Yoda on Portfolio Management, Part 2

 

“You must unlearn what you have learned.”

In my previous blog(s) I have addressed how much of what passes for insightful management science, as taught at the college level, is really rather silly stuff. From the assertion that the purpose of all management is “to maximize shareholder wealth,” all the way down to risk management types being able to quantify the future, a whole lot of drivel masquerading as sophisticated analysis has been introduced to the business decision-making process, at all levels of the organization. What is there to do about it?

Well, Yoda has a point in the previous quote. And it may very well be that a small band of truly enlightened Jedi (strikethrough) managers do succeed in turning the great ship of management science towards a set of structured ideas that far more accurately reflect what’s happening in the real microeconomic universe.

But I kind of doubt it.

I think far more likely scenario unfolds where professionals who are blissfully free from having been indoctrinated in the standard MBA fare will find themselves in positions to make managerial decisions, and will make better ones than their counterparts enmired in the drivel.

“Judge me by my size, do you?”

And where, exactly, will these non-indoctrinated managers learn the more advanced tricks of their trade? Actually, that’s kind of an easy question, being, as we are, in the midst of an information technology revolution. The most obvious places would be web sites such as ProjectManagement.com. There are also myriad books, many of them best-sellers, that directly challenge many of the precepts of standard management science. For example, I’m convinced nobody can read Nassim Taleb’s The Black Swan, the Impact of the Highly Improbable, and then sit through a paper presentation given by a risk management-type without erupting into a fit of the giggles. Michael Crichton, in his CalTech/Michelin Lecture series speech “Aliens Cause Global Warming,” points out the irrefutable fact that consensus is not science, and science has nothing to do with consensus, period. All “science” needs is a single researcher who happens to be right, and can reproduce her results in the laboratory. Management science is somewhat removed from the hard sciences, in that it’s impossible for us to isolate the parameters of the experiments we need to test our theories; however, Crichton’s basic assertions are perfectly transferable. It doesn’t really matter if most business school professors insist that the point of all management is to maximize shareholder wealth – those in the real world who know better will outperform their “better educated” associates, and in obvious ways.

“For once you start down the dark path, forever will it dominate your destiny.”

Pick up a typical university-level textbook on quantitative analysis in business, and thumb through it. Pretty daunting stuff, no? Even after having survived accounting, finance, statistics, and micro and macroeconomics, I remember being pretty freaked out when I bought my text on the subject. But after immense amounts of effort and time, ingest the material I did. Imagine, then, my consternation when additional scholarship led me to question its precepts, and then to come to the conclusion that most of it was profoundly misguided. I didn’t want to give up on that knowledge! It made me more capable than those who hadn’t been as “educated!”  The accountants have a saying that you should never invoke the sunk cost argument while contributing to a business discussion on whether or not to continue with a given project. While that may be easy to observe in an organizational setting, personally it’s very, very hard. Once someone has devoted significant time and effort to any given structured set of ideas – religion, politics, how to manage – getting them to realize that they may be in error is next to impossible, much less convincing them to reverse course. But I’m reminded of an old Turkish saying – “It’s never too late to turn back from the wrong path.”

While Yoda’s sage wisdom was certainly true in most cases, the whole bit about “forever dominating your destiny” wasn’t so with Darth Vader/Aniken Skywalker, was it? I suppose 800-year-old fictional aliens are only so sanguine when it comes to portfolio management…