Saturday, April 3, 2010

Double-Dip Linkism

Leading off is this report of mismanagement in the private equity investment markets…apparently, many state pension plans lost money in investing in private equity; they were promised “the 20 to 30 percent returns.” When someone is conned, you blame the con artist, pity the conned and wonder, well, why didn’t the conned know better? Particularly when the conned is paid to know better (as I imagine pension fund managers are). Well, anyway, as it turns out, private equity isn’t too hot:
Two professors, Steven Kaplan of the University of Chicago and Per Strömberg of the Stockholm School of Economics, contend that, after fees, many private equity investments just about match or even trail the returns of the broad stock market between 1980 and 2001.

Additional research by Ludovic Phalippou of the University of Amsterdam and Mr. Gottschalg of the HEC School of Management shows that private equity funds underperformed the Standard & Poor’s 500-stock index by 3 percent annually from 1980 to 2003, after accounting for fees.
But it’s worse than that: if you pick a bunch of stocks that underperform the stock market, that doesn’t necessarily imply ill effects for the people who work for that company. The company might choose to restructure or something, but the key here is a choice. If you invest in a private equity firm, you know that said private equity firm is going to buy a company by loading it up with debt; you know that said private equity firm is going to fire and layoff tons of employees to pay off that debt; you know that said private equity firm is consequently probably going to cut R&D and other investments in the future…And, after all that, if you aren’t getting returns, well, what is there to say but that your investments abetted suffering and lost opportunity?

Paper entrepreneurs and Product entrepreneurs.

Basel III, the financial reform that no one mentions.

The voices of people in Lagos, in a diversity of professions and outlooks (halfway down--the beginning is kind of boring).

Why the savings rate is falling.

When CNN was a revolutionary.

Jane Jacobs on bad gentrification: “…When a place gets boring, even the rich people leave.”

The superstar effect—sometimes as bad as it is good:
Modern management practice assumes that the best way to maximize employee performance is to institute sports-like tournaments, in which people compete directly against each other. Consider, for instance, the competitive structure put in place by former CEO Jack Welch at General Electric. He instituted what became known as the 20-70-10 rule: the top 20% of employees got generous financial bonuses, and the bottom 10% were "managed out."

There is little doubt that, in many situations, such incentive structures lead to motivated employees, working hard for the top spots. But the presence of a superstar can reverse this dynamic, so that instead of trying our best we accept the inevitability of defeat.

According to Ms. Brown, the superstar effect is especially pronounced when the rewards for the competition are "nonlinear," or there is an extra incentive to finish first. (We assume that the superstar will win, so why chase after meaningless scraps?) Just look at golf: Not only does the tournament winner get a disproportionate amount of prize money, but he or she also gets all the glory.
Read the whole thing—too good to try to excerpt everything.

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