The firing of the president at the University of Virginia

People have been scratching their heads, trying to understand why and how the University of Virginia’s (UVA) board fired its president, Teresa Sullivan, for what appeared to be arbitrary reasons, and with little consideration for process. For those who have not been following the story, the board’s Rector, Helen Dragas, polled each board member by phone to assess if they would support firing Sullivan, who had been in the role for only two years. When Dragas found that a majority would, she called Sullivan and asked for her resignation, telling her that she had lost the board’s support. Faculty and students responded with considerable anger to what looked like an arbitrary and imperious decision.

Needless to say, the board’s process was exceedingly clumsy. Faculty members and students felt blindsided, and for several days the board could provide no clear rationale to any of its publics for why its members had dismissed Sullivan so suddenly. The earliest report of the firing, published in the Chronicle of Higher Education, suggested that the board wanted a president who could lead with the spirit of “strategic dynamism,” a phrase that certainly lacks precision and led people to think that the board was foolish enough to be influenced by business fads.

As the story unfolded it became clear that the board worried that Sullivan was too much the “incrementalist.” She had spent her first two years developing a new budgeting process for the university, while board members thought the university needed a transformational leader who, most importantly, could take them into the world of online learning. Hence the term “strategic dynamism.” We are left with two questions; why they “really” fired Sullivan, and why in such a clumsy and almost self-defeating manner? One hypothesis is that the answers to both of these questions are one and the same.

Prior to the firing, there was much reporting in the general press about the “breakout” of online learning from what was once a curiosity, relegated to for profit-universities looking to make money, to one embraced by elite institutions; namely MIT, Harvard and Stanford. Most dramatically, this past March, Stanford engineering professors, Peter Nerving and Jennifer Widom, offered two online courses in machine learning and artificial intelligence, both of which attracted between them over a quarter of million students around the world. The students in Widom’s class collectively viewed 290,000 videos, took 10,000 tests, asked 224 questions and gave 2000 replies. As one journalist wrote, “although the students do not get Stanford credit for their work, they gain access to faculty and Stanford Engineering’s most popular computer science courses.” Subsequent to this breakout event, MIT and Harvard committed $60 million to develop and offer free online courses. In addition, two other Stanford professors who helped develop the computer platform used for the university’s online courses, formed a company called Corsera.

One hypothesis is that this flurry of activity in online learning constitutes a “sentinel event.” This kind of event concatenates several long-term trends that heretofore have operated below the social radar. The event crystallizes the potential meaning of these trends when taken together, and highlights how they might disrupt organizations, status hierarchies and marketplaces The trends themselves appear obvious in retrospect; for example, in this case, the proliferation of high speed internet connections, the ability to process and manage large scale data bases, years of experimenting in online learning, the rise of the middle class throughout much of the developing world, and an entrepreneurial culture which is reshaping university life. We knew about all of these when considered separately. We just did not appreciate their power to change our situation when taken together.

The meaning of a sentinel event is invariably linked to both feelings of excitement and anxiety. Stanford’s online courses excited observers because they suggested that students everywhere have access to the best pedagogical materials, regardless of social class, ethnic group or geography. But they also created substantial anxiety because they suggested that the universities and colleges could be “dis-intermediated.” Might students in the future pursue certificates of competence in particular skills or subjects rather than degrees from institutions; particularly if elite institutions backed these certificates, and guaranteed that they were using the best pedagogy and assessment methods?

This mixture of anxiety and excitement shapes our response to the sentinel event. But when anxiety predominates, for example we feel unprepared to cope with developments the event portends, the event may stimulate apocalyptic thinking; the experience that, “the world as we know it is changing.” Many decades ago Alvin Toffler, in his classic text, characterized this experience as “future shock.”

One question is, how does future shock shape executive decision-making? The term “shock” is suggestive. A shock overwhelms our senses, and in response we become desensitized or numb. When we are desensitized our thinking becomes imprecise and impressionistic, and we lose sight of some of the commonsense connections between cause and effect -- a process that psychologists call dissociation. This is similar to the hysteric’s thought process, and of course it makes sense that when we succumb to apocalyptic thinking, we become something like hysterical. 

So one hypothesis is that UVA board members were gripped by apocalyptic thinking; that the sentinel event stimulated in them the belief that the world, as they knew it, was changing, and that they responded hysterically. This could account for both the conviction they felt that Sullivan had to be dismissed -- they still refuse to back down despite the protests-- as well as for the clumsy way in which they fired her. This hypothesis gains some additional credence when we consider that some of those who protested her firing responded hysterically as well. Thus for example, in protesting the dismissal, the university’s provost said, “I know I find myself at a defining moment, confronting and questioning whether honor, integrity and trust are truly the foundational pillars of life at the University of Virginia.”

We are naturally led to ask if these hysterical responses are arbitrary or unfounded. The answer depends on two factors, is the sentinel event really a sentinel, and if it is, is the institution vulnerable?  I am inclined to answer yes to both, that the hysteria, while unhelpful is not arbitrary, and that UVA is vulnerable. While some commentators have suggested that the issue of online learning is trivial, “an individual professor’s hobby,” “other universities offering a few online course for free,” the fact is that the MIT Open Courseware Initiative has published instructional resources online for 2,000 courses since 2001. Similarly, 41 million users visited the online site, “Kahn Academy,” in the last 18 months. The site houses a library of 3,000 videos providing instruction in a wide array of technical courses such as math, finance and economics. In addition, UVA is quite vulnerable since it has lost the bulk of its state funding and it cannot rely on tuition increases to fund its development costs.

Sullivan defended her record as an “incrementalist” on the sensible grounds that you cannot order faculty around, that you can’t lead “top down.” As she wrote, “Corporate-style, top-down leadership does not work in a great university. Sustained change with buy-in does work." But if you believe in the apocalypse, this argument only reinforces the conviction that the institution is at risk. There is no time for “buy-in.” Sullivan’s defense becomes paradoxically an argument for her dismissal, not against it.

One prediction is that we are in for many more of these “future shocks,” and that our leaders are vulnerable to apocalyptic thinking and thus hysterical decision-making. How can we prepare for the future without succumbing to the anxieties it creates?

Rajat Gupta's trial and conviction

The jury has just convicted Rajat Gupta, once the head of the iconic consulting firm, McKinsey, of insider trading. After his retirement from McKinsey, Mr. Gupta got seats on the boards of Goldman Sachs and Proctor and Gamble. The prosecutors in his trial presented evidence linking his presence at board meetings to phone calls he made to his co-conspirator, the hedge fund head Mr. Rajaratnam, and to trades the latter promptly executed to make money on the inside information Gupta had presumably relayed.

The prosecution presented no wiretaps of Gupta tipping off Rajaratnam. Instead, the jury was persuaded by the circumstantial evidence that when, for example, the Goldman Sachs board, at the depth of the financial crisis, made a decision to accept an investment of $5 billion from Warren Buffet, Gupta, as his cell phone records show, called Rajaratnam immediately after the board meting had adjourned. Within minutes, the latter bought Goldman stock just before the market closed. Needless to say, Goldman stock rose after the news of Buffet’s investment went public. Indeed, Mr. Rajaratnam was himself convicted of insider trading a year ago, based on actual wiretaps of conversations he had with other co-conspirators. He was sentenced to 11 years in prison and fined $93 million.

Absent a wiretap in which Gupta and Rajaratnam are talking about how to profit from the inside information to which Gupta had access, it is impossible to know if Gupta is actually guilty. What is striking however is that Gupta himself made no money from Rajartnam’s trades. In fact, in 2009 he lost money, some news sources suggests as much as $10 million, on a venture capital fund, called Voyager, that he and Rajaratnam had co-founded. Moreover, Gupta had a sterling reputation as an advisor to the most powerful companies and governments in the world. As one of his investment partners described him, “Rajat is sui generis, there’s no one else quite like him on the planet. He’s extremely smart, he has an unbelievable Rolodex. If I went to the South Pole, I could call Rajat, and if he didn’t know someone directly, he’d call someone who did.” His status, his  standing. the sense of his reliability, even generosity,  seemed secure. If he is guilty, we are compelled to ask, “What more could he possibly want?”

I can only speculate. But I am drawn here to the distinction between the management consulting business and world of finance and investment. The big story from the early nineties until the Great Recession is the story of risk, finance and investment. It was the period in which the United States became the “risk society.” The risk society grew up around a methodology for pricing and distributing risk across many asset classes by using derivatives and options. These instruments enabled banks to shield themselves from the vagaries of money markets, increasing their ability to provide millions of dollars of instant liquidity to institutional markets. This propelled the growth of new ventures. Of course, the methodologies for pricing risks could also backfire.  For example, the AAA tranches of mortgage-backed securities were not as safe as was calculated. This mis-pricing unleashed bankruptcies, defaults, and as is evident in Europe, considerable social unrest.  We do live in a risk society.

There are two other distinctive features of the  risk society. First, successful risk taking is disproportionately rewarded. This is one reason that the stock market grew so rapidly until the Great Recession. Second, the risk society gave rise to a culture of entrepreneurship. Talented young people who might have once become doctors, lawyers, accountants and consultants were now eager to start or join start-ups.

This risk society and its associated culture has been on balance a creative one, witness the rise of Google, Facebook, and the second coming of Apple. This may be one reason as the chart below shows, that the US still has the most productive economy in the world, even as it has lost manufacturing jobs, become a service economy, and weathered a housing bust. 

 

One hypothesis is that Gupta felt excluded from the settings and culture of the risk society. Management consulting is a service business. Mckinsey’s brand enabled it to charge for its labor costs plus a markup while relying on a continuing stream of referrals and requests from old and new clients. In other words, it faced minimal market risk, and little execution risk. It was close to a “cost-plus” business. Gupta in this sense was sidelined, away from the action. Indeed, as a management consultant myself, I experienced a period in which business consulting had a certain “glamor.” The best graduates of the top business schools wanted to join the top management-consulting firms. But starting in the mid nineties, the world of entrepreneurship became much more glamorous. 

Facing these developments perhaps Gupta's prior accomplishments seem in retrospect less meaningful to him. This may explain why he started “New Silk Road,” a venture capital fund committed to investing in Indian companies with growth potential. He could join his passion for helping his native country with his desire to play in the world of risk and reward. He was not looking for more money -- there is little indication that he was greedy -- but rather for more meaning.   

Of course this remains speculative. It does not give a complete account of why he might have crossed the line and conspired with a colleague. Perhaps, despite his accomplishments, he may have felt unprepared to compete in the world of risk and so came to rely excessively on a colleague, who prior to his own indictment and jailing, appeared to be one of the most successful hedge managers in the United States.

It is always puzzling to learn that very successful people are unsatisfied with their accomplishments. Psychoanalysis reminds us that a person performs in front of two audiences, one external, our actual friends, colleagues and family members, and the other internal. Freud described the internal audience as the “ego ideal,” This inner voice is the precipitate of the voices of parents and other authority figures, as we have internalized them .The ego ideal is a positive force when it stimulates us to achieve. But it can also be source of shame, when according to our own internal and sometimes overly strict standards, we have failed. This sense of shame implicates our identity, we are no longer sure of who we are. One can imagine how, to avoid feeling this kind of shame,  a person might cross the line. If this is true, we are presented with a case in which Gupta, seeking to avoid the shame from within, shamed himself in front of the people he most valued.

What will it be: Feelings killing reason, or reason killing feelings? JP Morgran versus Bridgewater Associates

Today’s New York Times article (http://www.nytimes.com/2012/05/27/business/how-boaz-weinstein-and-hedge-funds-outsmarted-jpmorgan.html?pagewanted=2&emc=eta1) confirms our earlier interpretation of JP Morgan’s trading loss some two weeks ago. (http://learningfromexperiencelarryhirschhorn.blogspot.com/2012/05/what-happened-and-why-at-jp-morgan.html). There were hedge funds, most notably one called Saba, founded by Boaz Weinstein, who were on the other side of JP Morgan’s trade. JP Morgan was selling credit default insurance at prices the other hedge funds believed were too cheap. “Smelling blood,” they bought, anticipating correctly that the cost of insurance would have to rise. When Jamie Dimon learned how mispriced his firm’s position was, he shut down the unit selling the insurance. As we noted, it is as if an insurance company unwittingly sold cheap homeowner’s insurance to households on a floodplain. Its potential liability would be far higher than it had anticipated

What is most interesting is how the New York Times, in several reports, has emphasized the emotionality surrounding this trade. While Jamie Dimon might have been surprised by his firm’s losing position, there was considerable conflict between the London office, which oversaw the trade, and its New York City counterpart. As the New York Times reporter writes, “The head of the London office, Achilles Macris, gained more latitude to build and expand trades from his desk in London — including the wagers that ultimately went so wrong for the bank. But, “Althea Duersten, who was Mr. Macris’s counterpart in New York and oversaw North American trading, raised objections to Mr. Macris’s outsized bet, but was routinely shouted down by Mr. Macris during conference calls between London and New York, former traders said. What’s more, the brewing tension between Mr. Macris and Ms. Duersten left traders feeling whipsawed, said one trader in New York…. At one point, Ms. Duersten called one trader into her office at the New York headquarters and told him that he would report to her, instead of to Mr. Macris, the trader said. “Achilles hit the roof” upon hearing of the meeting, the trader said, adding that he “didn’t know who to listen to.”

Interestingly, in describing Boaz Weinstein they paint a picture of a “conquistador” eager for the big fight and the bit bet. “Those who have traded against Mr. Weinstein describe him as an aggressive trader who bets big and moves fast. He values a deal more than old-fashioned etiquette. Traders tell tales of losing money to him because of split-second price differences he picked up faster than they did. While that kind of behavior doesn’t win a lot of friends on Wall Street, these traders concede that Mr. Weinstein is too big and powerful to ignore.” The article notes that Weinstein is an avid poker and blackjack player. But the article also reports that he lost $1.8 billion for Deutsche Bank in 2008, trading in, of all things, credit default swaps!

It was not supposed to be this way. One presumptive benefit of quantitative finance is that reason and caution should rule, and where necessary, rule out, emotion. There should be no place for impulses and no recourse to unexamined intuition. Indeed, JP Morgan had “value at risk” economic models, which in 2011 pegged the London unit's exposure at only $1 million less than for the firm’s much larger investment banking business. The unit’s loss of what might now be as much as $3 billion suggests that this quantitative model failed to constrain Macris’ trading impulses. But then again, Deutsche Bank failed to constrain Weinstein’s.

I have recently completed a study, based on limited but publicly available information, of another hedge fund star, Ray Dalio, and his trading style. He is the head of Bridgewater Associates one of the largest hedge funds in the word, which had assets under management of $38 billion in 2011. He has written a remarkable manifesto about his principals for living and managing. The manifesto’s central theme is, “Drive out all emotions.” The financial results are undoubtedly superb. Dalio does not try to hit home runs, he is obsessive in his search for correlations among a wide array of financial instruments, he is cautious and disciplined, and he meditates every day as a way to gain control over his feelings. He believes that markets are unforgiving and that the world is a machine.

But the culture he has created appears to be unnatural. As he reports, and as employees and ex employees report anonymously on a job board, everyone is vulnerable to being “probed” (his word) in order to ferret out their emotional responses. When a reporter from the New Yorker magazine visited Bridgewater to do a profile, Dalio readily berated an employee, called Peter, in front of colleagues for letting emotions get the better of him the day before the reporter’s visit. When, as the reporter writes, Peter protested that he felt that his integrity had been attacked that day, Dalio walked up to a white board and wrote down the word, “Felt”. The anonymous employees writing on the job board confirm that everyone is potentially vulnerable to an inquisition through which probes extract and eliminate feelings. Moreover, one employee writes that everyone is being watched with video cameras, even in areas where there are supposed to be none!

I think we can safely say that this culture stimulates paranoia. Humans are feeling creatures. The prospect of being probed to identify unwanted emotions must lead to mistrust and wariness. Paranoia may be a useful adjunct to trading; after all other traders are trying to increase their wealth at your expense. But should paranoia be all consuming, and should feelings be the identified enemy?

This split between excessive emotionality on the one side, and its ruthless suppression on the other, raises important questions about the psychological climate that trading and investing stimulates. What will it be: Feelings killing reason, or reason killing feelings?

The firing of Scott Thompson at Yahoo

The board removed Scott Thompson, the CEO of Yahoo, after it was revealed that he lied on his resume. He claimed to have a computer-engineering degree from Stonehill College in Massachusetts, which did not even have a computer- engineering major at the time of his graduation. An investor, Daniel Loeb, representing discontented shareholders who sought seats on Yahoo’s board, uncovered the discrepancy and forwarded the information to the Yahoo board. The New York Times reports that Thompson was evasive and unforthcoming throughout the process of the board’s investigation. For example, he sought pledges of support from some board members without responding to the allegations. He asked a senior executive to support him, and when the latter declined, he asked that the executive not reveal their conversation to board members. On a radio interview he elided the distinction between doing a major in computer engineering, and having a background in computer engineering by saying; “That’s really the background that I have, and it started back in my college days, and I think that’s really the wonderful part of being an engineer is you think that way.” In addressing Yahoo employees, he blamed a search firm for the discrepancy on his resume, which the search firm promptly denied. The New Times reporter, who has followed the story, wondered, “How and why Mr. Thompson’s résumé came to reflect the false claim that he had a degree in computer science remains a mystery. If the company wants to solve it, Yahoo may need to add a psychologist to its investigative team.”

Perhaps the answer to the psychological puzzle lies in Thompson's response to the revelation of the discrepancy. He appears to rely on evasion to cope with difficulty and stress. The practical gains to being evasive are readily apparent. One can create a good impression without quite lying. Hence he references his “background” rather than his major on the radio interview. One can also gain advantage without quite challenging people who control resources.  So he sought support from a senior executive but did not want board members to learn of his politicking.  

If a person learns to use evasion successfully, he is at risk of developing a certain obtuseness, a lacking in emotional intelligence. This is because he becomes comfortable getting what we wants without realistically assessing the obstacles he faces. He evades the obstacles by telling lies, white or not, and so never learns to actually negotiate his way through reality. Over time what is real and what is not take a back seat to how situations appear.  The New York Times article suggests that had Thompson been completely honest from the beginning, and had offered his resignation, the board may have refused it, if only because they had just recently fired another CEO.

One question is; what are the roots of an evasive style of acting? Since an evader is not a sociopath – he has a conscience, and can be burdened by the distinction between right and wrong --it is likely that he evades because he feels that he deserves the opportunity or the resource he wants.  But this belief, that he is deserving, is not based on a sense of his accomplishment, else why would he lie, but rather on the conviction that he has been held back, or unfairly deprived.  In other words, the evader feels entitled.  For example he "surely" could have been a computer engineer had he been offered the opportunity or had gone to a different college or had received proper guidance from adults.   This means that his “small lies” are actually righting a wrong by conferring an advantage that had been unjustly withheld. Ironically, he is correcting a moral imbalance by lying!

One question, which is of always of interest, is how do character flaws affect an executive’s performance. One answer is that sometimes these flaws may create an advantage. For example, the narcissistic executive may exude self-confidence, and the paranoid one may be detect threats sooner than others. Perhaps the evasive person succeeds, at least initially, because the politics of competition and cooperation among executives merits some evasiveness. Power is distributed ambiguously and coalitions of executives who support a strategy are not always stable. It may sometimes help to keep one’s friends, as well one's enemies, off balance. But it is often the case that as you get to the top, or to more powerful positions, Thompson was head of PayPal, reporting into the CEO of E-bay, before he became the CEO of Yahoo, these flaws  catch up with an executive, undermining or destroying his career.

What happened and why at JP Morgan

The news is filled with reports and articles on JP Morgan’s loss of $2 billion dollars on a poorly executed trade. The question people are asking is how this could happen at a bank with a very good reputation for controlling risk. In this blog entry I want to explain what happened, and provide a psychological explanation for why it happened. At its core, the story is about a game of poker between JP Morgan and hedge funds, as the former doubled down on a bad bet, hoping that the hedge funds would "fold."  JP Morgan's loss is still on paper, but as it unwinds its positions,  paper losses could turn into real money.

The story begins when the bank’s office in London, part of its Chief investment office (CIO), was buying insurance on corporate bonds that the bank owned. This insurance, called “credit default swaps,” would compensate the bank for losses, should the companies that sold these bonds go bankrupt and not be able to pay its creditors. It was a perfectly sensible hedge. It is the same as protecting the value of your house by buying fire insurance. You pay the premiums, but your house is insured.

At some point however, this investment strategy changed, and the CIO began selling rather than buying insurance. It seems that the traders in the CIO now believed that the finances of companies backing the original bonds would be improving. JP Morgan could make money by selling insurance at rates that would be very favorable to them, once it became clear that the original corporate bonds were safer than once thought. In other words, buyers would wind up paying too much in premiums. It is as if a company selling fire insurance knew that a new fire retardant was about to be introduced, so that the risk of a house burning down was going to fall substantially. If homeowners did not know this, they would wind up paying more than they had to for their fire insurance policies. Should it choose to do so, the insurance company that owned these policies could then sell them to other insurance companies, at favorable prices. While the risk of fires had gone down, the earlier, higher, insurance rates were locked in.

But when JP Morgan switched from buying to selling insurance, its previous hedge changed to what is called a “directional bet.” JP Morgan was now betting that the finances of the companies that stood behind the bonds would improve. This was a pure bet as opposed to a hedge, since it presumed an outcome that was uncertain.

How did this bet fare? Not well. JP Morgan was selling insurance on a composite of bonds, called an index. Hedge fund traders soon realized that the cost of buying the insurance with the index was cheaper than the cost of buying insurance on each bond in the index. This is called a "mispricing." It is as if the price of a bundle of groceries is substantially less than the sum of the prices of each item in the bundle. So to make money all the hedge funds had to do was to buy the insurance, lock in the lower price, and wait for prices to rise. As one trader at Merrill Lynch said, “Fast money has smelled blood.”

But prices did not rise, because the CIO traders continued to sell the insurance, effectively keeping the premiums -- the cost of insurance -- down. They were willing to throw good money after bad, effectively "doubling down" on their bet,  because they had what Jamie Dimon, JP Morgan’s CEO, once called, the bank's "fortress balance sheet" behind them. In effect, the CIO traders were like the poker player with lots of chips, who ups the ante on a bet, so that his opponents, scared by the size of his bet, will fold -- in this case, sell rather than hold onto the index.

The hedge fund owners were pissed. From their point of view JP Morgan was trading like someone who “corners a market,” and so controls the price and quantity. But since this is an unregulated, over-the-counter market, they could only complain to journalists rather than federal officials. This was how Jamie Dimon and his leadership team first got wind of the trade and shut it down. In other words, Dimon first learned of this trade and its mispricing from the newspapers.

It is tempting to think of the professionals in the CIO as rogue traders. But the office's reputation was solid. It had put on successful hedges many times before, and had even made money for the bank from some of its directional bets.  Diamond trusted the executive Ina Drew, who oversaw the unit, which is one reason that he and his top team did not monitor the trade closely. Upon realizing the extent of the mispricing, Drew did the honorable thing and offered to resign, several times in fact, until Dimon accepted her resignation. The trader directly involved in the transaction, Bruno Iksill, was skilled and talented and had a good reputation in the close knit world of Credit Default Swap traders.

Some reporters have speculated that the CIO traders were tempted by the prospect of making money for the bank, and perhaps for themselves, assuming they were paid for their performance. But the incentive system at JP Morgan was much more nuanced than this, and traders were assessed on how they managed risk, not simply on how much money they made for the bank.

I want to suggest instead that CIO traders were induced into the “game” of trading, which despite all the quantitative controls and models that evaluate risk, can feel quite personal, just as if you are playing poker face-to-face with known opponents. Derivatives trading, as opposed to trading on the stock market is a “zero sum game.” For every winner there is a loser. By contrast, on the stock market, all investors can experience an increase in the value of a share. The zero sum nature of derivatives trading makes trading feel personal since you are causing someone else considerable pain to extract personal gain. This is why the Merrill Lynch trader used the metaphor “smelling blood” to describe the contest between JP Morgan and the hedge funds. When trading switches from a discipline informed by quantitative models, to a personal contest, people are vulnerable to taking outsized risks. The markets become a game, albeit one with big stakes and personal reputations to defend. This is especially true when the number of players is small.

This hypothesis is strengthened when we consider the character of Achilles Macris, who was in charge of the London desk of the CIO, and oversaw Bruno Iksil’s trading. While this is speculative, he appears to be the kind of person who would relish a game. He once told the Financial News that he kept his personal art collection on his office walls because, "The idea is to be part of an organization that is forward looking, intellectually curious and keen to reflect passion for new ideas and creativity. We want the work environment to reflect who we are." This is not the voice of a bureaucrat or a risk modeler, but of someone who takes pleasure in putting his personal stamp on a setting. 

It is probably true that the “quants,” the quantitative modelers, are taking over Wall Street. But as long as trading is experienced as a game, the human element--with its dares, contests, reputations, winners and losers -- will persist.  

CNN in a polarized culture

The New York Times carried an article on the struggles CNN is having sustaining its television ratings. “In April 2011,” the article notes, “CNN had an average of 451,000 viewers at any given time, more than the cable news channel MSNBC’s 428,000. The month included the much-watched royal wedding in Britain. But this April, an unusually quiet month in the news business, CNN had an average of 357,000 viewers, its lowest monthly average since August 2001. MSNBC held steady with 425,000.”  Employees who are proud of the CNN brand are disturbed by the channel’s inability to beat the competition. One employee is quoted as asking, “Who is the strong leader that’s going to get us out of this thing?”

In pre-internet days, CNN was the radical upstart showing how very busy people -- think of the business traveler returning to his or her hotel room after a hard day’s work --could get the news-of-the-day every hour. This was a revolution. Moreover, during the Gulf war CNN proved that it was the go-to station for national emergencies. It had depth and presence throughout the world to provide comprehensive and immediate coverage. But this was all pre-internet. Today, people who want to stay tuned can access a wide array of websites any time and any place. CNN still shines when emergencies break, but by definition these events are few and far between.  By contrast, “the news” today is largely a backdrop for the projection of personalities such as Bill Riley, or Rachel Madow. This is why news has converged with entertainment. This is also one reason why John Stewart has been able to secure a niche for, “The Daily Show,” his wonderful blend of comedy and news.

If we think of the strategic space within which CNN operates, it appears to have two choices; make “the news the star” or make the “star the news.” The internet rules out the first, news is a commodity, and the polarization of political opinion rules out the second—left and right are already occupied by competitors. This may be one reason why CNN cannot create stars out of Anderson Cooper, Wolf Blitzer or Piers Morgan, while in contrast, Rachel Madow, of MSNBC, has become the star of the left.

But it was not always so. For those of us old enough to remember, Walter Cronkite, the famed newscaster for CBS from the 50’s through the 70’s, represented probity and cultural authority in presenting the news of the day. He ended every newscast with the phrase, “And that’s the way it is,” as if to emphasize that our collective experience, as he had just described it, had been accurately and faithfully rendered. But just as he represented the news, he was also a star. When in 1968 he turned against President Lyndon Johnson’s Vietnam War strategy, Johnson is reported to have said, "If I've lost Cronkite, I've lost Middle America.”  So in his case, the news was the star and the star was the news.

In hindsight we can see the conditions that sustained Cronkite as a cultural authority figure. There were only three major networks, they were quasi-monopolies, and along with major newspapers, there were no alternative sources of news. By contrast, market competition often drives out the company that occupies the “middle” space, so that for example, retailing is split increasingly between low-cost providers such as Wal-Mart, and high-end sellers such as Nordstrom. Should a competitor choose to situate itself between them, Wal-Mart will offer better prices and Nordstrom higher quality and better service. This is one reason Sears has had difficulty sustaining its brand.  Similarly, should CNN chose to be somewhat left, MSNBC will out perform it, and should it choose to be somewhat right, Fox will beat it.

But I also want to highlight another feature of Cronkite’s persona. As I suggested, he played the role of arbiter and representative of the truth. One of the features of a polarized political climate is that opinion displaces truth, or to put it another way, the very idea of truth is suspect. Instead, we believe that behind any purported statement of fact there is a hidden interest, and we can no longer be assured that “that’s the way it is. “

It is useful then to ask, what is the source of polarization?  It is easy to see how in an era of audience fragmentation- one consequence of the new technologies –symbols of cultural authority and national consensus, like Walter Cronkite, fade. But why the polarization?

There are of course many explanations for the latter, but I want to focus on a psychological one here.  In one way of thinking, we join up with the world around us by internalizing it. For example, we are not simply attached to our parents; we are attached to the internal representations of our parents. That is why it is said that siblings always grow up in different families. Each internalizes the same parents in a different way. So our experience of what lies outside of us is linked inextricably to the representations inside of us.

So one question is, how do we internalize a fragmented society?  One possibility is that it shows up as an internal experience of disorder or even chaos. We don’t know where we belong. That may be why Robert Putnam famously argued that today we “bowl alone,” --clubs and groups are disappearing --and Sherry Turkle suggests that our life online leads us to be “alone together.” This is speculative to be sure, but it may help explain why political discourse sounds increasingly apocalyptic. The apocalypse lies on the other side of chaos.

Seen in this perspective, joining a camp in a polarized battle helps us compensate for this experience of fragmentation. But since the experience of fragmentation is in some degree toxic, we bring to the battle the angry feelings that fragmentation induces. It is not unlike the ways in which fans of a soccer club can become a mob after a game, particularly if its team wins.  

This may shed some light on the CNN employee who wished for the “strong leader.” CNN “sits in the middle of one of the world’s most labyrinthine enterprises, ever buffeted by changing bureaucratic fortunes.” Fox, by contrast is the vision of a single man, Roger Ailes. As one reporter suggests, even Rupert Murdoch cannot interfere in Ailes’ decisions.  In a fragmented world we may hunger after strong leaders, call this the authoritarian seduction. As it positions itself as the source objective news, CNN would like to draw on the authority of a national consensus about what is true, But if this consensus is gone, do its employees instead need to subordinate to the vision of a single leader and his or her authority. And if it does this, will it then be forced to join the battle of camps in a polarized culture?