Saturday, December 20, 2008

The rise of the fuddy duddy?

Don't plan on it.

There is something about human nature where we follow the bright, the sexy, the shiny, the amazing. In short we want to believe nonsense. It is so rooted in our psyche that many cultures have parables about fooling ourselves into believing something absurd is true. Who knows with toddlers busy texting, playing video games and surfing the web, but does anyone remember the fable "The Emperor's New Clothes"? Nowhere is this greater than Silicon Valley, where there is a lot of self congratulatory back slapping that we are not Wall Street. I as usual reserve judgment.

I was originally going to title this post "In plain sight, Pt III" but that would get too old, and to be honest I'd be at part 12,653 if I tracked these stories across the news. The next one is Junior league compared to Bernie Madoff and comes from Denmark about the "Entrepreneur of the Year" where a former body builder managed to create the illusion of a high tech company that was really a series of shell companies buying from each other. The fact that this is so old school for anyone who read about a little Houston company called "Enron" that basically did the same thing with "special purpose entities" Do we ever learn, apparently not. What's even better is the "Entrepreneur of the Year" award was issued by auditor Ernst and Young. But it gets better:

KPMG audited IT Factory's accounts from 2005 through 2007. Deloitte did the same in the previous two years. From 2003 through 2007, IT Factory reported that its revenue grew 69 times and its profit rose 288 times, to 121 million kroner ($22 million). This year, says Mr. Jensby, the chairman, IT Factory expected to roughly quadruple its profit.

KPMG in Denmark says it is "shocked" and "cooperating with police." Deloitte's Danish unit said it has double-checked its 2003 and 2004 audits and found no problems.

Ernst & Young, for its part, has now withdrawn the three awards it gave to IT Factory on the day Mr. Bagger took flight. "We feel deceived," said Søren Strøm, head of Ernst & Young's "Entrepreneur of the Year" program, in a statement. The accounting firm, he added, is "unable to understand the last few days' developments."

It smells of Arthur Andersen all over again, but this is bush league (but given the size of the recent fiasco, Bush league may take on new meaning) in the size. Auditing is so flawed because the agency problem is so prominent and yet we ignore it. (Though to be honest, I'm not sure how to solve it, with a public company who pays for the due diligence? In an acquisition, the buyer does and an audit is just a form of due diligence. Would the government do it better? Probably not because of the dilution of responsibility that occurs.)

So again this is in plain sight again, again in this story there is a beacon of truth and that is in the form of a older woman blogger (hmmm note any similarities to Tanta (aka Doris Dungey) and the housing bubble blow up.) who called it in her blog and her observation:

One person to come out of the mess looking good is Dorte Toft, a 64-year-old free-lance journalist and blogger. She, too, received an email message from Mr. Svensson last year. A former computer programmer, Ms. Toft began swapping notes with Mr. Svensson, whom she initially knew only as "John Doe." In December, she wrote a blog challenging Mr. Bagger's extraordinary growth figures.

But, she says, virtually no one wanted to listen to "an old woman."

Why do we believe who we believe? The messenger is the message!

This reminds me of a CEO I use to work for at a startup who was incapable of separating the messenger from the message. If someone he didn't respect said something that wasn't in line with his belief system, he'd say they were an idiot. And I kid you not, 10 minutes later the same thing said by an executive of a major public networking company and he'd literally reverse his view and align immediately with that view. Well that CEO lives in Atherton and I don't. Explains a lot. How do we telegraph competency --or at least desirability -- (it's not by being a fuddy duddy, calm rational, deliberate apparently). Apparently by being unsustainable. Consider the following research article or from Yahoo! Finance Some excerpts:

Vying for women is simply what men do and have done for hundreds of thousands of years, said study leader Daniel Kruger, a social and evolutionary psychologist at the University of Michigan's School of Public Health. But how they entice mates has evolved.

"Men in the ancestral environment were valued if they were good providers," Kruger said. "Now we have this new consumer culture, so basically we show our potential through the consumer goods that we purchase, rather than being a good hunter or providing protection."
Why we're in debt

Kruger said the results could help to explain why so many people are in a financial mess right now.

"It is partially a result of our economic system and recent financial policies, but I really do think that our evolved mating strategies have an influence," Kruger said. "Our competition for economic displays drives our consumer economy and culture of affluence."

He added, "In terms of the current mortgage crisis, the findings suggest that one of the reasons why we overextend ourselves is that we're basically in a status race. We have expectations that spiral upward as people make more money, and everyone wants to show that they are better than average."

This research involved the secondary analyses of data from a project funded by the Centers for Disease Control and Prevention.

This has been a much longer post than I was hoping, but why do I bring these items up. Understanding how we interpret the world in our economic decisions is going to impact our environmental behavior. Economic Issues ARE Environmental Issues since both deal with the allocation of resources. If we understands what drives our resource decisions (having more, relative status, sex, not looking stupid (oh that's that damn status thing again). Otherwise, the billions of people making bad decisions just isn't just going to scale.


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