Hot Pants Investing

I watched Mike Krzyzewski’s first Duke win from the stands in Cameron Indoor Stadium as a student in 1980 and his fifth national championship victory earlier this month at home, on television, with my grandchildren. I’ve probably seen a majority of the games in-between one way or another. Coach K is an icon, and widely regarded as perhaps the best college basketball coach of all-time. He is the winningest college basketball coach of all-time. But when has hired 35 years ago, he wasn’t even generally considered to be in the running for the job. During the entire month-long coaching search, Krzyzewski’s name never appeared in any North Carolina newspaper as even a long-shot candidate for the job. No radio station nor any television station suggested him as a possibility.

Then Duke Athletic Director Tom Butters insisted that he was getting the “brightest young coaching talent in America” to lead his basketball program (video from the hiring news conference here – notice how “Krzyzewski” is repeatedly mispronounced in the report) when he hired Coach K. There was no live coverage of any kind. The local morning paper had reported that one of “three Ws” – Bob Weltlich of Ole Miss, Old Dominion’s Paul Webb or then top Duke assistant Bob Wenzel – was going to get the job. But Butters hired the West Point graduate, then just 33 years old and coming off a losing season at his alma mater. Butters had ultimately listened to Bob Knight, who told him that Krzyzewski had his own good attributes without the bad.  The headline in The Chronicle (Duke’s student newspaper) was “Krzyzewski: This is Not a Typo.” Ironically, the local afternoon newspaper got the scoop several hours before the press conference, but it was after deadline and there was nowhere to report it.

This story seems quaint today, with the idea that a major college basketball hiring could remain unreported and largely secret until the press conference and that the coach hired had not even been considered a candidate is appropriately presumed to be impossible in this digital age. Obviously, times have changed. To get at what that sort of change means to our culture and to the financial services business, we have to go back into ancient history, even before 1980.

Over half a billion years ago, the very primitive life forms that had existed for about three and a half billion years were simple, blind scavengers. But in an astonishingly short period of time, via what has been called the Cambrian Explosion, there was a sudden and dramatic growth and change in biological species. Organisms developed new body shapes, new organs, as well as new predation strategies and defenses to counteract them. How and why this happened, especially as if all at once, has been paleontology’s greatest mystery.

According to the “light switch” hypothesis offered by University of Oxford zoologist Andrew Parker, it was an increase in the clarity of seawater that led to the evolution of eyes and thus to the advent of this explosive change. When your enemy can see you and find you, and vice versa, the dynamics of those relationships change dramatically, providing an impetus for all kinds of evolutionary adaptation toward hunting skills, armor, pursuit, evasive techniques and the like, all driven by vision. With (half-hearted) apologies to the great James Brown, everybody (indeed, every living thing) uses what they got to get what they want (or need).

Whether or not Parker’s hypothesis ultimately holds up, his approach makes great intuitive sense and offers real explanatory power, both about the past and about the future. In the March 2015 Scientific American, Daniel Dennett of Tufts and Deb Roy of MIT, who is also Twitter’s chief media scientist, analogizing to Parker’s “light switch,” wrote about the society-altering consequences of digital transparency. Sunlight may be the best of disinfectants, as U.S. Supreme Court Justice Louis Brandeis famously wrote, but many modern institutions, including governments, businesses and markets, have developed in a “relatively murky epistemological environment, in which most knowledge was local, secrets were easily kept and individuals were, if not blind, myopic. When these organizations suddenly find themselves exposed to daylight, they quickly discover that they can no longer rely on old methods; they must respond to the new transparency or go extinct.”

The internet has made the world much smaller and more decentralized. Moreover, digital communication and information access is (quite suddenly) lifting the veil around many institutions and sources of information that were once shrouded in mystery. The essence of this explosive change is transparency, Dennett and Roy argue, and it will transform 21st Century culture no less than the Cambrian Explosion transformed paleontology.

“We can now see further, faster, and more cheaply and easily than ever before—and we can be seen. And you and I can see that everyone can see what we see, in a recursive hall of mirrors of mutual knowledge that both enables and hobbles. The age-old game of hide-and-seek that has shaped all life on the planet has suddenly shifted its playing field, its equipment and its rules. The players who cannot adjust will not last long.”

As during the Cambrian period, organizations dealing with the new transparency today tend to respond defensively first. It’s natural to want to protect current benefits when they are challenged. However, forward-thinking adaptation that takes advantage of the new reality is the longer-term key to survival.

This new transparency means that the balance of power between customers and those trying to serve and profit from them is unalterably changed and changing. Marketing could once overcome public criticism most of the time. Doing something stupid didn’t always come to light. The failure to act in the best interests of consumers could typically be kept hidden from view.

No longer.

Large, monolithic organizations are no longer required to make a big impact upon society, culture and the markets either. Small groups of committed people, armed with social media skill, can excel “at the kind of fast, open, responsive communication the new transparency demands.” Indeed, “[a]s the pressures of mutual transparency increase, we will either witness the evolution of novel organizational arrangements that are far more decentralized than today’s large organizations, or we will find that Darwinian pressures select for smaller organizations, heralding an era of ‘too big to succeed’.”

This new era is a reality, whatever one thinks of its likely features, benefits, problems and consequences. However, as Dennett and Roy make plain, there can be no denying that this “new transparency will lead to a…proliferation of tools and techniques for information warfare: campaigns to discredit sources, preemptive strikes, stings, and more.” Misinformation and exposure will remain constant threats.

Transparency can be a two-edged sword, of course. Secrecy can be dangerous indeed, even if and as it is sometimes necessary. Businesses have an interest in protecting what is truly proprietary. One of the fundamental insights of game theory is the need for certain secrets to be kept if success is to be achieved.

The financial services industry has been particularly adept at thwarting transparency with respect to its goals, products and processes, keeping customers uninformed or misinformed about the products they sell and the services they provide. As a consequence, we feature money management strategies that aren’t likely to work and routinely don’t work, products with hidden and excessive fees, as well as needless, often counterproductive complexity. We insist that we aren’t really accountable to our customers. We push what is easily sold and what pays us the most instead of what might actually work. We are not anxious to communicate clearly, thoroughly and accurately.

We talk a good game about serving our clients’ interests, but the key goals still generally remain market share, revenue enhancement and the limitation of liability. Our key tool is still misinformation in the guise of disclosure, delivered by snail-mail whenever possible. Efforts to adapt to this new digital transparency with consumer-friendly approaches and strategies are sure to be opposed at every turn by entrenched interests. But as Joel Brenner, former senior counsel at the National Security Agency, noted with respect to the sudden shift in the agency’s operating environment (post Snowden), “Very few things will be secret anymore, and those things which are kept secret won’t stay secret very long.”

In the financial services industry, there is precious little that ought to remain secret. Instead of trying to maintain the self-serving secrecy that has dominated our industry for so long, especially because such secrets will keep getting exposed sooner and sooner, the key to our longer-term survival will be to re-make who we are and what we do to serve clients in a transparent future. That will mean true transparency – not the faux-transparency (think “disclosure”) our industry uses to protect its own interests. It will mean clearly and fully articulating what we do and why there are (data-based) reasons to think we can accomplish what ought to be accomplished. It will mean an honest appraisal of our fees and their justification. It will mean serving our clients’ interests instead of our own. It will mean more truth-telling and less sales pitch.

This new paradigm won’t be ushered in overnight. The Cambrian “explosion” still took at least ten million years. But make no mistake, the change is inevitable. Our choice is whether to delay, avoid and obfuscate to protect the status quo for as long as we can or to create new strategies, products, and structures that will survive and thrive in a new and fully transparent financial world. I’d prefer a jump-start on the future rather than a life of wallowing in past (alleged) glories.

As James Brown unambiguously describes, people will remain self-interested as long as there are people. But thanks to the transparency offered by digital media, what the financial services industry’s got to work with is much less and much less potent than it used to be and it is dissipating constantly. We can still pull on the hot pants, but we don’t look nearly as good as we used to. And we will look worse and worse as time goes on. Maybe we should try on some new clothes instead.

6 thoughts on “Hot Pants Investing

  1. Pingback: What We're Reading This Morning — April 21, 2015

  2. Pingback: connecting.the.dots

  3. Pingback: Things People in the Finance Industry Don't Want You to Know - A Wealth of Common SenseA Wealth of Common Sense

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