“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” -Mark Twain
Can a single person transform your organization?
Of course, we’d all like to believe this is true.
But I’m skeptical.
Because I worked for many years with synagogues, I know far too many congregations that hoped that their new rabbi would fix every single problem facing them, and almost as many congregations that were disappointed a few years later. Most of the time, it’s not that the rabbi “failed,” it’s that the expectations set for the rabbi were unrealistic.
Transformation due to a single person is not impossible, but it is rare.
And because I’ve described my struggles with being considered a “one-man wrecking crew,”1 I’ve also been on the receiving end of people setting out-of-whack expectations of me. And while it’s bad enough for search committees in nonprofits to set unrealistic expectations, it’s even worse when we believe the unrealistic expectations set about ourselves by others. If anything, the most effective leaders I know master lowering expectations so that people regularly experience the joy of beating them.
In fairness, Charlie Munger knew that (at the 2:31 mark)…
All leaders must manage expectations.
But it’s not easy, and I think you know why…
Rational Expectations
Consider the following hypothetical:
Organization X is a non-profit raising a little over $150,000 annually.
When a search committee creates a job description for a new CEO, the search chair is adamant that they insist that after three years, the new CEO must raise $2,000,000 annually.
A new CEO was hired, and after three years, largely due to the CEO’s efforts, the organization was raising $1,000,000 per year.
In this scenario, how would you evaluate the performance of the CEO?
Knowing nothing about the organization, you’d probably look at this CEO and consider them a phenomenal success. After all, if fundraising is the main measure of success, the organization is fundraising 6.6 times more than when the CEO was hired. Sounds simple, right?
Well, it depends on how you are looking at it.
Remember, the search committee chair said that the CEO needs to raise $2,000,000, which means that, by the criteria set by the search committee, the CEO missed their numbers by 50%.
So that means the CEO is a failure, right?
Also, not exactly.
In this scenario, the primary fault lies with the search committee for setting an unrealistic goal (and for the CEO agreeing to that goal.) As a result, not only do they lack an understanding of what’s reasonable, but someone might actually be foolish enough to suggest that the CEO should be fired for failure to meet their unrealistic expectations.
Meet the theory of rational expectations.
First proposed by John Muth, EconLib defines rational expectations as “economic situations in which the outcome depends partly on what people expect to happen.”2 Muth’s article examines financial markets, and Muth argues that most theories of market fluctuations do ”not include an explanation of the way expectations are formed.”3 Muth and later theorists argue that people form their expectations based on their information and how that decision will maximize their self-interest, and thus whether or not an expectation was rational depends on how people made a decision based on the information available to them.
Returning to our search committee, we should not judge the committee’s decision based on the pronouncement of one person but on what was a likely result based on the information the committee had. Ironically, the committee made a great decision but may be too blind to see it.
The Loser’s Curse
No book this week. Just an article.
You’re welcome.
To probe more deeply into the question of rational expectations and decision-making, let’s turn to a secular holiday that wrapped up yesterday: the NFL Draft.
I love the NFL Draft, not just because my Baltimore Ravens excel in it and Mel Kiper Jr. loves us. (I say “we” like I’m on the team.)4
No, the NFL Draft is an excellent case study for people making critical decisions on live television that others will dissect for years to come. These decisions have millions, sometimes billions, of dollars at stake.
Cade Massey and our friend Richard Thaler (M&T) did a statistical analysis of what NFL teams should do to maximize their chances of success in the NFL Draft.
Their big takeaway?
Trade down.
A casual observer of any draft knows that the earliest picks in the draft are the ones dissected the most on television, particularly the first pick. Given all of the information available, one might conclude that teams always pick players first in the draft who end up making the Hall of Fame.
Wrong.
On the contrary, M&T finds, "Rather than a treasure, the right to pick first appears to be a curse,”5 and, at best, success is a coin flip. If this seems odd, I get it. Our assumption is that the team that picks first always picks the best player, but that’s not the case for a couple of reasons:
Anyone who follows football knows plenty of examples of number-one picks who provided almost no value to their teams (e.g., JaMarcus Russell, Art Schlichter, Ki-Jana Carter, etc.).
Furthermore, the higher a player is picked in the NFL draft, the greater their starting salary. As a result, in their analysis of the surplus value of draft picks, M&T finds that “Because top picks are paid so much, there is little room for a player to exceed expectations greatly, but when top picks turn out to be complete busts, tens of millions of dollars are wasted.”6
In other words, while Peyton Manning was the Indianapolis Colts' amazing number-one draft pick, it’s hard to argue that he greatly exceeded his expected value as the first pick; he achieved exactly what the Colts hoped he’d achieve.
However, any Patriots fan knows that Tom Brady was the 199th selection in the 2000 NFL Draft, massively exceeding the value of a conventional sixth-round draft pick. M&T actually says, “If picks are valued by the surplus they produce, then the first pick in the first round is the worst pick in the round, not the best.”7
To address this challenge, M&T argues that the best strategy for teams with the highest draft picks is to trade down, accruing more draft picks by giving away a seemingly prized possession. In M&T’s model, the teams that tend to trade their higher picks win, on average, 1.5 more games per season because those teams end up with more draft picks over time.8 Since success in the draft is essentially a coin flip, teams are always better off getting more opportunities to pick.
Of course, the Jewish world has nothing like the NFL Draft (although I’ve heard of camps where unit heads get to select counselors in a draft, although they prefer not to advertise this.) However, consider this finding of M&T and how it can relate to all of us:
“At its most general, these findings stand as a reminder that decision-makers often know less than they think they know. This lesson has been implicated in disaster after disaster, from financial markets to international affairs. Closer to the topic at hand, football players are surely not the only employees whose future performance is difficult to predict. In fact, football teams almost certainly are in a better position to predict performance than most employers choosing workers, whether newly minted MBAs or the next CEO…The problem is not that future performance is difficult to predict, but that decision-makers do not appreciate how difficult it is.”9
Some readers of Moneyball Judaism are fortunate to work or lead organizations where many want to be selected, whether for jobs, fellowships, grant applications, etc. If an analysis of the highly public NFL Draft gives mixed results on the ability to pick winners, it’s reasonable to assume that the key decisions of Jewish organizations are even more fraught since organizations in the Jewish world lack even a fraction of the data available to football teams.
But returning to my original example, don’t succumb to fatalism. The key implication for rational expectations in our organizations is that realistically calibrating how much success is possible may be even more important than the decision itself. Because success is much more of a coin flip than any of us would like to believe.
The Meb Favor Show
30 Million
Lina Kahn, the chair of the Federal Trade Commission, estimates that almost 30 million Americans are affected by non-compete agreements from their employers. While most of these workers make high salaries, over 10% of workers who make $20 per hour or less are covered by non-compete agreements.
What I Read This Week
NFL Teams Know the Best Way to Draft. So Why Don’t They?: Thaler and Massey’s paper is not new, but the evidence is well-established. But adoption has been slow for many reasons you’d expect.
The Columbine Killers Fan Club: Yes, this is a real title. As a child who grew up during Columbine, I’m horrified that this is a real thing, but it is.
Middle Managers Drive Transformation: As organizations grow, they possess more experienced people who are not newcomers to the organization but not top leadership. These are your middle managers, and they are the most critical people to transformation.
Primo Levi in an Age of Dehumanization: Towards the end of Pesah, I start thinking about Yom HaShoah. Read and learn.
Stress Redesigns Our Brains: I didn’t believe it until I read this article. Now, I’m a believer. As always, I’m wrong a lot.
But both definitely help.
Ibid., 1490.
Ibid., 1493.
Ibid., 1492.
Ibid., 1493-1494.