Tag 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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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 scientificleader.com) so I’ll get to meet you.

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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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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Human Capital Carnage or Renewal?

Citigroup announced today it was cutting 50,000 jobs.  Circuit City filed for bankruptcy protection, closing 155 stores and laying off 17% of its’ workforce.  Starbucks closes 600 stores, displacing 1,000 workers, according to the New York Times.  And The Scientific Leader blog has covered extensively the massive casualties at the financial industries catastrophies at Lehman Brothers, Freddie Mac, Fannie Mae, and AIG.  These sorts of layoffs in an economic recession are among the most emotionally difficult business events for employees and employers.  For lower skilled labor, it feels like a mini-death.  For others, especially employees with skills in high demand, a dismissal reflects what economist Joseph Schumpeter calls “Creative Destruction“, in that their labor can be now quickly redeployed to a higher valued use.

What assets can help people weather these storms?  I subscribe to the definition of human capital as those knowledge, skills, abilities (cognitive, physical), traits, interest and values owned by people and leased to employers.  When combined with other assets, such as technology and brands, in a businesses value chain, employees can create value for a firm.  In turn, they agree voluntarily to rent their labor for a fee.

The Scientific Leader’sCue See(TM)” model suggests that people’s ability to do valuable work is what creates this value.   Labor, like physical assets, has value in context.  For example, an accountants’ skills no longer have the value they had in the roaring 1990s at Enron as they would today at Google.  Similarly, the same Financial Analyst at Lehman Brothers who today is unemployed, has a much higher probability of keeping a steady cash flow into her bank account if she has diversified her skill portfolio with other valuable forms of labor.  If she redeploys her financial analyst skills toward Enterprise Risk Management, to mitigate the sorts of risks that destroyed Lehman, she can repurpose her skills toward a new market.  But the most robust human capital that produces the most consistent set of cash flows for employees are those that create value in diverse markets.  An analyst who also has a nursing degree can redeploy herself to care for patients, for a paycheck, when the financial industry goes bust.

Skill Portfolios Mitigate Personal Income Risk
Just like investments in financial assets, possessing skills across a variety of areas relevant to diverse industries reduces the uncertainty associated with future income.  This is because multiskilled people can switch roles, companies, and/or industries as the labor market supply and demand changes.  In this way, multiple skills amount to a set of personal Real Option that represent the right, but not obligation to exercize, if a better opportunity arises.  Robert Cialdini‘s research on ethical influence suggests that people are more likely to recognize your diverse skills if they have “cues” or symptoms that are vetted by credible authorities.  Relevant signs of expertise include certifications, degrees and awards.

For a company that wants to avoid Citibank, Starbucks and Circuit City-style massive layoffs, they can deploy policies that ensure workers are cross-trained; or hired into the firm with multiple skills that can be redeployed as business conditions change.  In this way, economy-driven layoffs can be minimized or avoided.  The Cue See(TM) model provides a framework for helping to assess business risks and invest in a variety of assets required to realize business goals – including but not limited to employee investments.  Details on the model are forthcoming in my 2009 book, “Leading Scientifically: Mitigating Risks and Increasing Returns”, to be published by Pearson Education / Prentice Hall.

What are you doing to hedge your personal portfolio?  Are you continuing to invest in maintaining, expanding or diversifying the industries in which you can work successfully?  Are you systematically using a framework like the Cue See(TM) model to help you detect and manage risks to achieving your business goals?

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Psychometrics to Assess Priest Risks: Human Capital Valuation at the Vatican

Did you ever think that the Pope would rely on psychological science to improve his priests’ performance?  Is there any doubt that the recently uncovered longstanding horrible clerical abuse scandals are materially damaging to the Catholic Church?

The Catholic Herald reported yesterday that the Vatican recently blessed the psychometric assessment of seminary candidates for priesthood, some of which have already been used by various groups for a number of years.  Unlike most pre-hire selection procedures, the Vatican’s approach intends to screen out psychopathology, sexual orientation and predict the probability of leading a celibate life.  Each group within the Catholic church, known as a diocese will be allowed to use different forms of psychological assessment within broad guidelines from the Vatican.

Clearly, this is an attempt to avoid the sorts of child abuse uncovered in the last few years.  While the Catholic Herald doesn’t report on what types of assessments, or psychometric methods are to be used, it does reference a need for skilled practitioners to be involved to avoid misuse.  It made me wonder whether they’ve developed specific instruments for uniquely Catholic inqueries (e.g. knowledge and skill about their own doctrine) and whether they reuse known instruments of psychopathology. 

Like other forms of Risk Management and Real Options, the Vatican is proposing the use of a form of Human Capital risk assessment to mitigate downstream risks to reputation and potentially, tithes (monthly church donations, often at the rate of 10% of income).  The option to continue a seminarians studies, and make him a priest is their right, but not obligation to exercize.  Detecting risks early, and either intervening or preventing a prospective candidate to enter the priesthood altogether is also a special-case example of classical personnel selection in Industrial-Organizational Psychology.  Anyone else like to see the item bank for the Computer-Adaptive Test of Homogenous Orthogonal Liturgical Informative Content (CATHOLIC) 😉 ?

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CFOs Feel Risk Management Practices #1 Root Cause

Poor risk management practices are the top contributing factor to the current financial crisis, according to a study done by an affiliate of CFO Magazine and The Economist, funded by Towers Perrin.  124 CFOs, SVPs, and other finance executives were surveyed September 22, 2008 – the same week that the $700 Billion dollar bailout bill was being sold to congress.  Highlights of the study include the following:
  • 72% were concerned about their firm’s risk management practices, suggesting a need to invest in more effective risk identification, measurement and mitigation actions.
  • 62% blame poor risk management at financial institutions as a major driver of the current crisis.
  • 59% noted the complexity of financial instruments (derivatives) as causing some of the current mess.  To me, this suggests a need for stronger cognitive ability in financial professionals and leaders; and learning to use the more sophisticated stochastic methods of risk management including Real Options, Monte Carlo Simulations, Rasch Measurement, and Computer Adaptive Testing of risk culture, financial skill, and leadership conscientiosness.
  • 55% plan to put their risk management practices under a microscope, from the board down and from the shop floor up

Do your risk management practices address the abilities, skills of finance and leadership professionals in mitigating risk?   Do your Audit and Enterprise Risk Management professionals demonstrate their proficiency at measuring, using modern psychometrics, cultural, employee, and leadership sources of risk and uncertainty?  Are you comfortable with your firm’s ability to detect and mitigate these risks?

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