You know the joke about two economists walking down the street and seeing a $20 bill lying on the sidewalk. The first economist says, “Look at that $20 bill.” The second says, “That can’t really be a $20 bill lying there, because if it were, someone would have picked it up already.” So they walk on, leaving the $20 bill undisturbed.
The logic — that there are no opportunities for achieving exceptional returns because if such opportunities existed, they would be quickly discovered and implemented by almost everyone — underlies not only the efficient market theory in the world of finance but is incredibly pervasive in management decisions about all sorts of topics. I have had people tell me that downsizing must be effective — notwithstanding lots of empirical evidence to the contrary — because if it weren’t, companies wouldn’t be doing it. Similarly for individual pay-for-performance incentive schemes and those pervasive, but despised, forced-curve performance evaluations that neither managers nor employees like but companies mandate. Most companies are doing them, so they must be a good thing to do, again, evidence to the contrary. Efficient market thinking presumes that not only are crowds wise — if everyone is doing something it must be optimal — but that, by inference, doing what everyone else does is the path to success or at least to avoiding calamity.
Read the rest of the article at BNet here.
By Jeffrey Pfeffer
July 8, 2009
Business Types, Franchises, Networking, Small Business