in the long run, we are all dead

That's the famous saying from Keynes, Son, but this is an interesting perspective on long run investing. I like this idea because it forces you to think like an investor. A business person. One shouldn't get excited about short term results or returns because ups and downs will happen.

Think about it in a different way, if you were running a business of say making widgets, will you stop and sell the company if there were no sales in one day? or in a month? no, you will keep on persevering and investing and running it. Same thing here. Good companies will last. Obviously if they are tanking, then you must sell them, but good companies will definitely last. The current valuations are extraordinarily low. If I take the FTSE 100 stocks, which are perhaps comprising of one of the most liquid international stocks in the world, then these are the companies whose PE ratio's are below 10. When the long run average of US stocks is ar 15-16, then these are significantly undervalued. Now here's my question and something that you have already answered by your investments, these firms are good firms, they have good assets, they have a fairly good yield, good prospects, good management and still their valuations suck. So its a good time to invest.

Remember, the time to invest is when people are selling....

 

Lloyds Banking Group	£22,281.17	£43,467	£369	£46,902	0.00%	-0.50p	n/a
BP	£80,683.62	$297,107	-$9,140	$95,891	1.04%	-19.81¢	n/a
Cairn Energy	£4,088.08	n/a	-$299	$3,838	0.00%	-19.17¢	n/a
Resolution Ltd.	£3,804.46	£1,288	£1,083	£6,549	6.61%	81.10p	3
Kazakhmys	£4,664.59	$3,237	$1,098	$8,219	1.60%	259.00¢	5
Barclays	£21,502.95	£32,204	£5,926	£62,262	3.12%	30.40p	6
Eurasian Natural Resources Corp.	£8,389.69	$6,605	$2,710	$10,033	2.97%	170.00¢	6
Aviva	£9,735.98	£36,274	£3,966	£17,725	7.50%	55.10p	6
Old Mutual	£6,015.41	£3,582	£3,926	£11,474	3.68%	16.00p	7
BAE Systems	£9,338.63	£21,097	£1,505	£5,403	6.19%	40.80p	7
AstraZeneca	£39,415.56	$33,269	$11,494	$23,410	5.44%	671.00¢	7
Vedanta Resources	£3,204.93	$11,427	$2,534	$13,679	2.76%	262.80¢	7
Rio Tinto	£48,158.80	$56,576	$19,694	$65,274	2.07%	713.30¢	7
Legal & General Group	£6,135.87	£5,348	£1,475	£4,874	4.55%	14.07p	7
BHP Billiton	£40,340.57	$71,739	$31,816	$57,755	3.35%	393.50¢	8
Xstrata	£27,799.79	$30,499	$7,102	$42,021	1.67%	177.00¢	9
Investec	£1,989.07	£2,013	£410	£3,961	4.64%	43.20p	9
BT Group	£14,078.21	£20,076	£2,578	£1,951	4.09%	21.00p	9
Anglo American	£30,487.82	$27,960	$10,245	$37,971	1.79%	413.00¢	9
International Consolidated Airlines Group SA	£3,031.67	£6,683	£342	£2,400	0.00%	18.05p	9
Man Group	£3,032.30	$1,655	$305	$4,436	8.68%	28.00¢	9
GKN	£2,955.62	£5,084	£385	£1,687	2.63%	20.70p	9
Marks & Spencer Group	£5,309.30	£9,740	£837	£2,677	5.08%	34.80p	10
ITV	£2,426.82	£2,064	£364	£663	0.00%	6.40p	10

 

Stocks For The Long, Long Run By
Morgan Housel
http://www.fool.co.uk/news/investing/2011/10/18/stocks-for-the-long-long-run.aspx?source=uoofolrf0010002
Inside the mind of Jeremy Siegel.
A version of this article originally appeared on our US site, Fool.com.
"Oh, you're meeting with Jeremy Siegel tomorrow? Lucky you," a professor at the University of Pennsylvania's Wharton School told me. "You'll leave feeling much better about your investments than when you entered," he said with a laugh and a hint of sarcasm.
This is the Jeremy Siegel -- Wharton's famed finance professor -- the public has come to know: A perennially bullish academic who was born an optimist and never looked back, leading to criticism that he's more stock market cheerleader than rational analyst.
But after meeting with Siegel at a conference at Wharton in Philadelphia this week, I left with a different view. He is perhaps as bullish on the stock market as he's ever been. "The pessimism these days is just striking," he notes. And some of his arguments are still as controversial, if not logically curious, as ever. But agree with him or not, Jeremy Siegel's view on the stock market is fascinating. There's a reason people still pay attention to him.
Siegel is quick to note that being characterized as a permabull is undeserved. "People ask me, 'Jeremy, why are you always so bullish?' Well, I'm not. I wasn't bullish on stocks in 2000," he says. And he's right: In March 2000, Siegel penned an op-ed in The Wall Street Journal warning that technology stocks were grossly overvalued.
But it's his book, Stocks for the Long Run, that people remember. First published in 1994 and now in its fourth edition, the book has sold hundreds of thousands of copies. Its message is clear: Over time, stocks outperform all other assets classes. They are, definitively, the greatest wealth-generating machine that investors can get their hands on. Hitting the shelves just as one of the largest bull markets in history was heating up, the book served as a bible during the 1990s for investors anchored to the idea that stocks could go only one way -- up. After stocks crashed and then languished for the past decade, Siegel has been the butt of all kinds of criticism. As markets bottomed in early 2009, Business Insider wrote, "No, the charming Wharton professor isn't dead. But he may just have killed what's left of his reputation." It continued: Siegel "has been very bullish, and very wrong, for the past two years."
But perpetual bullishness isn't what Siegel preaches. Most of those criticizing his bullishness ignore the title of his book. He isn't just bullish on stocks; he's bullish on stocks in the long run. I'd even qualify that: Siegel is bullish on stocks in the long, long run.
A group of financial writers had been at Wharton for four days, listening to lectures on behavioural finance, outsourcing, and accounting fraud. Siegel's presentation had a feel different from all others. He isn't just a professor presenting his research. He's a seasoned (he's been a professor for 40 years) financial philosopher meets historian meets talented showman. The last part is perhaps Siegel's most underappreciated strength. The man is far more charismatic than you might think. When presenting otherwise dry data on historic investment returns, Siegel drops his voice to a whisper and then booms into a punch line for dramatic effect.
It's that data that underscores Siegel's view of the market. In the late 1980s, then a monetary policy economist, he began collecting historic returns on stocks, bonds, cash, and gold going back to 1802. It's the most complete set of historic investment returns available, he points out.
What the data show is crystal clear. One dollar invested in stocks in 1802 would be worth more than $700,000 today, adjusted for inflation. The same dollar in bonds would be worth less than $1,500. In gold, it's about $4. In a dollar kept under your mattress, it's $0.05. Over two centuries, there is no substitute to stocks.
Which would be an open-and-shut finding if we were Methuselah, and had 200 years to save. Unfortunately, we don't. And within that 200 years of data sits an uncountable number of chaotic swings, with stocks moving from wild bull markets to crushing bear markets -- even a 90% collapse during the Great Depression. Over some periods, stocks dramatically underperform bonds, gold, and cash. That holds true for the past 10 years, as investors know all too well.
But it's at this point -- the point where so many become skeptical of Siegel -- where his work becomes the most persuasive. Comparing risk between stocks and bonds, the opposite of what most assume is true emerges when measured over long periods of time.
Modern finance theory holds that stocks should return more than bonds because they're riskier. What Siegel's data show, however, is that this risk diminishes, even flips upside down, when you hold an asset long enough. Since 1802, average stock volatility is much higher than for bonds when looking at one-, two-, or five-year periods. But then it flips. When held for 10 years, average real stock returns become less risky than bonds. Over 20-year and 30-year periods, there's no comparison: The upside potential is far greater for stocks, and even the worst periods generate positive real returns, while the worst period for bonds leaves investors with substantial real losses. "Even when looking at periods that ended in the bottom of the Great Depression, stocks had a positive real return if held for 20 years," Siegel said. "You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds. So which is the riskier asset?" he asks, his voice now booming. "And nothing that's happened over the past 10 years negates this data." Nor are these unreasonable periods of time. Twenty or 30 years is about the average time between when people start saving and when they retire.
This is where those criticizing Jeremy Siegel often get it wrong. The key to understanding his analysis is that he's only concerned with long, long periods of time. Asked about stocks' recent lost decade, he notes that average annual returns since 1991 have actually been quite good. Ten-year periods aren't of much interest to him. They're too short.
"Stocks go back and forth, back and forth," he says. "The past decade has been frustrating. But that's only because we had unreasonably high returns in the 1990s. The last 10 years has just offset the previous decade."
Siegel is especially bullish on stocks today because he thinks valuations are extraordinarily low. Stocks now trade at a price-to-earnings ratio of 11.5, compared with a historic average of closer to 19 when interest rates are this low. Analysts expect the S&P 500 to earn $112 next year, putting stocks at just over 10 times forward earnings.
Now, most investors think the $112 figure is far too high, and will come down -- a reason many use to justify being bearish on stocks. Siegel actually agrees. "I don't believe the number. I think it will come down," he says. But that's fine. Even if earnings fall 25% from current levels, stocks would still sell at a P/E ratio close to their long-term average. If earnings stay at current levels forever, stocks would still be a great buy, Siegel says. "You don't need growth to justify these numbers," he says. "And if we actually earn $112 next year? Oh, god. It's a bonus. You'll see stocks up 30% or 40%."
The amount of pessimism in today's market is totally overdone, he says. "It's one of the most bearish forecasts I've ever seen." Bond giant PIMCO has a gloomy theory called the "new normal," which forecasts real economic growth of 1%-2% going forward, compared with 3%-4% in the past. At the same time, gauges of economic growth expectations, such as the yield on Treasury inflation-protected securities, or TIPS, are now near zero percent. The market panic of the past few months has made even bearish analysts like PIMCO look cheery. "It's the ultimate sign of pessimism," he says.
What keeps Siegel bullish on the long term is a belief that what drives our economy over time is still alive and well. In the short run, economists focus on demand as the key economic driver. In the long run, the real fuel is productivity, or output per hour worked, and population growth. This is one of the least controversial theories in economics, but it, too, is prone to criticism when viewed over different time periods. Most economists are bearish on the economy right now because demand is low as consumers deleverage. Siegel agrees, but remains bullish on the long run for a simple reason: Productivity is not only increasing, but it's increasing at an accelerating rate as technology connects the world. When ideas build on top of other ideas, prosperity multiplies. "We've brought 2 or 3 billion people online sharing ideas," Siegel says. The impact that this has is astounding. People used to work full time just to feed and shelter themselves, he notes. Today, the average person in the developed world needs to work just an hour a day to support basic human needs. Productivity has dramatically increased the quality of life around the world, and there's little sign of it slowing down -- in the long run.
Still, there are legitimate critiques of Siegel's views that remain open to debate. Yale economist Robert Shiller -- a good friend and former classmate of Siegel's -- values stocks based on an average of the past 10 years' earnings, adjusted for inflation. He calls it the cyclically adjusted price-earnings ratio, or CAPE. Based on CAPE, stocks are currently fairly valued at best, if not overvalued.
Asked to defend his analysis against CAPE, Siegel's views turn fuzzy. "CAPE shows valuations to be quite high, but the source is purely the earnings collapse of 2008-2009, when financials had these enormous write-offs," that aren't indicative of corporate America's earnings power, he says. When I point out that Shiller and others (including our own Alex Dumortier) have shown that this isn't so clear -- even ignoring the earnings collapse of 2008-2009, CAPE doesn't move significantly, which is the point of using a 10-year average -- Siegel doesn't come up with much of a response, noting that the losses were spread out over several quarters.
He is equally incredulous of the idea that corporate profits are at a cyclical top as profit margins approach record highs. "Those profit margins are up because foreign sales make up a larger percentage of companies' business. And guess what? Foreign business generates higher profit margins because they have lower tax rates," he says, although foreign sales as a percentage of total S&P sales have actually declined since 2008. "Some say we're at the top of this boom. I just don't understand that. Have you looked around? What boom are they talking about? The recession just ended two years ago. Unemployment is still high. How can cyclically adjusted profits be at a cyclical high?"
He then says something that catches my attention: "Forget the numbers. Go back to the logic of it all," he says. This was an interesting turn. The same Siegel who an hour earlier asked us to ignore our feelings about stocks and look at the data was now asking us to ignore the data and look at our feelings.
It is moments like this, I believe, that cause Siegel to face criticism. His work is valuable, persuasive, and intriguing. But it's very specific to the long run. Those critical of his work often ignore this, and it appears Siegel may forget it at times, too. The truth is, short-term profit peaks or 10-year earnings multiples aren't that relevant to his findings. Almost any critique thrown at Siegel can be properly defended with the words, "That shouldn't matter to investors with a long-term time horizon." Ironically, the beauty of Siegel's work is the idea that the short-term market fluctuations his critics obsess over set the stage for the long-term returns he emphasizes. "Fluctuations unnerve investors," he says. "Why? Because people can't stand them in the short run. Volatility scares enough people out of the market to generate superior returns for those who stay in." In that sense, those critical of Siegel's work are often actively proving its validity.
What might change Siegel's mind? Another uncontrolled collapse of the financial system, similar to what happened in 2008, could set the global economy back in a big way.
Will that happen, someone asks?
"Stay tuned," he says.
************************************************************

Why libraries destroy books rather than giving them away to a good home

This post made me very sad. I quote:

The first and most obvious objection is, why not give the books to the poor? They need stuff to read. Or to prisoners? Or to sick kids? Or to struggling independent booksellers? It doesn’t cost a thing to give something away, right?

The problem is the situation for a library is more complicated than when you just take a bunch of old clothes and unwanted porn down to the Salvation Army. A library book is stamped and bugged and cataloged so that the library knows that it belongs to them. When a book is given away or sold, the library has to go through and remove all that crap, so whoever winds up with it can prove they didn’t just steal it off the shelf. I’m not kidding about that, either — some people who wind up with such books helpfully return them to the library.

And we’re talking about a lot of books here — these libraries are having to cut down their stock in a hurry. Imagine you’re the manager of a library, and some accountant tells you that you need to get rid of 100,000 books, and do it in a week. You really have two options. One, you can get a bunch of academics to scour your collection and painstakingly rate each book according to its value and importance. Then you can hire a bunch of people to take down the 100,000 least important books and painstakingly stamp and debug them, one by one. Your second option is to get the computer to spit out a list of the 100,000 least borrowed books, and hire a few people to walk down the aisles with their arms out, throwing those books in a shredding machine.

That second option is much quicker and much cheaper. Sometimes you can find a paper recycling centre that will pay you for the pulp, so destroying the books leads to a net profit. Nobody likes it, but for a librarian it’s like your best friend just got bitten by a zombie and you’re the only one with a gun.

 

Go read the entire post, its sad, very sad. And this link was shocking. Even the British Library is doing it

Being religious helps with mental illness recovery

This was a fascinating study. I quote:

There is increasing recognition that a person's spiritual or religious experiences contribute to quality of life (QOL). However, research exploring the relation between spirituality and QOL has mainly been in the context of chronic and life-threatening illnesses and studies examining this important correlate of QOL in chronically mentally ill subjects are sparse. This study aimed to explore the relationship between spirituality and QOL and to investigate if spirituality contributes to other domains of QOL (both physical and psycho-social) in subjects with residual schizophrenia. By using a cross-sectional design 103 patients with residual schizophrenia were assessed on positive and negative syndrome scale and their quality of life, spirituality and religiousness were assessed by WHO Quality of Life-Spirituality, Religiousness and Personal Beliefs (WHOQOL-SRPB) scale. The SRPB domain and all its facets other than spiritual connection correlated significantly (ρ < 0.001) with all other domains of QOL and overall QOL. On regression analysis, inner peace domain of spirituality explained 21.6 to 37.6% of variance of all QOL domains except the domain of level of independence. Spirituality domain explained 33.8% of variance of ‘level of independence’ domain of QOL. Taken together, inner peace and spirituality facets explained 23 to 40% variance of social relationships domain, psychological domain and level of independence domain of QOL. This study suggests that spirituality and religiosity have an important influence on overall QOL of patients with schizophrenia. Hence, besides pharmacological and non-pharmacological management for schizophrenia, clinicians should focus on this aspect and encourage their patients to follow their religious practices and spiritual beliefs.

Now here’s the issue, for example in the UK. When doctors ask patients about their faith, they are slapped down. Here is an example. What was the problem? The doctor suggested some other faith than the chap’s. But because of issues like this, doctors are purely clinical or medical or both. But looking after the mental well being of the patient is left alone because it crosses too many boundaries. I think this is a wrong thing but I suppose that’s the price for living in a secular system.

Information Processing: The rise of data science

Data scientist. Sounds like an interesting job title eh? Given your interest in physics, you might be interested in this. 

Incidentally, that's what we do within the bank as well. It's just that our data is economics and financial in nature. And economics data is basically social anyway. This data helps us in coming up with new products, sell them, manage them, transact them and help our customers with their business. 

But I likes the formulation of a data scientist being an entrepreneur. Look at data and frequently it tells you new stuff, new insights, new customers, new ways of making money, etc. 

The flip side is also true, every entrepreneur has to worry about data as well. 

What do you think? 

Information Processing: The rise of data science
http://infoproc.blogspot.com/2011/08/rise-of-data-science.html

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See also this follow up article from O’Reilly Radar, and the earlier post Exuberant geeks.

What is data science: … Data science requires skills ranging from traditional computer science to mathematics to art. Describing the data science group he put together at Facebook (possibly the first data science group at a consumer-oriented web property), Jeff Hammerbacher said:

“… on any given day, a team member could author a multistage processing pipeline in Python, design a hypothesis test, perform a regression analysis over data samples with R, design and implement an algorithm for some data-intensive product or service in Hadoop, or communicate the results of our analyses to other members of the organization.”

Where do you find the people this versatile? According to DJ Patil, chief scientist at LinkedIn (@dpatil), the best data scientists tend to be “hard scientists,” particularly physicists, rather than computer science majors. Physicists have a strong mathematical background, computing skills, and come from a discipline in which survival depends on getting the most from the data. They have to think about the big picture, the big problem. When you’ve just spent a lot of grant money generating data, you can’t just throw the data out if it isn’t as clean as you’d like. You have to make it tell its story. You need some creativity for when the story the data is telling isn’t what you think it’s telling.

… Entrepreneurship is another piece of the puzzle. Patil’s first flippant answer to “what kind of person are you looking for when you hire a data scientist?” was “someone you would start a company with.” That’s an important insight: we’re entering the era of products that are built on data. We don’t yet know what those products are, but we do know that the winners will be the people, and the companies, that find those products. Hilary Mason came to the same conclusion. Her job as scientist at bit.ly is really to investigate the data that bit.ly is generating, and find out how to build interesting products from it. No one in the nascent data industry is trying to build the 2012 Nissan Stanza or Office 2015; they’re all trying to find new products. In addition to being physicists, mathematicians, programmers, and artists, they’re entrepreneurs.

Data scientists combine entrepreneurship with patience, the willingness to build data products incrementally, the ability to explore, and the ability to iterate over a solution. They are inherently interdiscplinary. They can tackle all aspects of a problem, from initial data collection and data conditioning to drawing conclusions. They can think outside the box to come up with new ways to view the problem, or to work with very broadly defined problems: “here’s a lot of data, what can you make from it?”

The future belongs to the companies who figure out how to collect and use data successfully. Google, Amazon, Facebook, and LinkedIn have all tapped into their datastreams and made that the core of their success. They were the vanguard, but newer companies like bit.ly are following their path. Whether it’s mining your personal biology, building maps from the shared experience of millions of travellers, or studying the URLs that people pass to others, the next generation of successful businesses will be built around data.

Here is a nice talk on machine learning and data science by Hilary Mason of bit.ly. One of my students will be working with her starting in the fall.

A New Charity–RISE

RISE is Rural India Schools Enterprise. I popped in for a session which explained what the charity does. I was simply gobsmacked, this lady has done some amazing stuff, improving literacy at a school in West Bengal, running some excellent social enterprise schemes in schools in the UK and and and. They now need a proper governing board of trustees to provide them with some guidance on strategy and make it sustainable. Good stuff. They also need to create a charity in India and do some more boring old stuff. So I will sit down with them to see what I can do to assist as a trustee. I think with the 100books project, and DISHA and other contacts that I can beg, borrow, steal from India, this can be a good dual country effort. I also think that using technology to spread the word, we can have a bigger impact. And I can also see few crossovers with the other charities..Quite excited about all this…

Very good team that the RISE team have, very impressed.

Ideas that are convenient, popular, and acceptable have become sacrosanct

You might like this son. Beware of guru's. It's very easy to get sidetracked by people's number of likes, retweets etc etc. Opinions are like ar..holes, everybody has one. 

So judge arguments and opinions on the basis of the argument or opinion. Rather than by the number of retweets or likes or most popular. That is what sheep do. You want to be an original thinker. And I am very proud of your opinions, you have good logical arguments. So even if I say things that you dont agree with, you have to debate with me, judge the argument, not just because the person has a phd or has a “name”.

Finally, if a person says that they are thinkers or a philosopher or intellectual, immediately be on guard, your bullshit alert detector should be on high clanging alert. 

Ideas that are convenient, popular, and acceptable have become sacrosanct « Iterative Path
http://iterativepath.wordpress.com/2011/08/13/ideas-that-are-convenient-popular-and-acceptable-have-become-sacrosanct/

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Ideas that are convenient, popular, and acceptable have become sacrosanct

13 Aug

There is incessant and increasing attack on our intellect. We are fed simple ideas based on convenient samples and bombarded with regurgitation of weak ideas extended by other popular gurus.

As Galbraith wrote first in introducing The Conventional Wisdom by John Kenneth Galbraith, ideas that are convenient, popular and acceptable have become unquestioned truths. Times may change, new fads replace old fads – but our acceptance of what is convenient, familiar and popular as sacrosanct remains the same.

We now have instant communication, huge follower-ship, everywhere connectivity. Yet these remain the channels for spreading the same type of unquestioned ideas that suffer from cognitive biases and analytical errors.

Here are some nuggets from Galbraith’s essay, see how relevant these remain to what we see in social media:

1. On attacking ideas: Anyone who attacks such [weak, incorrect] ideas must seem to be trifle self-confident and even aggressive. The man who makes his entry by leaning against an infirm door gets an unjustified reputation for violence. Something is to be attributed to be poor state of the door.
2. Acceptable==Truth: Audiences of all kinds most applaud what is merely acceptable. In Social Comment, the test of audience approval, far more than the test of truth, comes to influence comment. (The more an idea gets blogged about, Retweeted …)
3. Tribe Think: Ideas come to be organized around what the community as a whole or particular audiences find acceptable. (Voting in Quora)
4. Self-Esteem: We also find highly acceptable what contributes most to self esteem. The individual knows he is not alone in his thoughts – that he has not been left behind and alone.
5. Power of Titles and Positions: Before assuming office, he ordinarily commands no attention. But on taking up his position, he is immediately assumed to be gifted with deep insights. Think of how we treat the ideas of those have the title “author, speaker” in their Bio. What would otherwise have been labeled as commonplace advice suddenly gets anointed as “inspiring advice” or “deep insight”.

It is time to call out that the Gurus have no robes!

Your Law Firm Does Not Have Your Incentives

Dear Kannu
I really liked it yesterday when you expressed confidence in yourself with your mathematics study. That's good son, keep it up and I am proud of you. Now for the math Olympiad.... I know I am pushing you but remember that I will only be pushing you only a few times in your life, this is one of them when you get into 6th form, then when you get into uni. Just couple of times over the next 2 years. After that, you will be an adult and you can ask for help or not as you desire. So lets work on this together to make sure that you get the best possible education in the world. Then you are launched and I have full faith in you that you will do much better than your father.
But here's an interesting article which I disagree with. The basic issue that this article raises is that the hourly charging mechanism of the lawyers isnt good, they might not do much work, they might do too much work, etc. etc. But the fatal flaw in this argument is that this argument is dependent upon the unit of time. Anybody who charges by the hour, day, week, month or year can be accused of the same thing. All the points which this author raises can and will be applied to any kind of paid employment. its the hourly charge that they are concerned with. If I have hired a person for an entire year, then the same arguments apply. So not very sure whether these arguments are correct.
Selecting a lawyer is not dissimilar to selecting a doctor or an architect or engineer or what have you. These are professionals and you are basically employing them to provide you with a service. The important thing to remember is that you are the buyer and you should know what you are purchasing, why you are purchasing and how will you measure the success of the task. Its your responsibility, so whether its law, or medicine, or architecture or engineering or consulting services that you are purchasing, know the subject, know the people, ask for references, create a relationship, trust but verify their bills and never lie to your experts.
Interesting areas of life, dealing with professional firms, Son.

 

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Your Law Firm Does Not Have Your Incentives | Spencer Greenberg
http://www.spencergreenberg.com/2011/08/your-law-firm-does-not-have-your-incentives/

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Your Law Firm Does Not Have Your Incentives
Posted on August 15, 2011 by Spencer

If you hire a law firm, as an individual or the owner of a small business, there is a pretty good chance they will bill you by the hour. So if the work performed takes 100 hours rather than 50, you will pay them twice as much. This is reasonable from the law firm’s perspective since each one of their hours of work is about as valuable to them as every other one of their hours (holding the specific employees on the project constant). However, if we are justified in assuming that law firms are entities that can reasonably be modeled as profit maximizers, this arrangement can be problematic.

Hourly billing means that the law firm has a profit incentive to exaggerate how long work has taken. And, unless the firm is already right at capacity in terms of the work load they are able to manage, it will be advantageous for the firm to stretch out the time that your work takes so that it fills the otherwise free hours of their employees. It is easy to make a project take longer in ways that don’t feel very unethical: for example, spending extra time on formatting documents nicely, double and triple checking work, compiling cases that are unlikely to be all that relevant, or have an unnecessary meeting to further discuss the case. Parkinson’s Law may also be at play here: if a project must be completed in two weeks, there may be a tendency for it to be worked on for two weeks, regardless of how many hours it would be optimal to spend on it.

Another incentive that law firms obviously have is to avoid getting sued and to avoid looking incompetent. If they provide you with inaccurate information, or make obvious mistakes in their work, they are putting themselves at risk. You of course also don’t want inaccurate information or large mistakes in the work they hand you. But it is not necessarily the case that you care about each of these mistakes to the same degree. For instance, some errors affect them much more than you, such as irrelevant spelling errors in work that is merely intended for you to read. Such errors make the firm look bad but don’t impact the quality of the legal work. Yet a law firm may spend extra hours scrutinizing documents to eradicate such unimportant mistakes. On the other hand, other errors are far more likely to harm you than to harm the law firm, such as terms in a contract that were not what you intended, but which you would not have a strong legal case to sue the firm over.

The profit incentive of a law firm will tend to impact how its employees act, as it will incentivize upper management to put structures in place to promote this profit generation. But we can also consider what the incentives are of the individual lawyers assigned to work with you. They too have a reason to exaggerate how long work has taken. More recorded billable hours makes employees look good to bosses, and makes them appear to be more valuable employees (which for associates, may increase their chance of making partner). Some associates at top law firms don’t even bother to use timers to keep track of time billed. In such cases, you can imagine how easy it would be for them to fudge the numbers, or conveniently round up. Even workers with no intention of dishonesty may rationalize over billing, or simply have an exaggerated sense of their own productivity. When we simultaneously have a strong incentive to do X, and also to believe that we are not bad for doing X, we humans are remarkably good at coming up with reasons why X is a fine thing to do (conveniently not searching for reasons why it wouldn’t be fine). And, of course, nobody can verify how many hours were actually worked by any particular lawyer.

Whereas firms as a whole have a profit incentive to do work slowly when the firm is operating below maximum work capacity, individual lawyers have mixed incentives when it comes to doing work slowly. On the one hand, slow work increases billable hours, which makes the lawyer look good. On the other hand, being able to turn around work quickly is viewed as a virtue by bosses, and in some cases, the faster a lawyer gets her work done, the sooner she can go home at night.

Incentives aside, another challenge of hourly billing is that it can make it difficult for a client to know whether the service they are hiring a law firm for is worth the cost, since they don’t even know what the cost is going to be. Some firms will produce estimates of the time that a project will take, but these can be quite unreliable (I know of at least one case where a firm was off by a factor of more than five) and while there is little incentive to overestimate the time a project will take, underestimating it will encourage a client to work with you. Plus, even without such financial incentives, it is well-known that people tend to underestimate the time that projects will take. Remarkably, this often still holds even when people are aware that project completion times are usually underestimated!

One countervailing force to the incentive alignment problem is that law firms have to worry about reputation and getting repeat business. If they take a long time to do your work, or exaggerate the number of hours that work took, or give you bad estimates of how long future work will take, you will be less likely to hire them in the future, and may speak poorly about them to others. Unfortunately, due to the difficulty of acquiring information, this probably produces less of an incentive that many people assume. It is very hard for an outsider to estimate how long specific legal work should take, or evaluate the quality of the work done. How do you know, for instance, whether the will a law firm produced for you is a good one? Are you, as a non-lawyer, able to evaluate its quality? And if you never get sued, how do you know whether a contract you hired a firm to create truly protects your interests? For that matter, how do you know whether the 30 hours billed was a reasonable amount of time to produce that particular contract? As a non-expert, you most likely would not be able to tell from the contract itself if they had in fact only spent 25 hours working on it. Even in the seemingly easy to evaluate instance of a case that was won or lost, it is unclear what would have happened with that case if you had gone to competitors. Did you win because of your lawyer’s skill, or despite their lack of it? Did you lose because of weak performance, or because the case was very difficult? Would a competitor have achieved a better settlement, or a better plea bargain, or gotten the same result but at 80% the cost? It can be very difficult for a non-expert, non-lawyer to measure the quality of work produced by lawyers. Many issues similar to these apply to areas outside of law as well, when the person hiring lacks the ability to evaluate the quality of the product that they receive. [As some commenters have noted below, when large corporations hire law firms, they should be capable of holding these firms much more accountable than individuals are, because they have internal legal counsel with expertise in evaluating the quality of worked performed.]

What about reputation? Many people will choose a firm in part based on personal relationships, or what they happened to have heard said about that firm, or based on the firm rankings, or based on how famous the firm is. But if most individuals hiring law firms can’t evaluate the quality of the work that they are hiring firms to produce, it is not clear that firm reputation will be updated very efficiently. Does the fact that a friend of yours had a good experience working with large law firm X imply very much about that firm’s average quality? First of all, he likely only worked with a small percentage of their lawyers. Second, it is fairly likely that your friend is basing his assessment largely not on the quality of legal work produced and cost effectiveness (since these can be hard for a non-lawyer to evaluate), but softer factors like how attentive the firm was, how closely they matched his expectations of what a good lawyer seems like, and perhaps even how much he liked the people he dealt with there.

The law firm ranking systems can be problematic as well. For instance, the Vault ranking, which is one of the most commonly used, is based on the opinions of law associates. They rate firms “on a scale of 1 to 10 based on prestige” (not being allowed to rate their own firm, and being asked to not rate firms they are not familiar with). How much does this really correlate with how good or cost-effective the work of a firm is for a typical client? Somewhat, surely, but it is far from an ideal measurement. What’s more, the prestige that an associate associates with a law firm itself probably is somewhat dependent on the prior year’s vault rankings, adding circularity to the process.

Fame is a problematic measure as well. Older firms will tend to be more famous, as will ones that were involved in famous cases, and ones that appear in the news a lot. But again, this may not correlate that well with quality of service and cost effectiveness for a typical client.

There is little question that hourly billing creates misaligned incentives between you and your law firm. Project based billing (where a cost for the project is fixed in advance) fixes some of these problems, but produces new ones. With project based billing you at least know what hiring the firm will cost you, and so may be able to do a better job of estimating whether the project is worth the expense. But, in this case, firms have an incentive to get your work done in the least hours possible, since they get paid the same if it takes them 100 hours as if it takes them 200. So they may spend a less than ideal amount of time working on your project in this framework, and produce lower quality work than under the hourly billing paradigm.

When you hire a law firm, their incentives are not very well aligned with yours. You may be able to improve this problem, in some cases, by consulting with one (unbiased) lawyer about the quality and cost effectiveness of another lawyer’s work (compared to the available alternatives) before hiring the latter. Of course, the former lawyer would have to be both reliable herself, and quite familiar with the latter’s work.

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Boredom Can Fuel Hostility Toward Outsiders - Miller-McCune

Now here is an interesting result. You haven't ever said you were bored, at least in my hearing. Which is quite interesting, son, because that in my experience is quite rare. I am also sending this to Diya because she does say she is bored. But I think i know why, at least as per this theory.
People say that when they are bored, they need stimulation. But that's wrong, its because they don't have a meaning in their lives. But you don't say you are bored, so that leads me to assume that you are self sufficient, son, and you do not need constant stimulation. So that's good. On the other hand, Diya is still growing up so she needs to develop more, read more, have more sense of herself, a better sense of purpose and then she should also be in that state.
So good to read. Also, son, you might want to think and observe your friends when they say they are bored. Try to see why they are saying so, what is their background and education. This will allow you to understand and appreciate others specially since you will be a leader or manager or CEO some day.
Love
Baba

 

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http://www.miller-mccune.com/culture/boredom-can-fuel-hostility-toward-outsiders-35001/
Boredom Can Fuel Hostility Toward Outsiders
New research explains how feelings of boredom can both strengthen solidarity within your in-group and heighten hostility toward outsiders.
By Tom Jacobs
1 Comment and 52 Reactions | PRINT | SHARE
New research suggests boredom may heighten perceived threats to the in-group, possibly leading to anger and violence. (Toby Burrows/Photodisc) Related Stories
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It’s all too easy to divide the world into people like us and outsiders. Newly published research points to a surprising factor that exacerbates this unfortunate tendency: Boredom.
Writing in the journal Personality and Social Psychology Bulletin, University of Limerick psychologists Wijnand van Tilburg and Eric Igou report boredom increases the value we place on groups we feel a part of and decreases the value of those who feel alien to us. They describe five experiments that provide evidence backing up this idea.
Their basic thesis is that boredom is more than a simple lack of stimulation. Rather, they write, bored people experience their lives — or at least the situations they find themselves in at the moment — as fundamentally meaningless.
This uncomfortable feeling motivates people to search for a way to re-establish a sense of purpose — which can be a good thing. In a research released in May, van Tilburg and Igou found boredom can inspire people to engage in helpful behavior such as giving blood.
But while aiding others can provide a feeling of purpose, so can strengthening our identification with key belief systems or social groups. If your sense of meaning comes from being a Democrat, a vegetarian or a Yankees fan, you’ll likely hold onto those affiliations with greater intensity in times of threat — and be more critical of Republicans, meat-eaters or those who root for the Red Sox.
In their just-published paper, Van Tilburg and Igou argue boredom is a subtle form of threat capable of activating this “my group first” mindset.
“We first tested this hypothesis by having Irish participants indicate their preference for the Irish name Eoin over its international, more-common equivalent Owen,” they write. “Participants who had first engaged in the boring task of counting letters in sentences counted Eoin over Owen to a greater extent than Irish participants who did not engage in the boring task.”
In another experiment, 47 Irish students were assigned to complete a highly repetitive task on their computer screens. Half the participants had to perform this task for twice as long as the others, which — according to their self-reports — left them feeling bored and meaningless.
They then read a fictional scenario in which an Englishman beats up an Irishman and later admits he “was acting on anti-Irish motives.” They were asked to play the role of judge and sentence the man to jail time. The bored participants “allocated substantially more months of prison” than the others.
“These results are consistent with our hypothesis that bored people seek meaningfulness by negatively evaluating the actions of an out-group member that are targeted against an in-group member,” the researchers write.
In a related experiment, 90 residents of Ireland read either the aforementioned scenario or a revised version in which an Irishman beat up an Englishman. All were asked to sentence the offender; half took part in a highly boring task before doing so.
The bored participants “gave shorter jail sentences to Irish offenders compared to English offenders,” while the others gave out equal sentences to the two men. Boredom apparently stimulated a stronger identification for one’s own group (Irishmen, in this case), and a harsher punishment for someone who harms a member of that group.
Van Tilburg and Igou note that boredom can also trigger other responses, such as sensation-seeking. But their research suggests it can also fuel hostility, particularly “if bored people encounter settings in which intergroup tensions are salient.”
That’s worth remembering as we watch footage of unemployed young people violently clashing with perceived enemies, be they rival gangs or the authorities. Such uprisings undoubtedly have multiple causes, but perhaps we’re overlooking a surprisingly salient point: These kids are bored.

VC, Trustees, money worries, inspiration and education

Boyo, this has been a rather busy time. Lets see

• The video conferencing pilot at IT4CH at a hospital is going to start soon. The idea is that we will provide laptops with webcams attached to long term ill kids at home, a VC company will provide the little VC suite in the hospital school and thus the teacher can teach a much bigger pool of children around the catchment area. Neat, eh?
• We will also extend this idea to the WCIT school. We will buy the integrated webcams for them.
• We are interviewing for trustees at IT4CH, we already have 5 male trustees, but I think having more women trustees is good for diversity and different perspectives. So I met up with this lady, Maggie Berry, who is the CEO of Women in Technology. Brilliant stuff they do, I hope to help them out a bit more. We need more women in technology and in banking definitely. Anyway, the appeal will go out in their newsletter soon and in the meantime, she gave me an intro. I met with an amazing lady, she might join us at IT4CH as a trustee. I really liked her, her background and her technology experience. Very chuffed.
• Met up with our MP, Minister and Patron of the HSH charity. He was quite encouraging and promised us help. He also wants to setup something so that local charities and local businesses can cluster and meet. Something like a Business/Social exchange. Hopefully something will come up from there.
• Went to talk to new members of LSE SIFE, i am always impressed with what they get up to. Very very humbled and very happy about these kids who are so willing to do something for society, raise money and be good solid value generators. And yes, they are capitalists, in all the good sense of the world. I am going to help them along much more as much as possible.
• Had a whole bunch of fresh MBA students from Essex down at the shop, we had a good discussion on sustainability. Its amazing how many students are interested in sustainability, eco-stuff, etc. Got couple of MD’s in as well to speak to them. They loved it. Also had a meeting with the advisory board.

Pretenders to power are the most dangerous

Dear Son
Here's an interesting article on usage of power. The column is obviously written in a bit of a humorous and facetious note, but there are some important messages in here.

1. Always remember the people in the junior positions or in positions like mentioned in the article in here. One of the things you have to remember is that they are usually fairly boring old jobs and they will not have the exciting life that you lead. So you will realise that pretty much everybody overlooks these people. Whether its the person on the check out desk in Salisbury's, or the security man or the lollipop lady or the check-in desk, its pretty much guaranteed that they are doing a bit of a repetitive role. And when that happens, the reaction will be like its described below. But DONT react to this, have a smile and keep on going. But more importantly, spend some time in establishing a relationship with these people at work, the secretary, the janitor, the mail room person. That helps in you being a better manager, you realise the importance of every person in the office and in your team.

2. Never react obstreperously to people in authority such as immigration guards, security guards, etc. etc. People forget that their jobs are to guard you and ensure security. Second, the rules that they are following, and yes, sometimes they can go overboard, are not of their making. These rules have been made by somebody much more senior, somebody quite like you and they are merely the executors. Finally, getting upset with them doesn't help ANYTHING and actually can have a bad impact on you and your results. Stay calm, collected and cool. Patience is key to deal with them.

3. You also have to remember that these people have very little job security and can be replaced very easily. So their only way of ensuring their job security is to follow the rules strictly.

4. Finally, you will meet nasty people in your life. But as I keep on saying, its their choice to be nasty, sarcastic or power mad. Its YOUR choice whether or not to respond to that. You see, when faced with a power mad, nasty chap, what I try to do is to remember what's important in my life. Is getting upset with this jumped up popinjay, getting stressed at the checkout lady, swearing and effing, ruining the day worth it? No, its not, what is more important is when I get home, i see you, spend time with you and Diya, cook with you guys, tickle Diya and tease you and Mamma and and and. But if I am upset or angry with somebody at work, I dont get to do these things and be happy at home. So I suffer a double loss. So exercise your choice to ignore these nasty creatures. That's their choice to be nasty and make horrible comments. Its your choice to whether or not you accept it.

So you can do this little test, in your next trip to the mall or when you are out with your friends, note the people in the tube ticket office, the security guards, the person in the corner shop, the street sweeper, the janitor, etc. and see how they behave. Also, do you know the names of the person who cleans your school or the maintenance person? If not, why not? Have a think.

Love

Baba

http://www.ft.com/cms/s/0/e05487f4-e5d1-11e0-8e99-00144feabdc0.html#axzz1ZKSrrENc
Last week, I turned up at the offices of a well-known company to interview its chief executive.
In reception, a security guard issued me with a pass but refused to let me though the barrier on the grounds that I’d attached it to my bag rather than to my coat.
When I’d moved it as directed, he let me in with the gruff warning that I wouldn’t be allowed out unless the pass was returned to him undamaged. On the other side of the barrier the chief executive waited, all charm and urbanity.
Power tends to corrupt and absolute power corrupts absolutely, as Lord Acton famously wrote. But I don’t think he got it quite right: power may corrupt, but absolute power corrupts a lot less than partial power – as the story of the CEO and the security guard demonstrates.
This thesis is upheld by a new study showing that people who have a little power but don’t have status can behave in nasty ways and get a kick out of demeaning others. The research, to be published in the Journal of Experimental Social Psychology, describes an experiment in which students were told to issue orders to others. Those who were assigned low-status roles tended to delight in getting people to do humiliating things – like making them bark like a dog three times – while those in higher status jobs treated them with more respect.
Reading about this experiment took me straight back to a scene of torture and cruelty that took place six weeks ago at Heathrow airport. I had arrived absurdly early to put my son on a flight to the US, but after an interminable wait at the Delta counter discovered I’d forgotten to get him an electronic visa.
There began a nightmare scramble through the airport to find a computer, to type in the information and finally get the visa. Then, in a torment of travel anxiety, we charged back to the check-in, where a man with a walkie-talkie looked at his watch. There were still 58 minutes to go before the plane left, but he shook his head: too late. My son wept. I pleaded and grovelled and would have happily barked like a dog.
“I’m sorry, madam,” he said in the least sorry voice I’d ever heard. In his eye was a sadistic gleam.
In telling this tale I am not saying that all people doing lowly roles enjoy lording it over an incompetent, hysterical mother; some of them are remarkably nice.
However, there is a syndrome of lowly nastiness that tends to get overlooked in management theory. It is often observed that the people at the top are bastards, but we forget that the people at the bottom can be even bigger ones. Which isn’t really very surprising: if I were a security guard or worked in the Hades of Heathrow, I’d be pretty horrid too.
The researchers argue that the best way of discouraging tyranny lower down the pecking order is to make sure that the jobs are not dead-ends and that advancement is possible. I don’t agree. The nastiest people I’ve worked for were junior managers hell bent on climbing the ladder.
I can think of one particular man who I worked under briefly in my 20s who was only one rung above me, but used to delight in reading out loud all my clumsiest sentences for the whole department’s enjoyment.
Now he has a very grand job indeed and is much less beastly. I bumped into him at a party the other day, and he even made a joke at his own expense.
It is true that not everyone gets more civilised as they climb the ladder. Gordon Brown wasn’t noticeably softened by the experience of power. Neither was Joseph Stalin.
But for most people success does seem to mean they become more outwardly agreeable. They are more confident, and their elbows are less sharp. Their jobs are more interesting and everyone sucks up to them. And if these things aren’t enough to exert a softening effect, then there is always the solace of the ginormous pay packet.
This isn’t to say that absolute power makes bad people good. It is merely that there is less need to be horrible for the fun of it.
Corruption works differently at the top: the truly powerful disappear into a haze of vanity and solipsism and other people don’t matter enough to torture, or to heed in any way.
If anyone doubts that, I can quote another piece of research, to be published soon in Organisational Behaviour and Human Decision Processes, proving that the powerful don’t listen.
The only surprise here is that it took four academics at New York University two and a half years to reach a conclusion that everyone knows already.