Tag Archives: Externalities

Could “General Managers” Have Stopped JP Morgan’s Loss?

Jamie Dimon (CEO of ) has been in the news for the last couple of weeks and I’m sure he’d much rather not have been (at least not in the news for the reasons he and his firm are in the news). The :

JPMorgan Chase says losses from a massive trading blunder in the bank’s London have reached $5.8 billion and could go as high as $7 billion.

That’s a . I think that this occurrence (and probably the kerfuffle with ) is tied to something I read in the Harvard Business Review last week. It was an article by in that talked about the :

At one time general managers were at the center of the action. Two decades ago, organizations were designed around stand-alone business units, so all managers had to understand finance, technology, manufacturing, sales, marketing, strategy, human resources, and more. . . However starting in the 1980’s, many companies evolved to “functional” structures to cut costs and reduce duplication. The transition consolidated those support functions which were common among the BU’s [business units]. GE, for example, went from hundreds of discrete BU’s to a dozen large businesses with each one having strong, centralized finance, HR, engineering, marketing, and manufacturing units. . . In fact, for many chief executives I’ve recently worked with, the first real GM job that they had was CEO!

While I can see how this trend has helped to save companies lots of money, I find it a tad worrisome. I’ve about having an eye towards the bigger picture and I wonder if by consolidating these business units that this eye towards the bigger picture has been shielded. That is, not having a general manager there to act as “oversight” may have made it easier to shirk long-term goals and focus on short-term profits.

Tying this back into the JP Morgan Chase loss: I wonder if the firm had a number of general managers (at more levels than the ) would this have happened? Would a general manager responsible for the trader in question have allowed this kind of trade to happen? The same question could be asked about Barclay’s and LIBOR. Would a general manager have created an environment where it was okay to behave so unethically? It’s nearly impossible to answer these questions either way. Nonetheless, it is worth considering the trend of the organizational structure of firms. Is it really in the best interest of the firm to eliminate all general managers? Are the short-term gains worth sacrificing the long-term sustainability?

When the Wisdom of the Crowd Fails

A couple of weeks ago the  (SCOTUS) ruled that the (otherwise referred to as ) was . This ruling did not come without controversy because, as with most cases brought before the Supreme Court, there were people who disagreed with the ruling.

More to my point though, is that there was controversy because of the lack of agreement amongst the news agencies as to what the ruling was in the first few minutes that it was released. If you like political humor/satire, then you’ll definitely want to check out about the mixup. Interestingly, one of the best on the morning that the decision was released comes from the same website that is being of the decision.

As you’ll have seen if you watched the coverage, read about it, or clicked through to the clip from , CNN was the first agency to report on the decision — but — their reporting was wrong. Immediately after CNN reported the (wrong) decision, those with access to technology began perpetuating the wrong news to their social networks. Shortly after CNN incorrectly reported the news, SCOTUSblog put forth their interpretation and the subsequent major news agencies fell in line reporting the right decision. Even after this happened, CNN and FOX News continued to report the news incorrectly.

This situation brings to light what I see as a potentially major of our ability to connect with hundreds of millions of people in an instant (read: ). As soon as the reports from CNN and FOXNews came out, everyone began telling everyone else the wrong news. This spread quickly. When the right information was thrown into the mix, it became hard for people to know who was right. Were CNN and FOX News right because they had it first? Were SCOTUSblog and other news agencies right because they took the time to read more than the ?

Regardless of who’s right and wrong in this situation, it left people confused and unsure of whom to trust. Different news agencies were telling them different things (about the facts). Now, this happens on a , but that doesn’t make it any less frustrating.

~

I’m beginning to wonder about the and it would appear that I’m not the only one. I came across an interesting article this weekend from called, “.” There were some interesting points made by Leonhardt, particularly as they relate to how some folks have begun to trust the “wisdom of crowds” as showcased by websites like  (an online trading exchange website where people can bet on events in a similar fashion to how people can buy/sell stocks).

Some folks think that the internet can be viewed in the same way (wisdom of the crowd). I’m not sure how I feel about this, especially when a well-respected news agency like CNN that’s been operational for over 30 years can make a mistake like this and set the internet ablaze. I like the last paragraph from Leonhardt:

After several years in which the market was often celebrated as a crystal ball, the Supreme Court ruling was a useful corrective. The prediction-market revolution, like so many others, initially promised more than it could deliver. But it’s not as if the old order was working particularly well.

Operation Cat Drop: A Lesson in Externalities or Unintended Consequences

In the last 3+ months, I’ve been meaning to write a post about “.” With my recent “” of having to write an “article,” I feel more comfortable recounting the story and adding a few of my ideas to the post. For those unfamiliar with the story of Operation Cat Drop, here’s a that has collected many versions of the story. According to said site, there are at least  of the story. Regardless of the number of variants on the story there are and the , the lessons from the story still stand. Here’s a brief account found on :

In the early 1950s, there was an outbreak of a serious disease called malaria amongst the Dayak people in Borneo. The World Health Organization tried to solve the problem. They sprayed large amounts of a chemical called DDT to kill the mosquitoes that carried the malaria. The mosquitoes died and there was less malaria. That was good. However, there were side effects. One of the first effects was that the roofs of people’s houses began to fall down on their heads. It turned out that the DDT was also killing a parasitic wasp that ate thatch-eating caterpillars. Without the wasps to eat them, there were more and more thatch-eating caterpillars. Worse than that, the insects that died from being poisoned by DDT were eaten by gecko lizards, which were then eaten by cats. The cats started to die, the rats flourished, and the people were threatened by outbreaks of two new serious diseases carried by the rats, sylvatic plague and typhus. To cope with these problems, which it had itself created, the World Health Organization had to parachute live cats into Borneo.

The coincidental nature (for me) of having wanted to write this post so many times in the last few months is striking. Two of my most recent submissions for coursework have involved me explaining: 1) unintended consequences and 2) externalities. They are, essentially, the same thing, but has a history in the economics literature. My point in raising the story about dropping cats into Borneo is that it’s very important to consider the ramifications of the actions being taken.

That’s not to say that those folks who were involved in Operation Cat Drop (if there was one) didn’t think about the unintended consequences or (externalities) of what they were doing, but just to illustrate the importance of these concepts. A perspective that takes into account the “whole system” would — at a minimum — consider the possibility of externalities and unintended consequences. I think that as the world grows closer together (read: ) it is vital that decisions take into account even disparate connections.