NASA, Dissent & Normalization of Deviance

I’m in the middle of writing a paper about this, but there is much to be learned by engineering-driven organizations from what has happened at NASA with both Challenger and Columbia. Cass Sunstein (cited by Clay Shirky) rightly points to stiffling of dissent, but to my mind that is really just a subset of a broader issue — normalization of deviance in risky cultures — first (and best) identified by Diane Vaughan in her excellent 1997 book “The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA“.

She describes normalization of deviance here in a book chapter about parallels between Challenger and Columbia:

“In all official engineering analyses and launch recommendations prior to the accidents, evidence that the design was not performing as expected was reinterpreted as acceptable and non-deviant, which diminished perceptions of risk throughout the agency.”

For those of you in large engineering-driven organizations, this should sound harrowingly familiar.

The Crack-prentice

I am, to paraphrase, Olivia Newton John, hopelessly devoted to The Apprentice, the new reality show about business. Call it the Crack-prentice for how addictive this show is about a slate of men and women who vie for vain Donald Trump’s (yes, that Donald Trump) financial affection.

The Donald is in fine form, doing equal-time promotion of his empire, himself, and both, while sporting a particularly bad variant of the Donald-do. His “hair” has become like thin, blonde spaghetti that has spent too long in a wind tunnel, and it is truly unnerving.

But I digress. The show is excellent, with the production values you would expect from a Mark Burnett creation. It already has me thinking that all MBA programs should immediately stop requiring the GMAT for would-be business-school students and just force applicants to sell lemonade for a day in lower Manhattan instead — it would be far more effective, and it might even make a little money too.


Can’t get enough Kedrosky? I’m on CNBC’s Kudlow & Cramer today (January 9th) at 5:30 EST. The subject is the economics of offshoring, and, in particular, Infosys’s standout results today.

Fastow vs. Stewart: Bigger is Better

So, here is the math on what prosecutors are looking for in Lea Fastow’s (Enron insider) and Martha Stewart’s (ImClone trading) jail terms, respectively. I measure the terms in YpM — years in jail for every million dollars in the supposed infraction:

Martha Stewart
15 yrs for $45,000 = 33 YpM

Lea Fastow
0.4 yrs for $66-billion = 0.000006 YpM

The moral of this story: If you’re famous and you’re planning to do anything untoward in the financial markets, go for billions or none at all. Word to the wicked.

Paramount & Time-Warner AOL

There was a piece a little while ago in the Financial Times arguing fuzzily that Time Warner would have been better off without AOL. A letter to the editor in today’s FT rebuts that, calling Time-Warner management consistently incompetent — and offers a history lesson in response:

“In 1989 Paramount offered Time’s equity-holders – on an unsolicited basis – $200 for each common share. Seeking the safe harbour of Delaware’s court system, Time and Warner Brothers staunchly rebuffed the Paramount takeover offer, with the result that their executive hierarchy remained happily intact … Allowing for splits, a Time Warner share purchased in 1989 is today worth slightly less than $125 – almost 40 per cent below the price offered by Paramount more than 14 years ago. By comparison, a comparable investment in the Dow Jones index would have more than tripled in value.”

NYSE: We’re Shocked! SEC: We’re Shocked Too!

The NYSE has asked the SEC to investigate the NYSE over the Grasso pay issue. It is a fine example of two cats (the NYSE and SEC) hiding their heads under couches and hoping no-one (Eliot Spitzer) notices that their asses are hanging out.

Here is the NYSE to the SEC:

“…serious damage has been inflicted on the exchange by unreasonable compensation of the previous Chairman and CEO, and by failures of governance and fiduciary responsibility that led to the compensation excesses as well as other injuries. While we believe that you are more capable of pursuing the matter than the exchange itself, we assure you that we will participate or cooperate in any way that is appropriate.”

And here is the SEC to the NYSE:

“The commission’s investigation will seek to determine whether there have been violations of the federal securities laws or NYSE rules. The commission will coordinate its investigation with the New York attorney general, who will seek to determine whether there have been violations of New York laws governing New York non-profit corporations.”

IMF Paper on Dollar Troubles

There was an alternately harrowing and fascinating IMF paper released today on the U.S. economy, deficits, and the outlook for the dollar. Here is a long-ish snippet:

… the emergence of large fiscal deficits and signs that they will be sustained at substantial levels unless corrective action is taken, raises a number of longer term and multilateral concerns.

First, sustained fiscal deficits lower national savings in the United States and will eventually raise real interest rates both in the United States and abroad, thus crowding out private investment. The eventual cost will be lower global productivity and income growth. These effects are discussed in Section 2 of the report.

Second, higher U.S. fiscal deficits means that federal debt will not be brought down as had previously been envisaged, making the impact of an aging population on Social Security and health care programs even more difficult to deal with.

Club Fed for Fastow

According to the Houston Chronicle, former Enron CFO Andrew Fastow is negotiating a plea bargain that would send him to federal prison. He has apparently been offered a 10-year sentence.

It’s not clear whether those figures presume that Mr. Fastow would testify against other Enron executives. It may instead be merely quid pro quo for pleading guilty to some subset of the 98 counts of fraud, money laundering, insider trading and the like with which he is charged for his Enron escapades.

Anyway, all of this just shows how mad things are when it comes to supposed securities fraud. Andrew Fastow gets ten years (or less) for consciously and steadily engineering one of the largest corporate scandals in financial history; but Martha Stewart, who, if anything, was at the receiving end of some trivial inside information, is being told she could go to jail for fifteen years or more.

Patents & University Entrepreneurship

Universities are becoming hot-beds of patenting. The number of patent filings is on the rise at U.S. universities, outpacing the growth in university research spending.

According to AUTM data, research spending is up 30% at U.S. universities in the last five years, while patent filings are up 36%. Over the same period, licensing income has gone from a little less than 2.5% to slightly more than 3% — and up to 7.5% at the twenty-five largest U.S. research schools. University patents are becoming a big deal.

There are plenty of controversies, however, including the current tussle over Columbia University’s apparent attempt to extent its highly profitable Axel patent through submarine techniques. There are also folks who don’t believe that universities should be permitted to patent publicly-funded research, which is a perfectly legitimate philosophical view — albeit a nearly impossible one to now-implement in practise.

Many think that one of the things that set universities loose was the Bayh-Dole Act in 1980. Prior to Bayh-Dole, university inventors couldn’t own their creations. The Federal government did instead, and it granted licenses to university and lab creations on an all-comers, non-exclusive basis. As you can imagine, that didn’t light a fire at very many companies.

Bayh-Dole changed all of that. It permitted exclusive licensing of inventions, with the the government still able to get a royalty-free, non-exclusive license to use on projects for government purposes (i.e., by government contractors). But at the same time, the act permitted universities to retain title to inventions made while funded by the feds.

But did Bayh-Dole really make a difference in patent filings? Intuitively you would think so, but the research in the area has been saying otherwise. It argues that much of the increase in patenting and licensing was driven by changes in intellectual property laws, and in the sorts of groups funding academic research.

There is a new paper out, however, that puts a different spin on things. In the current Journal of Business Venturing, Scott Shane argues that Bayh-Dole has had an effect. But rather than increasing the aggregate number of patents and licenses, its effect has been to redirect researchers’ efforts. He found that “the effectiveness of licensing in a line of business is significantly correlated with university share of patents in the post-Bayh-Dole period, but not in the pre-Bayh-Dole period”. In other words, universities began focusing patenting & licensing in areas where it is easiest to transfer technology.

As Shane point out, while that is interesting in itself, it also points to a problem. To the extent that Bayh-Dole was intended to assist in broadly commercializing embryonic research it has had mixed sucess. The low-hanging licensing fruit is being plucked, but that is really it.

So Long, & Thanks for All the Credit

Excerpts from an email this morning:

In order to provide an orderly & peaceful Exit from the credit based economy, the Board of Security is sponsoring the Operation: Exit for Security, Liberty, Prosperity, Peace & Justice. The Purpose of the Board is to provide the participants of the Exit with a mean to protect their belongings and organise an efficient credit free, free market economy among them.

Chances are that people not participating will, on the short run, suffer very high material losses. Now it is not fun to compete anymore! Sincerely Yours, Office of the Chairman of the Board of Security, Shalom Patrick Hamou

Patrick is apparently a busy and pessimistic fellow, but I guess his last idea didn’t pan out so well.

More broadly, however, what is interesting about this sort of thing is how it is an example of a largely-unremarked streak of financial apocalypticism that exists in investing and economics. Recent examples have been diverse, with entries like the above — and books from Robert Prechter and Ravi Batra — but as long as there have been financial markets there have been people around who think that said markets are long overdue to go to zero.