The cover price for the Harvard Business Review (HBR), a magazine fat on ads and thin on content, is a robust $16.95. But fret not; if you are the savvy business type with an appreciation for a long-term investment, you can save 56% by subscribing for two years and never miss a beat of the black-tie repartee. While being relatable at the cocktail party is certainly important, most business writing fails to provide actionable insight and instead either panders to celebrity CEOs or restates the obvious with slick narrative.
I started thinking about shoddy business writing after reading an article by Benjamin Gomes-Casseres in the HBR entitled Making Mergers, Acquisitions, and Other Business Combinations Work. The author—who, from reading his resume, may in practice truly exhibit expertise—provides three rules for success in business combinations:
First law: The combination must have the potential to create more value than the parties can alone. The ﬁrst law asks these practical questions: How much more value can we create in the market together? What speciﬁc resources must we combine to create this value?
Intuitive and simple heuristics are often enormously practical. In some fields, there exists truth and consistency in simple formulas. In this case, any director that is not acutely aware of these three laws and the accompanying considerations while developing their strategy should be canned. To be fair, this article acts as an executive summary for the author’s book, which likely, or hopefully, offers some quantitative insights (although, as I will explain later, I am dubious any exist), it is nonetheless symbolic of the reasons most business writing, and books, are a waste of time.
What's the matter with business books?
Business books create ex post facto narratives of successful and unsuccessful business ventures—creating an illusion of control that often unjustifiably trumps the unpredictability of markets, the significance of timing, and just straight luck. Sticking with an M&A example, the stock price for the acquiring company in a merger almost always drops in initial trading (no, a stock gaining isn't a harbinger of future success), meaning that the market in aggregate infers so much uncertainty in a merger, beyond company specific conditions, that it interprets the likely outcome as a loss in value.
Business books tend to excessively weight the talent of a CEO in predicting or explaining the success of a firm—to the contrary, experts think the correlation between a CEO’s ability and a firm’s success is at most 0.30 (Kahneman, 2011). This means that the strength (or weakness) of the CEO explains, at most, 30% of the variation in the firm’s outcomes. Similarly, the founders of successful companies are erroneously mythologized. Great CEOs are exceptional mostly in their luck. Once upon a time, Larry Page wanted to sell Google for $1.6 million and Bill Gates recommended another company produce IBM’s operating system.
Finally, for here at least, business books expound general axioms and then pile on fluff to defend them—reading the first and last chapter will usually suffice.
You (mostly) can't predict the future
Duke University conducts an annual survey of CFOs and asks for their predictions of the stock market in the following year. They perform woefully. In fact, there is a—albeit statistically insignificant—negative correlation between their prediction and market performance. That means, in the sample, the market is, on average, slightly more likely to go in the opposite direction of their prediction. This finding adds to the well-documented and atrocious record of market predictions by mutual fund managers, stocks brokers, and other investment advisors.
Like these hubristic sages, an author predicting the future value of a business based on easily articulated traits is likely to be throwing darts in the dark. In The Drunkard's Walk, Leonard Mlodinow explores the role of randomness in the movie industry and the inability of studio executives to evaluate commercial value years in advance of production. You don’t need to take Mlodinow’s data and arguments alone, he quotes the former-CEO of Paramount and Columbia pictures as saying:
“If I had said yes to all the project I turned down, and no to all the other ones I took, it would have worked out about the same."
Similarly, Mlodinow and Nobel Laureate Daniel Kahneman, among many others, question the relevance of expertise in highly variable environments. Mlodinow looks at publishers to illustrate the point: John Grisham’s A Time to Kill was rejected by 26 publishers, Harry Potter was rejected by 5, and The Diary of a Young Girl by Anne Frank was rejected multiple times and called “very dull” and “a dreary record of typical family bickering, petty annoyances and adolescent emotions.” These publishers spent thousands of hours reviewing books to identify commercial potential, but were nonetheless totally unable to spot a gem right in front of them.
Kahneman spends a lot of time in his book Thinking, Fast and Slow detailing the dangers of overconfidence and the false power of a coherent narrative—the book is a masterpiece. For identifying when expert intuition and prediction matters, he identifies two rules of thumb: (1) a sufficiently similar reference case occurs regularly, (2) there are prolonged opportunities to learn these regularities through practice and feedback. Kahneman identifies far too many examples of false confidence in predictions because of optimism (a trait common in almost all leaders), a failure to consider competitors, and a feeling of exceptionality that ignores base rate probabilities (the outcomes of all reference cases). Then again, Kahneman acknowledges that entrepreneurs must possess these irrational qualities or they would never be foolish enough to start a business in the first place.
Are there any good business books?
In October of last year, the Schumpeter column in The Economist offered a profound tidbit of business advice. Noting the corporate fascination with teambuilding—where a CEO leads his colleagues on a whitewater-rafting trip to simulate guiding them through the rapids of the real world (likely a total waste of time and money)—Schumpeter instead suggests that the executive team lock themselves in a hotel for a day to read and discuss Plato. He has a point. You can master the skills specific to your business (programming, economics, engineering, etc.), but you can’t master the innate abilities of a charismatic leader, the predictive acumen of an oracle, or the nonexistent secrets to a successful business. There are just too many moving pieces, too much randomness, and too little control.
Instead, occupying your time with books that teach you to think, be measured in your judgment, and be sufficiently humble, like Plato’s The Republic, will be far more profitable. A few other great books that pop to mind (in addition to Thinking, Fast and Slow and The Drunkard’s Walk) are Zero to One, The Black Swan (nothing to do with the movie), and The Last Lion: Winston Spencer Churchill (Volumes 1 & 2).
I recommend The Last Lion for a slightly different reason than the others. Winston Churchill, although born to privilege, did not follow a linear ascent to glory. He failed over and over and over and was the beneficiary of extraordinary luck. Injuring his shoulder disembarking at the docks of Bombay as a young man, he was later in life unable to draw his sword and enter the intensely bloody fray outside of Khartoum—instead he remained in relative safety atop his horse. Escaping imprisonment during the Boer War and trekking through the enemy territory with a bounty on his head, Churchill happened blindly into a sympathetic miner’s encampment.
Apart from his death-defying forays abroad, Churchill defied assured forecasts of political death on multiple occasions at home. So, what does this have to do with business? Resilience in the face of calamity, the conviction to dust off and keep trying even after repeated failures, and an appreciation for the fickle hand of luck, are attributes common to almost everyone that achieves success, in business or anything else.
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