Tuesday, February 21, 2012

Decisions Derisions

In Chapter 3, No Cash on the Table, Frank continues his argument that relative standing incentivizes individuals to make decisions that act towards the detriment of the group. There are two points I'd like to address here, first, the assumptions Frank uses to support his claims, and second, his passionate defense of worker-managed firms and his assumptions about specialization.

To anyone that has a basic understanding of systems, it is clear that aggregate effects are produced not necessarily intended or devised by the constituents. Frank argues the actions of these constituents often act to the detriment of the system. This is true, particularly in a case where incentives are not aligned to bring the greatest available value to the system and the participants.

When investment banks determine their leverage ratios in risky financial products, return relative to competitors comes into play. Higher leverage entails higher return (loss) and higher risk, yet individual firms are incentivized to take on these risks to remain competitive. Despite the recent financial crisis, if they did not increase their leverage, they very well may have been run out of business. The systemic nature of the problem is clear when one views the system first, components second.

Frank appears to be arguing that these system/participant problems can be solved. I don't disagree and look forward to understanding his proposed solutions. Though he did clarify at the end of Chapter 3 that prohibition is not required, his solutions have yet to be clarified. The problem with any government-based top-down solution, that I see, is that these decision-makers hold the same lack of perfect information as the individual participants (investment firms in this example) with the additional bonus of slow reaction time and the inability to recognize unintended consequences. It appears to me that a direction for the solution would be founded in the concept of increased transparency. Additional information produces relatively more efficient decisions (on the part of the constituents investing with the firm and on the part of the firms themselves, in this example). As information technology advances, information overload becomes less of a problem.

The second idea I'd like to address is Frank's argument for worker-managed firms and his assumptions of specialization. Briefly, worker-managed firms react to the external environment slower and less efficiently than firms with a central nervous system. By specializing the decision-making process, firms are more able to make efficient decisions. It is not always the case, in other words, that additional perspectives contribute to more efficient outcomes. It depends on the problems being solved.

Furthermore, some individuals prefer a more specialized/mundane/secure/repetitive/certain style work environment. Not everyone prefers a job that is plagued with uncertainty. As well, the increased productivity of individual workers, in my opinion and in all appearances, derived from an increase in control over the firm itself, would more than be offset by the decrease in productivity derived from specialization.

1 comment:

  1. In the last sentence I meant: "...the increased productivity of individual workers derived from an increase in specialization, would more than be offset by the decrease in productivity derived from an increase in control over the firm itself.