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Appreciating the rich for how they got there, Part II

We once wrote that the hard-earned success of entrepreneurs is what gives them the inclination and the wherewithal to help support the next generation of high-growth companies.  The wealth created “yesterday” is not stuffed under plump mattresses, it’s used “today” to fund the businesses and innovations that enhance and enrich all our lives.  Most of those savings come from a relatively small fraction of individuals in the top income tax bracket, and to disparage them is to bite the hand that feeds long-run economic growth.

Intel's 4004: the first microprocessor

Intel’s 4004: the first microprocessor

John Steele Gordon, author of “An Empire of Wealth: The Epic History of American Economic Power,” advances the argument in the 6/4/14 Wall Street Journalextreme leaps in innovation, like the microprocessor, bring with them staggering fortunes – but also enrich and enhance all our lives.

(N)o one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services—and lower prices—that the microprocessor made possible. Anyone who has found his way home thanks to a GPS device or has contacted a child thanks to a cellphone appreciates the awesome power of the microprocessor. All of our lives have been enhanced and enriched by the technology.

This sort of social transformation has happened many times before. Whenever a new technology comes along that greatly reduces the cost of a fundamental input to the economy, or makes possible what had previously been impossible, there has always been a flowering of great new fortunes—often far larger than those that came before. The technology opens up many new economic niches, and entrepreneurs rush to take advantage of the new opportunities.

The full-rigged ship that Europeans developed in the 15th century, for instance, was capable of reaching the far corners of the globe. Soon gold and silver were pouring into Europe from the New World, and a brisk trade with India and the East Indies sprang up. The Dutch exploited the new trade so successfully that the historian Simon Schama entitled his 1987 book on this period of Dutch history “The Embarrassment of Riches.”

Steele mentions a few other notable examples:

  • James Watt’s rotary steam engine sparked the Industrial Revolution, causing growth – and thus wealth and job creation – to sharply accelerate.
  • Railroads made transportation cheap and created national markets.  Railroad owners and retailers made fortunes while everyone benefited from easier access to cheaper goods.
  • Edwin Drake’s drilling technique made oil abundant, the Bessemer converter made steel cheap, and both taken together made the automobile possible;  this in turn had spillover effects (and fortunes) in other industries (rubber, glass, road building, etc.)

The Little Miracle Spurring Inequality today is cheap computing power.  Software, hardware, the Internet, and precise inventory control have transformed the world and created huge new fortunes in the process.

To see how fundamental the microprocessor—a dirt-cheap computer on a chip—is, do a thought experiment. Imagine it’s 1970 and someone pushes a button causing every computer in the world to stop working. The average man on the street won’t have noticed anything amiss until his bank statement failed to come in at the end of the month. Push that button today and civilization collapses in seconds. Cars don’t run, phones don’t work, the lights go out, planes can’t land or take off. That is all because the microprocessor is now found in nearly everything more complex than a pencil.

Just as before, that wealth will not be stuffed into mattresses, it will go to work:

Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won’t be taken.

And the risks in any new technology are very real in the highly competitive game that is capitalism. In 1903, 57 automobile companies opened for business in this country, hoping to exploit the new technology. Only the Ford Motor Co. survived the Darwinian struggle to succeed. As Henry Ford’s fortune grew to dazzling levels, some might have decried it, but they also should have rejoiced as he made the automobile affordable for everyman.

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Mt. Everest conquered but not tamed

hillarynorgay61 years ago, on May 29, 1953, New Zealander Edmund Hillary and Nepalese sherpa Tenzing Norgay became the first to reach the summit of Mount Everest, arriving just before noon after spending the night high on the mountain.

The anniversary brings to mind another May (1996) expedition on Everest which ended in deadly disaster.  The details of what went wrong in that May 43 years after Hillary and Norgay’s triumph are recounted by John Krakauer’s Into Thin Air (one of the recommended books on decision-making in The Library in St.Pete.)

air_In the author’s retelling, a series of events led to several climbers inexplicably ignoring the “Two O’Clock Rule,” which says:  if not at the summit by 2:00, turn back because “darkness is not your friend.”   Their descent occurred at night, in a blizzard, as they ran out of supplemental oxygen.  5 people died and others barely escaped with their lives after many hours wandering in the dark while braving subzero temperatures.

That series of events was analyzed by Professor Michael Roberto in a 2002 paper entitled “Lessons from Everest.”  It had struck Professor Roberto that “the disastrous consequences had more to do with individual cognition and group dynamics than with the tactics of mountain climbing.”  He found several factors that caused experienced people to violate their better judgment.

Cognitive biases

3 cognitive biases came into play:

  1. Sunk Cost Fallacy:  The magnitude of the personal investment – $70,000 and weeks of agony – made many reluctant to turn back once so close to the peak.  “Above 26,000 feet the line between appropriate zeal and reckless summit fever becomes grievously thin.”
  2. Overconfidence bias:  The lead guides had impressive track records of success and had overcome adverse conditions before.  One told his team, “We’ve got the Big E figured out.  We’ve got it totally wired.  These days, I’m telling you, we’ve built a Yellow Brick Road to the summit.”   He also “believe(d) 100% I’m coming back” because “I’m going to make all the right choices.”  The overconfidence extended to many other climbers as well.  Krakauer wonders if they weren’t “clinically delusional.”
  3. Recency Effect:  Paying too much attention to recent events.  Climbers had encountered good weather on the mountain in recent years so many of the climbers thought the storm was surprising but in fact it was rather typical.

Team Effectiveness

The team lacked the ‘robust social systems’ in which members’ informal  modus operandi ensure that the decision-making process functions properly.

  1. Climbers were almost strangers and had not had time to develop trusting relationships.
  2. Group members did not feel comfortable expressing dissenting views, in part because one expedition leader had stated, “I will tolerate no dissension up there… my word will be absolute law.”  (Sadly, to protect everyone via enforcement of the Two O’Clock Rule.)
  3. There was an absence of candid discussion due to (a) the deference in the “guide-client protocol” and (b) a pecking order amongst the guides that led “lesser” ones to keep their concerns to themselves.

Complex Interactions and Tight Coupling

Very briefly, “the team fell behind schedule and encountered the dangerous storm because of a complex set of interactions among a customs problem in Russia, Scott Fischer’s acclimatization routine in Nepal, a Montenegrin expedition’s use of rope, a failed negotiation with Outside magazine, and so on.”  There was also no slack in the system, so when there was a problem in one area it triggered failure in another.

The bottom line may be that they violated a sacrosanct rule, but the more interesting question is why?  The unwillingness to question team procedures and exchange ideas openly prevented the group from revising and improving their plans as conditions changed.

Though the stakes are (much) smaller in a high-growth company, an entrepreneur faces similar challenges:  he has a team and a plan, faces a fast-changing environment, and the odds might be long.  Success hinges on creating an environment of mutual accountability in which team members trust and challenge each other.

 

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Which corporate structure is best for a start-up?

business structures 2This article in Entrepreneur suggests that many entrepreneurs give insufficient thought to the corporate structure of their start-ups, that they “check (it) off their list on a weekday night after researching on the web for an hour or so.

LLCs, S-Corps, and C-Corps offer different advantages and restrictions, and choosing poorly can lead to expensive and difficult changes down the road.  There are many complexities and issues to consider and no one right answer.  You can, however, reduce the number of future headaches (and possibly legal bills) if you choose the structure that is most appropriate for both your current situation and your long-term objectives.

Aside from avoiding personal exposure to business liabilities, the main considerations when choosing from among the three structures are i) tax consequences, such as maximizing the benefit of start-up losses, avoiding double taxation, ordinary income versus capital gains treatment and state nexus issues, and ii) corporate governance issues.

C’s and LLC’s tend to dominate the landscape of venture-backed companies because an S allows only up to 100 shareholders and one class of stock, and does not allow corporations or partnerships to be shareholders.

We have invested in both C’s and LLC’s with success over the years, and wrote this White Paper on the topic to provide an unbiased perspective and help educate entrepreneurs on the benefits and potential drawbacks of each structure.

LLC or C

LLC or C – comparison table

We invite you to read the White Paper, but, very briefly:  in our experience, very few venture-backed LLCs benefit much in the area of tax avoidance and the defined governance structure of a C-corp is almost always preferable.  Moreover, the high legal costs and ambiguity associated with some Operating Agreements that accompany the LLC structure make it a potentially disadvan- tageous approach relative to the C-corp.

That being said, we have seen situations where an LLC structure makes sense for everyone involved and we discuss that with entrepreneurs when it is the case.

Think hard about your long term goals for the business when getting advice on your legal structure.  Just as people shouldn’t decide to have children for the tax benefits, we advise that you don’t view tax considerations in a vacuum when choosing the legal structure of your business.

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BPV invests in PowerDMS

logo-PowerDMSBallast Point Ventures is pleased to announce a growth equity investment in PowerDMS, a cloud-based document management software company whose platform organizes policies and procedures online, allowing companies to distribute crucial documents collaboratively, message employees and capture signatures.  Proceeds of the investment will be used to augment the company’s sales and marketing team and enhance its technology platform by offering new features to its customer base, which includes customers in law enforcement, public safety, healthcare, and retail.

Founded in 2001 by CEO Josh Brown, the robust software platform provides practical tools necessary to organize and manage crucial documents and industry standards, thereby helping organizations maintain compliance with constantly evolving industry accreditation protocols. Created as a software-as-a-service (SaaS) model, PowerDMS combines attributes of Governance and Risk Compliance (GRC) and Enterprise Content Management (ECM) into its software platform.

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NFL combine drills actually pack (some) predictive power

ESPN the Magazine asks, of the NFL Combine’s influence on the Draft, “How do you weigh a week of drills against three or four years of a player’s work?

NFL draftCiting regression analysis of combine metrics dating back to 2006, by Jeff Phillips, MIT grad and principal of the Parthenon Group, columnist Peter Keating writes:

If you look at certain combine stats, they explain on average 20 percent of how well players perform during their first three pro seasons.  That’s probably a weaker relationship than most team executives would want, but it aint zero…  Phillips found that different measures matter for different positions.  For instance, 40-yard dash time – sometimes derided by analysts who argue that players don’t actually have to run 40-yard dashes in games – is the only skill that’s significant for all positions.  A players’ weight is important for offensive linemen, defensive linemen and linebackers, while scores in the three-cone drill (which measures agility) matter for running backs and defensive backs.  Other metrics are narrower in their predictive value… definitive answers haven’t emerged yet from the fledgling research.

The data don’t predict a player’s ceiling, the “perfect storm awesomeness of Adrian Peterson or Patrick Willis.”

The raw data simply don’t know what kind of system a player will enter, or talent he’ll have around him, or luck he’ll have with injuries, or intangibles he possesses.  But (the) stats do a pretty good job of separating the potential stars from likely busts…  So looking at extreme cases from the class of 2014, Jadeveon Clowney’s 40 time was 0.3 of a second faster than any of the five best defensive linemen drafted in the past eight years, and his Phillips stats are better than 99 percent of players at his position.  Among less famous prospects, keep a draft-day eye on Brandin Cooks, a receiver from Oregon State, whose blazing speed helped him achieve the third-best blend of stats among all wideouts since 2006… [picked Rd 1, #20 by the Saints] watch Minnesota’s Ra’Shede Hageman too [picked Rd 2, #5, #37 overall by the Falcons].  Just 11 defensive linemen over 300 pounds in Phillip’s database have shown better speed than Hageman did at the combine, and eight of them have gone on to successful NFL careers.

On the flip side, Ha Ha Clinton-Dix could go in the top 10 but he was below median in every key component of Phillip’s statistics for defensive backs at this year’s combine [picked Rd 1, #21 by the Packers].

We recently made a crucial distinction in another post on the topic of data and decision-making, entitled The greatest comeback ever and the limits of decision modelssome outcomes can be influenced and some cannot.  Big data may help make accurate predictions or guide knotty optimization choices or help avoid common biases, but it doesn’t control events.  Models can predict the rainfall and days of sunshine on a given farm in central Iowa but can’t change the weather.  A top draft pick may or may not develop based on the system, surrounding talent, &etc.

In our experience the best results often come from a combination of deliberation and intuition.  Too much data can lead to analysis paralysis, common sense can be a shockingly unreliable guide, and those who rely on intuition alone tend to overestimate its effectiveness.  (They recall the times it served them well and forget the times it didn’t.)

In the wake of the last financial crisis, BoE Director of Financial Stability Andrew Haldane deployed an analogy about a Frisbee-catching dog to explain how complex (and sometimes frivolous) attempts at regulation push the limits of data modeling or even the nature of knowledge itself.  The dog can catch the Frisbee despite the complex physics involved because the dog keeps it simple:  run at a speed so that the angle of gaze to the Frisbee remains roughly constant.

So while old-fashioned intuition is not out of date it’s also unwise to rely only on one’s instincts to decide when to rely on one’s instincts.  The dog’s doing just fine, but if it involves more than a Frisbee he might want to crunch some numbers too.

Specifically about this year’s draft:  we’re never quite sure what to make of the draft, it’s so over-hyped.  Clowney seemed like the obvious first pick and Manziel is high risk, so that worked out as expected.  A pretty efficient market overall given the information available to the teams…

 

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Our column in the Business Journal

tbbj2On April 7 a syndicated column entitled “Why your company should avoid venture capital” ran in several City Business Journals.  The piece struck us as a bit uncharitable and off point, so we asked our hometown Tampa Bay Business Journal for the chance to reply, to which they graciously agreed.  Our column ran today and can be found here.  (Or if you prefer a .pdf, here.)

Early stage investors don’t always fit neatly into categories and take varied approaches to working with entrepreneurs, so one must be careful not to paint with too broad a brush when criticizing or praising.  However the industry as a whole is indisputably critical to the nation’s wealth and well-being.

20% of U.S. gross national product is created by companies that were formed through venture backing. Everybody knows Google and Facebook, and before them Apple and Intel, but there are countless lesser known venture-backed companies throughout the country who have contributed to economic growth and created high quality jobs.  Venture capital is the one asset class that consistently creates the next generation of great companies and jobs and it doesn’t ask for (or need) bail-outs.

 

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Toyota escapes to Texas

texansOn Monday we tweeted a brief story about this but today’s Wall Street Journal does a more complete job of “counting the ways” that is a must-share.  (This might count as a check-raise in social media?  Tweet then blog?)

Toyota’s chief executive for North America Jim Lentz stressed that its move isn’t motivated by [targeted] incentives. He listed the friendly Texas business climate, proximity to other Toyota operations and two major airports, as well as such lifestyle benefits as affordable housing and zero income tax.

The bigger picture is that Texas has become more economically competitive while California has become less so, particularly for energy- and labor-intensive industries. Let us count the ways.

Start with right-to-work laws in southern states that have limited unionization and thus labor costs. Just 4.8% of workers in Texas and 6.1% in Tennessee belong to a union compared to 16.4% in California. Real estate is also cheaper in the South due to less restrictive zoning and environmental regulations, and taxes are lower. According to the Tax Foundation, the state-local tax burden is more than 50% higher in California than in Tennessee and Texas, which don’t levy a personal income tax. California’s top 13.3% marginal rate is the highest in the country.

Electricity prices are also about 50% higher in California than in the South due to the Golden State’s renewable-energy mandate, and its gas is 70 to 80 cents per gallon more expensive because of taxes and blending requirements.

The hostility to fossil fuels has cut California’s oil production in half from its 1985 peak while output in Texas has doubled in three years and lifted incomes. The Bureau of Economic Analysis has ranked Midland the country’s fastest growing metropolitan area in personal income for the past three years. Nearby Odessa was second for the last two. Between 2008 and 2012, personal income grew 8.05% in Midland and 6.98% in Odessa compared to 4.48% in San Jose and 1.81% in Los Angeles. In March, the unemployment rate was 3.2% in Odessa versus 6.8% in San Jose and 9.7% in L.A.

No city epitomizes California’s malaise better than Los Angeles, which hasn’t recovered its mojo since the post-Cold War aerospace wind-down. Since 1990 its employment base has declined by 3.1%, which is more than even Detroit (-2.8%). Job growth in Dallas, Houston and San Antonio exceeded 50% over the same period.

The article later cites a compelling datum about the Rise of the High-Tech South and what Joel Kotkin has called the end of the California era

According to TechAmerica Foundation, Texas in 2012 surpassed California in high-tech exports. The completion of the Panama Canal’s expansion next year will further erode what’s left of California’s commercial edge.

…and provides a money quote from California’s governor Jerry Brown about the flight of high-quality jobs from his state:

We’ve got a few problems, we have lots of little burdens and regulations and taxes,” the Governor said on Monday, “but smart people figure out how to make it.” California’s problem is that smart people have figured out they can make it better elsewhere.

The growth corridors of the high-tech South enjoy several advantages familiar to NVSE readers: growth-oriented tax policieslower public sector debt burdens, stronger job creation, the best climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

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Untangling skill and luck in sports and business

image2

David Tyree, SB XLVI

In the era of big data, in which everything is calculable, is there such a thing as luck anymore?

So asks Entrepreneur magazine, of Michael Mauboussin, author of The Success Equation.  He thinks the role of luck in business, investing, and sports is greater than ever because technology and best practices are so widely disseminated and articulated:

The difference between the very best players and the average players is less today than it was in the past.  If skill is more uniform, and luck stays the same, that means luck actually becomes more important in determining outcomes.  It’s everywhere you look.  But one area where you can see it very readily is in sports: In 1941, Ted Williams became Major League Baseball’s last player to hit over .400 in a single season.  Why has no one been able to do that since?  The answer is because skill is much more uniform today.

A more recent baseball example would be “Moneyball,” which gave the Oakland A’s an advantage that was first dismissed, then disparaged, then successfully copied by other baseball clubs and other sports.  (This video provides a brief overview at our YouTube channel.)

Mauboussin goes on to argue that while you can’t make your own luck, you can manage it:

One way comes from Colonel Blotto, a model from game theory, which says if you and I are competing with one another, and you’re the stronger player, your goal should be to simplify the game to make sure that your skill overwhelms mine.  By contrast, if you’re the underdog, you want to complicate the game, to add dimension to the competition.  That will dilute the strength of the stronger player.  In entrepreneurship, this would be disruptive innovation.  In warfare, this would be guerrilla tactics.  There’s a long history about this in military strategy, corporate innovation, etc.  You’re basically changing the nature of the game so luck becomes more important.

If you can’t make luck, perhaps you can create the circumstances for it to show up.  In Four traits that drive entrepreneurial success we quote author Anthony Tjan, who recommends humility, curiosity, and optimism towards relationships:

In many instances, when we talk to people who describe themselves as lucky, it’s really their outlook toward relationships that helps them create the circumstances for luck, and their attitude helps them take advantage of it… There are plenty of times when you’re going to conferences or cocktail parties, and you’re thinking about where there’s a fit [in making a connection].  You’re trying to quickly assess and screen value, and we all fall prey to that.  People who are laid-back and luck-driven are the ones who discover the wallflowers, and they benefit disproportionately later in life from some of those relationships…  There are many great leaders who, if you met them at a cocktail party, you’d just skip over because they have a different personality type…  Lucky people have an openness, an authenticity, and a generosity toward embracing people – without overthinking ‘what’s the value exchange’?  It’s just, that’s an interesting person  Luck alone doesn’t explain it.  [Most people] next to that same person probably wouldn’t have realized that opportunity because of their attitude.  They probably wouldn’t have embraced that moment.

Luck is often mislabeled in business.  A better word might be serendipitythe happy accident responsible for many remarkable innovations:  Gmail, Aspirin, the Pill, insulin, penicillin, antihistamines, the smallpox vaccine, Teflon, Velcro, Nylon, Ivory Soap, the Post-It note…

The term serendipity was coined in the 18th-century by novelist Horace Walpole, inspired by the Persian fairy tale about three princes traveling through the land of Serendip.  They “were always making discoveries, by accidents and sagacity, of things they were not in quest of.”  What distinguished their “abilities” from simple luck was that they could see meaningful combinations where others did not.

Happy accidents may be more a matter of the right environment than the the right processResearch from Harvard Business School suggests that serendipity is a close relative of creativity and can be encouraged by a few organizational factors.  Serendipity:

  • Benefits from scarcity (forcing people to be creative) and from a degree of sloppiness, tenacity, and dissent
  • Depends partially on socialization (who you share offices and interests with)
  • Gets a boost from tinkering, especially when co-workers tinker with resources for things they care about personally

To this list we might add:  maintaining a high-trust environment, allowing people to play with mistakes, encouraging trial and error, and accepting an “optimal degree of wastefulness” in which minds wander and activity can seem directionless.

 

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The entrepreneurial impulse and epistemic humility

Over at the HBS Blog Network, Matt Reilly points out that “it’s easy” to make the argument that large companies struggle to innovate “because they need to reorient their attitudes toward failure” and “not only tolerate but celebrate the fruitless pilots and instructive flops that are an inevitable part of the process.”

He then cites a new Accenture Survey about entrepreneurial culture that digs a little deeper and finds that the “entrepreneurial impulse” isn’t destroyed, it’s merely channeled in other directions.

In spite of the challenges, the majority of employees report having initiated an entrepreneurial pursuit at their companies…  Looking more closely at these employee innovations, however, the overwhelming majority had to do with internal programs and processes; 54 percent were limited to the workings of the business unit in which the employee worked while another 31 percent improved processes or created programs that crossed unit boundaries. That leaves just 15 percent whose pursuits were focused on externally-focused products – the innovations that companies are most rewarded for in the marketplace.

One interpretation of these findings is that employees have an entrepreneurial impulse that even time constraints and unsupportive management can’t destroy, but it is being channeled in a direction that doesn’t match their companies’ urgent need for market-facing innovation. And what’s responsible for the diversion? Again, I would point the finger at the typical company’s unhealthy response to any foray that visibly fails.

Stupid experimentation

Stupid experimentation?

The entrepreneurial impulse thrives in a high-trust environment that allows people to play with mistakes.   In Stupid Experimentation (May 2012) we cited author Jim Manzi, who believes innovation is based on “epistemic humility.”

“Many things about our company turned out differently than we had expected…  The Hayekian knowledge problem is not a mere abstraction…  External analysis can be useful for rapidly coming up to speed on an unfamiliar topic, or for understanding a relatively static business environment.  But at the creative frontier of the economy, and at the moment of innovation, insight is inseparable from action.  Only later do analysts look back, observe what happened, and seek to collate this into categories, abstractions and patterns.

“More generally, innovation appears to be built upon the kind of trial-and-error learning mediated by markets.  It requires that we allow people to do things that seem stupid to most informed observers — even though we know that most of these would-be innovators will in fact fail.  This is premised on epistemic humility.  We should not unduly restrain experimentation, because we are not sure we are right about very much.”

Failure is a by-product of pushing the envelope and can be counted on to make a cameo in any endeavor.  It can be a great teacher, it’s the secret to national wealth, and “useful” failures can help prevent catastrophic ones.  In our business, where “failure” is not uncommon, it’s also important to learn how to fail the right way.

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Power changes the way the brain operates

Companies are human networks that suffer when transparency and teamwork are supplanted by hidden agendas and diverted resources.

So says the March issue of Entrepreneur, which urges us to “just follow the bottlenecks and the bickering” to the root of many start-up difficulties:  empire builders.

Empire building appeals to our primitive limbic system, the emotional hub of our ancient brains, where we “initiate impulsive actions without conscious direction.

Power corrupts, and we know exactly what it corrupts:  empathy…  researcher Ana Guinote (University of Kent) found that powerful people tend to ignore peripheral data and don’t process information about the less powerful folks around them.

There’s evidence that power actually changes the way the brain sees others.  A 2013 study by researchers at the University of Toronto and Wilfrid Laurier University in Waterloo, Canada, tracked how the brain’s motor resonance system, which mimics the actions of others through what are known as mirror neurons and helps us relate, responded in high-power and low-power individuals.  The high-power individuals had less motor simulation, “reduced interpersonal sensitivity” and “decreased processing of social input.”  As a result, the powerful have decreased recognition of others’ concerns, allowing them to throw their weight around without qualm.

That gives empire builders the control they need to reduce the fears – insecurity, imperfection, loss of status – that fuel their pursuit of external validation.

However, the bumps [from the neurotransmitter dopamine] to the striatum and ego fade, since they’re based on the gaze of others, and when they do, the fears returns.

This new research confirms the empirical evidence we cited a little over four years ago (hat tip to Professor Michael Roberto):  it’s not power in and of itself that corrupts, but the leader’s sense of entitlement to that power.  Those with more humility – for lack of a better term - about how high they’ve climbed seem to be harder judges of their own behavior than those who instead believe It’s Good To Be The King.  Professor Roberto:

The Economist reports on some new research by psychologists Joris Lammers and Adam Galinsky.  In an experiment they conducted, they examined people in four different states:  1) high power, believed to be achieved legitimately, 2) low power, believed to be legitimate, 3) high power, believed to be achieved illegitimately, 4) low power believed to be illegitimate.

These scholars found that high power individuals who believed that, “they were entitled to their power readily engaged in acts of moral hypocrisy.” On the other hand, low power individuals did not engage in moral hypocrisy.  In fact, they tended to be harder on themselves than on others, when judging immoral behavior (such as stealing an abandoned bicycle). Lammers and Galinsky coined the term “hypercrisy” to describe that behavior.  Now, here is the most interesting part: the high power individuals who believed that they had been ascribed that power, but were not really entitled to it, actually behaved just as the low power individuals did. What’s the conclusion?  It appears that the feeling of entitlement among powerful individuals actually becomes the fundamental driver of misbehavior and immoral behavior.  Of course, we all knew this intuitively, but the stark findings here provide some persuasive empirical evidence, while also showing us the interesting “harsher on themselves than others” effect for low power individuals.

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