. A race to the bottom ensued that required heavy-duty government intervention to resolve.

The job market seems like it would be very vulnerable to this effect. If companies tend to retain good employees and ditch bad ones, soon the very fact that someone is after a job is itself enough to taint their application. How do we get around this? How does a good candidate signal to the employer that they are indeed a good candidate?

The answer is that they perform a task that is relatively easy for them but would be deeply painful for a poor candidate. Back in the old days, hunters used to prove their strength and tactical expertise by slaying a large predator, and anyone who hadn't yet done so was given reduced privileges within the tribe.

These days, students flock to universities in their thousands, in the safe knowledge that the time spent (wasted?) on some obscure academic subject will repay itself when they hit the job market. It's (fairly) easy for a smart, disciplined individual to pass exams, but very difficult if you're a poor candidate.

Similarly, although VISCOUNT4 may not contribute to a manager's effectiveness, the fact that someone has put themselves through expensive training courses demonstrates a great deal of commitment to the cause. Imagine: they could have gone on a three-week bender, they could have spent a weekend in Amsterdam's red light district, they could have knocked a month off their mortgage repayments, but instead they went on a training course. What dedication that individual must have!

So, counterintuitively, even if VISCOUNT4 sucks it may still be in employers' best interests to hire VISCOUNT4 practitioners. The world is weird that way.

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