Category Archives: Real Options

Elephant Risk Management & Technology Innovations

With dwindling habitats and large appetites, Elephants are increasingly dangerous in countries like India. Elephants are increasingly entering cities, killing people and eating crops of coconuts, ginger and other valuables.  On December 29th, for example, they entered the Indian city of Bhubaneswar, attacking a honking car and injuring six people reports The Times of India.  This video of an Elephant rampage in Sri Lanka shows how hard they are to control.  This elephant plays with a minivan like it’s a toy.


If you’re a farmer, or just live in a city with a forest that contains wild Elephants, they represent a special kind of
Enterprise Risks to your business, not unlike the Monkey Marauders noted in a previous blog entry.

But in the case of Elephants, several noteworthy options are being tested for efficacy in thwarting the Elephant menace:

1) The man honking his horn was hoping to scare away the elephant, and that strategy backfired

2) Forest officials in Mochapallam brought two trained elephants to drive a wild herd of 13 elephants back to the forest.  They successfully persuaded 12 to follow, but one got away and chased officials and local citizens.

3) The officials in Mochapallam ultimately were successful in getting the remaining renegade Elephant to retreat to the forest by lighting firecrackers.

4) A Bengali inventor, Amunuddin Ahmed, invented an “Elephant Repellent“, that combines sirens, bulbs and wires connected to a battery, or solar power.

Each of these examples, is a real option – the investment, or partial investment, with an uncertain payoff.  In one case, there was not only no payoff – but the strategy backfired.

I’m continuously fascinated by the range of risks that need to be considered by different industries in different countries.  Clearly Elephant rampages are rare, but so are Enron scandals and both have terrible outcomes. Are you considering all the risks to your operations, even if they’re not as exotic as Elephants?  Do you understand your options, and what they’re worth to you?

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Madoff Destroys $50 Billion with “Giant Ponzie Scheme”

Bernie Madoff is the latest in the series of senior executives to destroy value, this time with an apparent $50 billion dollar fraud, according to the Financial Times.  Madoff, a former Chairman of the NASDAQ stock market, on thursday admitted to his employees including his two sons that his operations were “all just one big lie” and “basically, a giant Ponzi scheme”.  The alleged fraud is the largest ever investor fraud ever blamed on a single individual.

Previously, I had written about the “Three Stooges of Operational Risk“, where I detailed senior executive destruction from Key Lay of Enron, Bernie Evers of Worldcom and most recently, Dick Fuld‘s follies with Lehman Brothers.  In two of those three I noted the dishonesty and fraud that accounted for their downfall similar to Madoff.  But unlike Madoff, they were less candid about thair fraud.  After Madoff’s brazen alleged admission, is there any uncertainty that leadership due dilligence is a critical part of the selection process of hiring senior executives?  Could it be any more clear that the pre-hire assessment procedure is a non-trivial subset of Enterprise Risk Management?

In fairness, these Industrial Organizational Psychology methods have their limitations.  No forecast could ever be perfect, or and even the best assessment procedures only account for 30-60% of the variance in job performance.  But it’s relatively rare that factors such as conscientiousness are used to screen executives – and conscientiousness highly predicts dishonest, and imprudent behavior in the workplace like that of Madoff.  With new methods from Rasch Measurement, Computer-Adaptive Testing, and an innovation from the Scientific Leader, “Inverted Computer Adaptive Testing” using Virtual Realtity, it’s increasingly difficult for people to fake or misrepresent themselves on these assessments. 

How much risk are you accepting when you use standard interviews to hire your employees?

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Top Conference Salutes The Scientific Leader

The Scientific Leader is pleased to announce that three submissions to the 2009 Society for Industrial-Organizational Psychology (SIOP) conference have been accepted.

The Society for Industrial-Organizational Psychology (SIOP) is the premier professional association for scientists and practitioners of human behavior in the workplace.  Each year, they hold a popular conference with peer-reviewed articles and symposia.  The number of proposed sessions always far outstrips the number of available places, and so the standards for acceptance are relatively steep by the peer-review group who decides on placement.

Three submissions were accepted for presentation at the next conference, to be held in New Orleans

1.  Enhancing Utility Analysis: Introducing the Cue See Model

I’m particularly proud of this paper, as it represents a new approach to asset valuation, both tangible and intangible.  While traditional I/O Psychology has its’ own tradition to quantify the value of human performance called Utility Analysis, it largely does not include any of the other organizational sciences’ ideas.  My paper tries to synthesize finance, psychology, industrial/systems engineering, computational organizational theory, and computer science ideas into the “Cue See Model”.  The hope is that the approach can be useful to managers and theoreticians by helping to specificy how a company creates profit across levels.  Once understood, then the Cue See Model can be used to track it, objectively, without relying on subjective human ratings.  My hope is that future studies will empirically demonstrate the models’ efficacy, and help avoid the fields traditional problem of measuring and monetizing outcomes.

2.  Succession Planning: Beyond Manager Nomitations

Led by our parent company, Human Capital Growth’s Dr. Shreya Sarkar-Barney, this panel discussion will include experts on leadership discussing the use of psychometric assessment instruments and other science-based practice methods for succession.  Panelists include:

Shreya Sarkar-Barney, Human Capital Growth, Chair
Matt Barney, Infosys, Panelist
Eric Braverman, Merck, Panelist
Lori Homer, Microsoft, Paelist
Jennifer Irwin, Proctor & Gamble Company, Panelist
Kevin Veit, Gabbard and Co, Panelist

3. The Role of IO Psychology in Resolving the Healthcare Crisis

I was asked to be the discussant – a senior leader with expertise in the area to comment on all the papers in the session ,as I was the Chief Learning Officer & VP for Sutter Health previously.  It will focus on interventions
targeted at improving outcomes related to quality of patient care. The
interventions to be covered focus on selection, leadership and culture, team
training, safety, and others. The session will represent research on various
levels of the organization, including management, nurses, and frontline staff.

Kristin Charles, Kronos Talent Management, Co-Chair
David Scarborough, Kronos Talent Management/Black Hills State U., Co-Chair
Justin Rossini, DDI, Inc., Author
Sallie Weaver, Univsersity of Central Florida and MedAxiom, Author
David Hofmann, Univ of North Carolina at Chapel Hill, Author
Matt Barney, Infosys, Discussant

The papers I’ll be reviewing in this session include:
Defining quality of care: Behavioral competency models across nursing
Kristin Charles, Autumn Krauss
Addressing Care Quality, Engagement, and Retention Likelihood: a Selection
Justin Rossini
Can Team Training Improve Operating Room Quality of Care?: Sallie
Weaver, Michael Rosen, Deborah DiazGranados, Rebecca Lyons, Elizabeth Lazzara,
Andrea Barnhard, Eduardo Salas
Leadership Levers to Motivate Error Management: David Hofmann, Adam

I hope some of the readers of this blog are able to attend this excellent conference, and if you are, please comment below or send me a note (matt at so I’ll get to meet you.

Should Harvard Follow Peter Schiff?

Harvard expects it could loose as much as 30% of its’ almost $37 billion dollar endowment fund that finances over a third of its’ expenses annually, according to the New York Times. Harvard President Drew Faust’s note to his Deans indicates that their diversified portfolio has lost about $8 billion, or 22% of their value.  While Harvard appears to be diversified, with investments in everything from private equity to timber and real estate, it appears to have been hit by the current crisis like most other organizations and private citizens.  The Times reports that Harvard only had about 12% of their portfolio in foreign equities, and another 10% in emerging markets.  It didn’t mention whether or not Harvard held non-US currencies or hard assets such as gold.

Here’s a 10-year view of Gold’s value in dollars.  While it’s taken hits recently, overall it has dramatically outperformed the dollar.

Peter Schiff is the President of Euro Pacific Capital, and has called the US recession many years ago.  His clients are well diversified out of US currencies and equities, in favor of developed economies because his motto is “There’s a bull market somewhere”.  Uniquely, he sells gold held at the Perth Mint in Australia, and gold has done relatively well as an investment against the dollar.  Anyone else think Harvard could do better by following Peter’s guidance, and perhaps moving a massive amount of their assets outside the US?  As I noted previously, I’m moving my assets to Peter’s firm.  Should Harvard follow my lead?

Silver Lining to Financial Crisis?

Excellent leaders persevere in the face of adversity such as the current financial crisis.  We need to help our people through difficult times, with personal resiliency and authentic optimism about the future.  We have to be candid about the dire situation of the financial markets and the significant pain and suffering that awaits employees in countries affected by the downturn. In the US, the likely long-term recession or horrific possibility of a sequel to the great depression is a possibility we must acknowledge.

But today, November 27 2008, is the day people in the US celebrate those things we appreciate.  On Thanksgiving, can we also have a vision of the big picture beyond the painful side of the crisis?  Can we credibly claim an upside?  The Scientific Leader thinks so.  I’ll outline some of the potential good that may come to business as a result of this difficult time, and welcome your own ideas:

  • Demise of Snake Oil
Could it be that a massive financial belt tightening across industries and boarders will cause leaders to consider the evidence before they buy?  I suspect that managers and employees will be more prudent than ever before, when cash is extremely limited.  As Bob Sutton notes that 90% of Consultant’s advice is crap; those of us in the 10% minority who use evidence may see an uptick in our business.

  • Respect for Uncertainty

Too few leaders historically cared about risk and uncertainty as major aspects to business management.  But the recent high-profile collapses may have changed this forever.  Lazy managers and leaders of the past would rely more on intuition and judgment instead of the more complicated and tedious methods that use probability.  But as Richard Feynman once noted, “Mother Nature Can’t Be Fooled”.  The scientific method requires uncertainty to approximate the truth.  Leaders who seek to manage risks and returns would do well to study the leadership methods to measure and value risk and uncertainty.  These include Monte Carlo and Real Options methods as part of a portfolio in managing Enterprise Risk. 

  • Substance trumps slick

Will companies managing through this downturn tolerate glitz without substance?  Will the trash and trinkets given away at large-company meetings lessen?  I don’t know for sure, but I suspect there will be less tolerance for this in the near term at least.  The free t-shirt for the “flavor of the month” initiative may be as endangered as the constant initiative churn that burns capital without creating value.  Demonstrable value may come into vogue again.  The Scientific Leader’s “Cue See” model attempts to be a practical way of discerning and improving the value creation process.

  • Global Cultural Savvy

With the US Dollar likely to follow the way of Zimbabwe, firms heavily dependent on the dollar will have to hedge their risk.  Even small to medium sized firms may be wise to consider holding retirement and other assets in foreign equities, currencies, bonds, and hard assets like gold.  To do this, Americans will have to learn more about other countries rules.  In many cases, people will find that places such as Singapore and Hong Kong have even more freedom than the so called “land of the free”.  Americans may have more sensitivity to different ways of working and doing things, rather than a mindless, “US is Best” mantra of the past.  Businesses like Peter Schiff’s Euro Pacific Capital are staged to take their business and help them diversify.

What upsides do you see from such a crisis for business?

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American and European Human Capital Options

A derivative is a financial instrument that gets it’s value from something else.  One special type is an “option” that gives the owner a right, but not the obligation, to buy or sell an asset.  Human resource, or personnel, employment is a special case of Real Options applied to people. In our case, though, we own ourselves and our labor, but for the right price we’re willing to lease it out to employers and clients for a period of time. 

In the case of employment, hiring an employee amounts to buying (call option) the right to utilize labor for 8 hours a day.  In some cases, the terms of an employment contract are extremely limited, such as contracts for professional athletes and union members.  These amount to a European option, such as the case where the owner of a baseball team has the right to release an athlete, on but not before a certain date.  The more flexible type of employment arrangement is the American option variety.  With an American option, the owner can exercise their right (e.g. liquidate the asset, or fire the employee) without respect to a specific date.  In option terms, letting a person go, or not hiring a consultant for another project is called a “put option”.

But with human assets, there are numerous other options employers can choose to take – including redeploying people to work on new projects, in new departments and in different jobs.  The more flexible a person in having skills and motivation to work in areas that are profitable to the firm, the more valuable the person. 

When mixed with psychometrics such as The Scientific Leader’s Computer-Adaptive Measurement(TM) approach, human capital can be valued the same way as other uncertain financial assets – using Managerial Real Options.  Have you valued your human capital the same way as professional financiers?  Do you know where your human capital is best deployed in the portfolio of job tasks and projects in your firm?  How flexible and adaptable is your workforce – to be able to redeploy them to new work as customers, markets, and economic crises unfold?  Have you considered the option of investing in growing the skills of your employees to increase their value and reduce your risk, through training and development?

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Cultural Insensitivity as a Human Capital Liability

US Citizen Gary Khera

US Citizen Gary Khera

A North Carolina US Citizen, Gary Khera, was asked to “take your turban off.  This is the United States”, when he tried to make a donation to a local charity, reports local news source WRAL.  In prior years, he mailed in his donation, but this year he wanted to see where his money was going to help the less fortunate.  In a surprising display of insensitivity, the Christian charity refused to allow him to donate his money unless he remove his turban – which is not allowed in his religion.  A video interview with both the mission’s Director, a Reverent and Mr. Khera appears here.

It’s a good example that a closed mind and rigid set of rules can hurt your organization’s ability to serve different types of honest, hard working customers – or in this case, charitable donors.  Hiring and training employees to adjust these policies, and exercise good judgment represents an example of a Human Capital “real option” to invest a bit in selecting culturally sensitive people; and growing them internally with profits to follow.  Ethics aside, the business question is the probability of unique cultures walking through my door is uncertain, and in many cases might be a rare event.  What would it be worth for me to invest a little in selection and training now, for uncertain payoff later.  This is precisely the value of the Real Options method, taught by The Scientific Leader and others.  It is an approach that quantifies the value of choice, given situations of uncertainty.  In smaller locales, like the one Mr. Khera frequents, there may be little value in this sort of investment.  But in cities with massive amounts of diversity, it might be absolutely essential to ensure that a wide variety of customers and donors are happy to do business with your firm.  What losses is your firm likely to experience because you’re exposed to this sort of human capital risk?

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