Thursday, September 29, 2011

Why did they give money to Madoff?

One of the simplest and most persistent questions is why investors willingly gave their money to Bernie Madoff, even though the steady returns he afforded seemed implausible when based on common investor experience. I googled the phrase “madoff magician” and came up with 575,000 entries. So the interesting question is; what is the psychological appeal of a magician?

Consider the situation in which an audience and a magician acknowledge that magic is entertainment. But what precisely is entertaining about magic? For those on the inside the pleasure is observing the magician’s skill. But for the naïve member of the audience the pleasure is in the suspension of disbelief; the giving over to the illusion and experiencing it in the moment as real. This is not as strange as it may seem, since we experience just this process when we cry at the sad endings of movies and stories. The plot and character are entirely fictional but we invest them with the very real qualities of what psychologists call our ”internal objects,” the fantasies we have of others and ourselves that populate our inner worlds and create the templates we use to interpret our lived experience. Psychologists call this “projection.”

One way to understand the appeal of magic is to consider those scientists who risked their reputation by vouching for the seemingly paranormal acts of such magicians as Uri Geller, for example his ability to bend objects by simply concentrating on them. In this way of thinking, Geller represented the possibility of manipulating an invisible world where the laws of cause and effect no longer held. What attracted scientists to Geller is the idea of his power to overcome the natural world, which after all is a close cousin of the scientist’s own wish to penetrate the mysteries of the natural world and to see beyond what the senses afford us. It is often stated that alchemy, with its avowed goal of turning lead into gold, was the basis for modern science; similarly, that mysticism and the scientific mind-set emerged together, with both promising mastery. We could say that the scientists projected into Geller their own fantasies about the chance to be powerful, as well as the wish that the slog of science might prove unnecessary.

Money has some of the features of magic, in the simple sense that through the law of compound growth one appears to get something for nothing. Asset bubbles have the same feature. The connections conspiracy theorists make between the ideas of “money,” “Satan” and “Jews,” rests on a similar logic. The creation of something out of nothing can be experienced as a paranormal process. This may be one reason that usury was outlawed in the bible; it had the feel of idolatry.  It also suggests that overall, the “culture code” for Wall Street itself is “magic,” and those who succeed in the market are “wizards,” just another word for magicians.

So many of us avoid risk in our daily lives. But this avoidance can come at a cost, as we may end up living what Thoreau called, “lives of quiet desperation.” This is one reason we are so fascinated with celebrities and why some swindlers attract investors precisely because they live and spend outrageously. They appear to be taking the risks we avoid, and their reward is omnipotence.

Madoff was no swashbuckler. Nonetheless, it is interesting that many “in the know” investors who were puzzled by Madoff’s investing success believed that he was “front-running” trades, that is, using his work as market-maker, to get a peek at trades about to be made, and trading in front of them to his benefit and the benefit of his investors.  Front running is illegal when based on private information -the orders for trades- but not when it is based on public information. It is a shadowy activity.

Risk, magic, omnipotence and the outlaw are a potent brew. By staying in the shadows and remaining cool and unavailable he only intensified the projections investors placed onto him. I want to suggest that it was the power of these projections, not their greed, that derailed people’s power of reasoning.  

Monday, September 26, 2011

The HP board and the firing of its CEO

The Hewlett Packard (HP) board fired Lou Apotheker, its CEO,  several days ago, stimulating many questions about its functioning. The board hired Apotheker 11 months ago after a divisive and fractious board process through which they fired the previous CEO, Mark Hurd. By many accounts, Hurd had “pulled off one of the great rescue missions in American corporate history, refocusing the strife-ridden company and leading it to five years of revenue gains and a stock that soared 130 percent.” He was fired for submitting false expense reports to hide expenses, of between one thousand and twenty thousand dollars, incurred in dining with a woman contractor. Though she had earlier charged sexual harassment, the matter was settled privately and a law firm hired by the board subsequently found no evidence of sexual harassment. The woman, Jodie Fisher, also denied having any intimate or sexual relationship with Hurd. One person close to Hurd noted, “Mr. Hurd did not have a romantic relationship with Ms. Fisher. He did enjoy her company at meals as he wound down from long days.” They had worked together at sales and promotion events.

The firing of Hurd divided the board, with one board member noting, “There were so many hard feelings. It became difficult to conduct business in a civil manner.” Or as another board member put it, the board “was rife with animosities, suspicion, distrust, personal ambitions and jockeying for power that rendered it nearly dysfunctional.” Unfortunately, the divisiveness undermined the search and hiring of a successor. Apotheker was hired carelessly, for example none of the board members outside the selection committee chose to meet with him before or after he was hired, and they were aware that he had been fired from SAP 11 months earlier. Apotheker proved to be an indecisive leader, for example releasing an HP tablet to compete with the Ipad, only to withdraw it from the market six weeks later. In light of what transpired – a drop in the share price of 45% over the course of Apotheker’s tenure - the board looks self-destructive. 

Apotheker's hiring suggests that the board was in flight from a toxic process of its own making.  The proximate cause of the toxicity was its divisiveness. But what was the source of divisiveness? It seems plausible that the ambiguity surrounding the charges against Hurd. --he had not harassed Fisher, had no affair with her, and at most, perhaps out of embarrassment, he covered up some small expenses incurred while dining with her -- created significant anxiety rather than a clarity of purpose. 

To put it another way, a board in exercising leadership could under many circumstances feel proud that it took a difficult decision to uphold ethical standards even if this would harm the shareholders in the short run. Feeling proud they would dedicate themselves to managing the transition to a new executive with great care. But the board’s flight from the decision of hiring a successor suggests that they felt shame instead of pride. 

What might they have been ashamed of? One hypothesis is that in firing Hurd, despite the ambiguity of his lapses, board members felt they were “covering their tracks.” They felt under the gun themselves and they behaved more as victims than stewards.

Now political correctness can certainly stimulate such primitive feelings. But what is most striking in this case is the Board’s flight from its work, and if I am right, its sense of vulnerability.

There is a way in which many leaders today do not experience the authority of their own leadership roles. They are just one more among the many bit players trying to “make out.” Indeed ethical misconduct in the run-up to the financial crisis reflected this same dynamic. Feeling at risk despite the resources they had garnered, leaders retreated to the defense of their narrow self-interest and exploited their clients and customers. Ironically, while seeming to act bravely, the HP board acting cowardly. And this I suggest was the source of its shame.

Saturday, September 24, 2011

The Tea Party and the Frontier

One of the interesting questions is why the Tea party appears to have so compelling a message. Clotaire Rapaille the psychoanalyst turned brand consultant suggests that objects, ideas, settings and groups can be understood through what he calls a “culture code.” In a deliciously funny example he suggests that the culture code for cheese in France is something that is “alive,” while the culture code for cheese in the U.S. is something that is “dead.” Hence French exporters of cheese to the U.S. had to recalibrate their advertising to match an alien culture code. More seriously, he suggests that one reason U.S. manufacturers had such a difficult time improving the quality of their products, is that in the U.S. the culture code for “quality” is, “whatever works,” while in Japan is it is closer to the ideas of precision and balance. 

I find the idea of the “culture code” helpful even if at first blush it appears to be overly simple. So one question we can ask is, what is the culture code for the Tea Party?  Let me suggest that it is the “frontier.” The frontier in the American imagination has several features. It is a place of opportunity but also lawlessness. It is a setting for the exercise of self-reliance but also a place of confrontation, and conflict. Authority is suspect, and self-organization- the deputized posse- is valued. The Tea Party represents these cultural ideas and this may be a source of its strength. Hating government is a way of valuing self-reliance. Resisting compromise is way to confront necessary conflicts. Interestingly, one does not look for safety on the frontier. The idea that government may provide a safety net is in this sense unappealing. 

The idea of the frontier in the U.S. is without a doubt a source of strength; think of Kennedy’s “New frontier,” and Clinton’s emphasis on entrepreneurialism. But in its comfort with lawlessness it may also present danger, particularly as the frontier becomes a psychological rather than a physical space. Psychodynamically, we could say that the frontier represents the paternal principle and the idea of force and agency. But force, if untethered to thinking and compassion, can result in violence.

Marxists used to wonder why America was never the site of class struggle. What accounted for “American exceptionalism?” One answer was that the physical frontier, provided an outlet for restlessness and a place of opportunity for the would-be proletariat. We may be re-experiencing this same dynamic right now. However rational are Keynesian ideas for government spending and income redistribution, what some on the right in fact label as signals of class conflict, the siren song of the frontier may be stronger

Thursday, September 22, 2011

Its only part of the game

I have just finished reading Reckless Endangerment by Gretchen Morgenstern, the business reporter for the NYT. If you want to see a catalogue of irresponsible behavior in the run up to the financial crisis and the Great Recession, do read this book. It raises the question of how executives and professionals, who in all likelihood lead ethically informed lives, could have engaged in reckless and  unethical conduct.

I want to draw attention to the idea of the “game” as a mechanism for avoiding responsibility. Since I believe that many lessons in leadership can be derived from the TV serial, “The Wire,” it is interesting to note that the gangsters in the drug trade called the trade, with all its violence, “the game.”  A game is a moral universe of its own making. It has its own rules in the service of separating the losers from the winners. Some of the rules in the drug trade, as depicted in The Wire, did have a moral character; for example not “shooting up your enemies” on Sunday, (the Sabbath) or not killing innocent bystanders. But within this moral universe the primary task of all actors is to try to win.

I wonder if this is in fact a stance that some leaders in competitive settings take. One can see the advantages of such a stance.   A game is not for real, it privileges winning rather than producing, and legitimates financial and psychological injuries as the natural consequences of losing. Morgenstern reports that as the mortgage bubble began to unwind, one actor in an investment bank noted that the  “mortgage game was over.”

If we look at ethical behavior psychoanalytically we can say that the superego, anticipating conduct that violates ethical norms, intervenes by creating anxiety. We are tempted to fulfill our desires by exploiting others, but are forewarned by the experience of anticipatory anxiety.  This would suggest that the concept of the game subverts this circuit, by proposing that the both the desires and the injuries are just “part of the game.”

It is interesting that “game theory” has arisen in the service economy where instead of wrestling with the materials of nature in production and agriculture, we are wrestling with each other. In creating economic value through our relatedness, for this is what the service economy is, we may go overboard and think of our relationships as “part of the game.” 

Sunday, September 18, 2011


Perhaps one of the most important developments in the US economy has been what analysts refer to as its “financialization” reflected in the growing weight and significance of financial markets. This process has destroyed much economic value and undermined many lives over the past 4 years. But might the increased salience of the financial markets have some developmental meaning as well?

It is said that we live in a “risk society.” This means I think that individuals feel more at risk and that institutions are no longer designed to buffer individuals from risk. This is reflected in many developments; the decline of careers, the loss of the stable employment relationship, the declining legitimacy of cultural institutions such as marriage, and political parties, the obsolescence of the linear life course. Ironically, in an age of affluence, individuals feel more and more like “proletarians.” As these many changes suggest, the risk society is not built on developments in finance alone. The risk society appears to be one expression of post-industrialism writ large. And we can also see some developmental responses to the challenges posed by risk, for example the cultural ideal of the “entrepreneurial self.”

But another developmental response might be the emergence of  financial markets that allocate risk taking across stakeholders, across time and between sectors. I am drawn to the fact that one of the most important technical innovation in finance has been the ability to price risk- (as represented by the Black-Scholes equation) Pricing risk would in this sense appear to be one of the tools we need to live within a risk society. The financial market would then be seen as a sociotechnical system for managing risk.

Here is where the link between psychology and economics may be most relevant. The risk society creates substantial anxiety and we know that under conditions of chronic anxiety people are more liable to behave thoughtlessly, to take undue risks, to overlook risks, to imperil others, to engage in magical thinking Perhaps, the magical thinking that underlay the belief in Madoff, or the conviction that housing prices could never fall, is one consequences of this anxiety. The system that was supposed to help us manage risk- the financial market, --gave expression to our dysfunctional responses to risk. This suggests that the financial market, like any sociotechnical system must be designed. The risk manager must be managed.

Friday, September 16, 2011

Leadership and ambivalence

Leaders are advantaged when they can pursue a goal without ambivalence. It is interesting to ask about the character type associated with such a leader. One such character type is the person who presumes that his or her passion or commitment should be shared as a matter of course by his followers, that persuasion is unnecessary and all that counts is the example one sets. One basis for this assumption is the leader's disinterest or inability to see into the psychic life of others. This need not reflect an underlying hostility toward others, but just a naivete about  others, a lack of familiarity with the idea and experience of psychic depth.  If substantial talent can be wedded to this immaturity good results may follow. But most likely should the goal environment itself prove too complex, too multidimensional, this kind of leader is likely to fail.

Wednesday, September 14, 2011

outlaw or entrepreneur

Here is another lesson from the wire. The police hero Jimmy Mcnulty  is with out a doubt self centered, but he is passionate about police work. In the service of "taking down" Milo Standfield and his gang, he simulates several crime scenes to suggest that someone is murdering street people. In truth he wants to create a crisis so that the mayor's office will release funds to the police department -- for overtime pay and equipment--that he hopes to use to get Stanfield.  In the process, he also uses an illegal wiretap which ultimately compromises the case the district attorney can bring against the Stanfield gang. But despite his stepping outside the bounds egregiously, we experience him as passionate about the policeman's  "primary task" of making the streets safe for ordinary people.

By contrast, Scott Templeton the young reporter makes up the news- pretending that the murderer of the street people  (who does not in fact exist, which Templeton does not know)  has phoned him. He does this  in order to create good copy and garner credit and glory for himself. The narrative is clever in linking these two developments. Both McNulty and Templeton lie, but presumably Templeton breaks the rules in the service of his own glory, while McNulty breaks them in the service of his primary task.

But is this distinction always so clear? The drama in fact suggests that McNulty while talented and committed, is vulnerable to grandiose feelings himself. What distinguishes the passionate entrepreneur who is willing to break rules from the outlaw who breaks the rule for his own selfish advantage?

Abraham Zaleznik once said that to understand the psychology of the entrepreneur one had to understand the psychology of the juvenile delinquent. Michael Milken created an entire new bond market, enabling companies with limited credit standing, to access the capital markets But he also was accused of insider trading. It is said that in considering the qualities of a person we must consider the "whole person" not just the parts we like. What are the dark sides of entrepreneurship?

Identity and strategy

I have been thinking about the leadership lessons of the film series "the wire" One theme is the link between identity and strategy. At a critical point the two leaders of the drug gang Avon Barksdale and Stringer Bell, face a strategy question. Stringer believes that they have made enough money from drugs  and could make a lot more with a lot less hassle by investing their money legitimately for example in  downtown real estate. Avon does not dispute Stringer's logic but comes to understand through the dialogue that he is basically a gangster and cannot be a businessman. So the strategy question devolves into a question of identity. We need to answer the question "who are we' before we can answer the question "what can we do." This sequence seems important when any institution faces a turning point. Yahoo failed because they have not been able to create an identity to replace the outmoded idea of being a "portal"