Why promotion breeds incompetence

Random promotion is more effective than promotion on merit, according to new research. The report, by Alessandro Pluchino, Andrea Rapisarda and Cesare Garofalo of the University of Catania, Sicily, concluded that picking managers at random actually increased the efficiency of organisations. According to the Guardian, the research mimics the findings of a 2001 study by Steven E Phelan and Zhiang Lin, published in the journal Computational and Mathematical Organization Theory.

Phelan and Lin concluded that random promotion performed better than every other method, including merit; up or out, where employees are either promoted quickly or fired; and seniority, which rewards longevity over performance.

But would a random promotion system work beyond the confines of a controlled study? It’s not hard to imagine how such a system might start to unravel team spirit and undermine motivation. Either a company imposes a random system in secret, running the risk of employees perceiving the promotions as misguided, or the firm publicises its intention to switch to a randomised process, risking lower performance levels across the board as normally efficient employees lose their chief incentive to perform beyond the minimum level expected.

But why promote at all? According to the Peter Principle, hierarchies are naturally inefficient because a continuous system of promotion inevitably leads to employees reaching a level that exceeds their own competence. Or as the Canadian psychologist Laurence J. Peter put it: “Every new member in a hierarchical organization climbs the hierarchy until he reaches his level of maximum incompetence”.

In practice, given enough time, every large company has the potential to become inefficient and prone to failure. As the channels that stretch to the very top of the organisation become filled with people who are promoted above their maximum capability, and in turn these incompetent managers are given the freedom to fill the rungs beneath them, the large hierarchical organisation grows ever closer to implosion. The Peter Principle is therefore the strongest and most rational argument in favour of private equity.

Pic credit: ThomasThomas

Voters don’t know what they want until governments take it away

With the Comprehensive Spending Review only a week away, communications is now the cabinet’s most important fiscal tool. A clear strategy is emerging. From David Cameron’s standpoint, it doesn’t really matter where the knife falls as long as the right message accompanies the pain. The amount of time spent explaining the proposed cuts is dwarfed by efforts to inform us of the potential consequences of inaction. There’s a reason for this: the coalition understands the theory of loss aversion.

Defending his decision to abolish child benefits for households in which one parent earns over £44,000, Cameron said the measure raises £1bn, “and that is £1bn that we don't have to take off the poorest families, or off the health budget, or the schools budget.”

In other words, if we don’t take this money from the rich, we’ll take it from the poor, or even worse, the children. Drink this medicine, or the puppy gets it.

Cameron uses these conditional threats liberally and deliberately. “You have to address the massive welfare bills,” he said in June. “You have to address public sector pay bills… Otherwise you will have to make reductions across the board...”

And:

“One of the most shocking things is the extent of the interest we are paying on our debt. If we don’t do anything about it, it is going to be £50, £60, £70 billion... We will be spending more on debt interest than we do on educating our children and defending our country.”

This isn’t just scaremongering. Social psychologists recognise this language structure as an attempt to manipulate our natural aversion to loss. According to Noah Goldstein, Steve Martin and Robert Cialdini, the human “tendency to be more sensitive to possible losses than to possible gains is one of the best supported findings in social science”.

In their book, Yes! 50 secrets from the science of persuasion, Goldstein et al cite the age-old business school case study, Coca-Cola’s attempt to change its formula from old Coke to New Coke, as evidence of our universal sensitivity to potential loss over gain.

In 1985, Coca-Cola decided to sweeten its formula in an attempt to make it taste more like Pepsi, which many consumers said they preferred. Coke blind-tested its new, sweeter drink on 200,000 people, 55 per cent of whom said they preferred it. When the blindfolds were lifted, and consumers told they were drinking New Coke, their preference for the new formula increased a further six per cent.

Backed by extensive market research, the company thought it was onto a winner. But new Coke bombed. Consumers hated the new variety so intently that they campaigned for the old Coke to be reinstated. The episode proved a public relations disaster. It was also difficult to explain. Why did consumers reject a taste they had overwhelmingly preferred during testing?

Some marketers attribute the anomaly to a brand loyalty so intense that consumers essentially ignored their own taste buds in an effort to preserve the status quo. But according to Goldstein et al, what really happened was that Coke’s marketing team underestimated its customers’ natural aversion to loss.

“During the taste tests, it was the New Coke which was unavailable to people to buy, and so, when they knew which sample was which, they showed an especially strong preference for what they couldn’t otherwise have. But later, when the company replaced the traditional recipe with the new one, now it was the old Coke that people couldn’t have and it became the favourite.”

It was the fear of losing old Coke that prompted the extreme reaction. How does this information help Cameron’s communications team? Because the notion of loss is so compelling, an announcement that shows people what they have to lose will always be far more effective than simply showing them what they have to gain. Most marketers realise that “50 per cent off” will always be less successful than “Last chance to get 50 per cent off”.

For a government preparing to announce a series of unpopular public sector cuts, the theory of loss aversion presents a challenge. Every cut it makes will likely produce an emotional reaction disproportionate to the perceived value of the original benefit.

Consider the child benefits row. The public reaction to the removal of child benefits for high earners (many of whom said they didn’t even use the benefits for living expenses, preferring to set up savings accounts so that their children can enjoy the benefits in the future) shows the difficulty of implementing a heavy cuts programme. Whether or not we personally benefit from a particular service the coalition plans to cut, we are pre-programmed to resent the removal of that benefit.

But the government can also use its knowledge of loss aversion to plan its communications strategy. By exploiting our fear of bigger, potential losses in the future, it can neutralise our natural aversion to losing certain services right now. Watch Cameron’s team announce the cuts, and follow it with a reminder of what we stand to lose if we don’t take the medicine.

Pic credit: The Prime Minister's Office

How to dismantle a superpower

How is the age of austerity treating you? There’s plenty more pain to come, as George Osborne frequently reminds us, but it’s in his interest to do so. To give the coalition its greatest chance of survival, cuts must be oversold in order to appear under-delivered. Doom mongering carries no lasting effect as long as the actual pain is less than expected.

Like a Tory Hans Gruber, Osborne will keep cutting until he finds something you do care about. But the aim is that when the time comes to close the local library on Wednesdays, you’ll be too preoccupied with the survival of your hospital’s cancer ward to care.

In the US, the headline cuts have already begun. A piece in the New York Times detailed a range of fiscal lacerations deep enough to make you wonder whether Obama has any kind of overarching strategy at all. Clayton County, a suburb of Atlanta, shut down its entire public bus system, stranding 8,400 daily commuters. In Colorado Springs, the authorities switched off “a third of its 24,512 streetlights to save money on electricity, while trimming its police force and auctioning off its police helicopters.”

Glenn Greenwald from salon.com notes that across rural America, paved roads are being torn up and replaced with gravel or other rough surfaces “as counties struggle with tight budgets and dwindling state and federal revenue", while the state of Utah is “seriously considering eliminating the 12th grade”.

For Greenwald, the end is nigh:

“Does anyone doubt that once a society ceases to be able to afford schools, public transit, paved roads, libraries and street lights—or once it chooses not to be able to afford those things in pursuit of imperial priorities and the maintenance of a vast Surveillance and National Security State—that a very serious problem has arisen, that things have gone seriously awry, that imperial collapse, by definition, is an imminent inevitability?”

A recent Ipsos Mori poll found that 55 per cent of respondents had never heard of Cameron’s Big Society. They’ll find out soon enough.

Pic credit: Architekt2

Necessity is the mother of disruption

A hat tip to IDEO’s Tom Hulme for pointing me in the direction of Kickstarter, a social-funding platform based in the US. Kickstarter aims to help hard-up creative entrepreneurs find money for artistic or “ambitious” endeavours. Ideas for potential projects are posted on the Kickstarter website, allowing interested parties to make donations. No equity is taken, but the most successful projects tend to come up with innovative ways to reward their benefactors.

One of Kickstarter’s more obvious charms is its all-or-nothing policy, borrowed it seems, straight from the BBC’s Dragon’s Den. Projects must be fully funded before the allotted time expires or no money changes hands. This has two notable benefits. One, it allows creatives to gauge public interest in a project before committing to it, which provides more-or-less free market research with zero risk. Two, it lends a sense of urgency to entrepreneurial creation. Want to bring an idea to life? The clock is ticking.

Kickstarter is full of creative ideas, focussing largely on prospective films, books and music, plus the odd entrepreneurial gem, such as the social enterprise Conflict Kitchen, a take-away restaurant that only serves food from countries with which the United States government is in conflict.

Conflict Kitchen’s current incarnation is the Iranian take-out restaurant, Kubideh Kitchen, serving kubideh: a spiced meat barbari bread sandwich with onion, mint, and basil. The sandwich is served in a custom-designed wrapper that features interviews with Iranians on subjects ranging from Persian poetry to politics, thereby serving up a multi-sensory attack on the cultural conscience.

The theme switches every four months (a frequency that appears to lag only slightly behind US foreign policy) allowing Conflict Kitchen to provoke discussion around a different culture. Next up is Afghanistan. Bolani Pazi, as it will be known, plans to offer a well-known Afghan street food, called bolani. After that, Conflict Kitchen will switch its attention to North Korea. If you want to invest, do so here.

While Kickstart’s projects provide a great example of innovation thriving in the oxygen of social support, it’s hard to ignore the invention of the funding model itself. Last month I spoke to the creators of Funding Circle, a UK social lending platform, about the paucity of available funding for established SMEs. Funding Circle aims to help small businesses reduce their reliance on punitive high street banks by putting them in touch with members of the public. Group lending ensures the risk of default is spread, securing an above average return for investors and improved rates for borrowers.

Small business finance is critical for long-term economic growth, yet the lack of supply remains a problem infinitely more discussed than resolved. Labour flat-refused to tackle it, while the coalition continues to prioritise the issue right to the bottom of the list. If the banks won’t play ball, perhaps it’s time to disintermediate them out of the picture completely. Social lending could prove necessity is also the mother of disruption.

Humans are boring, say machines

Behavioural psychologist Gavin Potter is an expert on idiosyncrasy. He helps computers understand what it means to be human. Potter works as a consultant to online dating companies, using massive data sets to help match prospective partners. Every time a user clicks on a potential date’s profile, all the relevant information leading to that click (hair, eye colour etc) is logged, helping the software to make predictions about the types of people we might be attracted to in the future.

While Potter is an expert on what makes us unique, his success in teaching computers to predict our behaviour comes from spotting the things that make us alike. For example, female daters click on profiles of men who are on average three years older than them. If you think that’s clichéd, consider that over 90 per cent of men seek women who are half their age plus seven. "People think they are unique," says Potter. "They say, ‘you can't possibly profile me’. The depressing thing is that you can actually do it pretty accurately."

The key to accurate, automated profiling lies in the size of the dataset. The bigger the dataset, the easier it is to iron out statistical anomalies. With evermore data, those clichés get easier and easier to find. It’s ironic that in our attempt to examine humanity through artificially intelligent means, all we ultimately reveal is our own robotic predictability.

Large-scale datasets are becoming increasingly available to the public. Take a look at behavioural economist Dan Ariely’s blog for an interesting take on password selection. Data from 100,000 Israeli user accounts, which were published following a cyber attack, show a depressing lack of what the author defines as necessary “randomness”.

The accounts, which were hacked from user registrations for Pizza Hut and an Israeli property website, revealed individuals’ usernames, email addresses and passwords. The most commonly chosen password was 123456 (584 users), with 1234 as the runner up (569) and 12345 in third (388). All in all, 1786 passwords (nearly 6 per cent) were comprised of consecutive increasing numerals.

“This means that one person in 18 didn’t muster the cognitive capacity to generate a password more intricate than 1234 and the like.”

Even worse,

“788 people (roughly 2.5 per cent, or one in forty people) chose a password identical to their username. [And] 417 people (1.32%) chose a password comprised of identical digits (e.g. 1111).”

The password analysis was completed by hand, but advances in computer processing power, and the addition of psychological insight to statistical analysis, have greatly improved our ability to automate the discovery of behavioural patterns from large datasets. It's unfortunate that the most enlightening discovery to date is our penchant for banality.

Pic credit: Tleilaxus

Zuckerberg's privacy trade-off

Facebook spends a disproportionate amount of time and money persuading us to leave our data in its capable hands. At least, its efforts appear disproportionate to the average user. In fact, Facebook CEO Mark Zuckerberg, who lists "openness" as one of his interests on his own Facebook profile, is desperate to sell us his vision of the future, if only to prop up Facebook's ambitious $10bn valuation. That future precludes privacy.

To Zuckerberg and his shareholders, disclosure is the new discretion. To justify the business model, all of our likes and dislikes must be indexed and segmented at the behest of Facebook's eventual paymasters. Privacy must die if Facebook is to live.

The average user may not fully comprehend the company's goals, but that won't stop them feeling cheated once the targeting begins in earnest. As the Guardian points out:

"...the internet has proved resistant to overt commercialisation in the past. When Rupert Murdoch's News Corp bought MySpace for $580m in July 2005, the company used it to plug its own products and the site's hip audience of teenage music fans soon began to search for other online hangouts."

But moral outrage is generational, argues Web entrepreneur David Murray-Hundley. "We're very good in technology at saying, 'this generation doesn't get it, let's concentrate on the one behind'."

"It scares the crap out of most people," adds Murray-Hundley. "But look at the generation behind. They give up their data. An 18-20 year-old will give you the whole world."

That we are outraged while Facebook grows ever more powerful is no longer a paradox. It is simply a demographic shift. The appeal of Zuckerberg's trade-off, access for data, is a gamble on social media's popularity and eventual ubiquity. Don't bet against it.

A bad Budget for creativity

The biggest business loser in today's Budget is undoubtedly the video games industry, which lost the tax relief earmarked by Labour’s pre-election budget. It's a massive blow for a sector that annually contributes £1bn to UK GDP. Despite a vague promise of support from Ed Vaizey, the Chancellor this afternoon announced the removal of a tax break he regards as "poorly targeted".

Big mistake. The industry has been lobbying hard for tax relief in the face of tough competition from countries such as France and Canada, which enjoy government subsidies that allow developers to pay more for the best talent.

In the past, the UK has more than punched above its weight in the sector, rivaling games giants Japan and the US. But with more attractive packages available in English-speaking Canada and Australia, or closer to home in France, developers fear a "brain drain" of talented programmers. In a Budget purporting to inject life back into the private sector, Osborne has greatly underestimated the value of one of Britain's most valuable creative industries.