The Psychology of Entrepreneurial Misjudgment, part 1: Biases 1-6

Charlie Munger is an 80-something billionaire who cofounded top-tier law firmMunger, Tolles & Olson and is Warren Buffett’s long-time partner and Vice-Chairman at Berkshire Hathaway, one of the most successful companies of all time.

Some people, including me, consider Mr. Munger to be an even more interesting thinker and writer than Mr. Buffett, and recently a group of Mr. Munger’s friends assembled a compilation book of his most interesting thoughts and speeches calledPoor Charlie’s Almanack, inspired by Ben Franklin’s Poor Richard’s Almanack. (The Munger book is only available on Amazon in used form, although you can apparently buy a new copy here.)

Mr. Munger’s magnum opus speech, included in the book, is The Psychology of Human Misjudgment — an exposition of 25 key forms of human behavior that lead to misjudgment and error, derived from Mr. Munger’s 60 years of business experience. Think of it as a practitioner’s summary of human psychology and behavioral economics as observed in the real world.

In this series of blog posts, I will walk through all 25 of the biases Mr. Munger identifies, and then adapt them for the modern entrepreneur. In each case I will start with relevant excerpts of Mr. Munger’s speech, and then after that add my own thoughts.

One: Reward and Punishment Superresponse Tendency

I place this tendency first in my discussion because almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.

…We [should] heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard’s Almanack: “If you would persuade, appeal to interest and not to reason.” This maxim is a wise guide to a great and simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives…

One of the most important consequences of incentive superpower is what I call “incentive caused bias.” A man has an acculturated nature making him a pretty decent fellow, and yet, driven both consciously and subconsciously by incentives, he drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior [like a salesman who harms her customers by selling them the wrong product because she gets paid more for selling it, versus the right product — see, e.g., the mutual fund industry].

…Another generalized consequence of incentive caused bias is that man tends to “game” all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Antigaming features, therefore, constitute a huge and necessary part of almost all system design.

…Military and naval organizations have very often been extreme in using punishment [the inverse of reward] to change behavior, probably because they needed to cause extreme behavior. Around the time of Caesar, there was a European tribe that, when the assembly horn blew, always killed the last warrior to reach his assigned place, and no one enjoyed fighting this tribe.

Human response to incentives is indeed a huge behavioral motivator, and I think Mr. Munger is right that once you think you realize how big it is, you need to assume it’s even bigger.

This is why stock options work so well in startups — and the fewer people in a startup, the better stock options work, since when there are only a few people in a company, it’s usually crystal clear to each person how her work will impact the value of the company.

There is a wrong-headed and dangerous theory afoot that restricted stock (grants of fully in-the-money shares of stock) is a more appropriate motivator of employees of tech companies than stock options:

Mr. Gates wanted Mr. Buffett’s input on whether to drop options in favor of restricted stock at Microsoft. [Gates] recalls asking: “How will employees respond to getting a lottery ticket that gives them a definite amount instead of one that could amount to nothing or a ridiculous sum?”

Mr. Buffett’s reply, according to Mr. Gates, was: “My wife would rather have a ticket for one fur coat, than a ticket that gave her two or nothing.”

Overt sexism aside, from an incentive standpoint the result of shifting from stock options to restricted stock should be obvious: current employees will be incented topreserve value instead of creating value. And new hires will by definition be people who are conservative and change-averse, as the people who want to swing for the fences and get rewarded for creating something new will go somewhere else, where they will receive stock options — in typically greater volume than anyone will ever grant restricted stock — and have greater upside.

And sure enough, in the wake of shifting towards restricted stock and away from stock options, Microsoft’s stock has been flat as a pancake. The incentive works.

Now, against that, it is true that stock options, particularly for public companies, have an often-destructive random component: they tend to increase in value in rising stock market environments and decrease in value (potentially to zero) in falling stock market environments, regardless of whether value is being created inside your particular company.

For that reason, in the long run it probably makes sense for some new approach to stock-based compensation to be developed that both preserves the motivation tocreate as opposed to preserve value, but factors out the environmental swings of rising and falling stock markets. Some form of indexing against market averages would probably do the trick. This has been tried from time to time, and I expect it to be tried more in the future, at least for public companies.

As a company grows, stock options and other forms of equity-based motivation become less and less useful as an incentive tool, since it becomes harder for many employees in a large company to see how their individual behavior would have any effect on the stock price of the overall corporation. So, more tactical incentives kick in, such as cash bonuses.

The design of tactical incentives — e.g. bonuses — is a whole topic in and of itself, and is critically important as your company grows. The most significant thing to keep in mind is that how the goals are designed really matters — as Mr. Munger says, people tend to game any system you put in place, and then they tend to rationalize that gaming until they believe they really are doing the right thing.

I think it was Andy Grove who said that for every goal you put in front of someone, you should also put in place a counter-goal to restrict gaming of the first goal.

So, for example, if you are incenting your recruiters on the number of new employees recruited and hired, you need to also give them a counter-goal (and tie it to their compensation) that measures the quality of the new hires three months in. Otherwise the recruiters are guaranteed to give you what you don’t want: a lot of mediocre new hires.

One of the great unwritten Silicon Valley skewed incentive stories was a major datacenter vendor in the late 90’s that incented its salespeople based on bookings of long-term datacenter leases, without sufficient counter-goals tied to revenue collection or the customer’s ability to pay. Sure enough, soon the company’s reported bookings were heading straight up, revenue was flat, and cash headed straight down, resulting in a truly spectacular bankruptcy. The salespeople got paid, though, so they were happy.

More recently, skewed incentives in the mortgage industry — mortage issuers getting paid based on quantity of mortgages issued, versus ability to pay — caused many of the current catastrophic Wall Street financial meltdowns you get to read about every day.

Even engineers need counter-goals: incent engineers based purely on a ship date, and you’ll get a shipping product with lots of bugs. Incent based on number of bugs fixed, and you’ll never get any new features. And so on.

Especially in smaller companies, peer pressure can be a very effective form of incentive. This is greatly enabled and abetted by transparency. People hate to be embarrassed in front of their peer group, so if it’s crystal clear who’s performing well and who isn’t, poor performers will be highly motivated to improve — and if they’re not, that’s good to know, since obviously then you really need to fire them.

Finally, any entrepreneur should be highly attuned to incentives when hiring outside executives, especially a CEO. Hire a CEO and give her a large stock-option grant with four-year vesting, and you can guarantee she will sell the company in year four. Give her a stock-option grant with accelerated vesting on change of control and she will sell the company sooner than that. Founders can get tripped up on this because they naturally have an emotional incentive to see the company succeed that hired executives often do not share.

And of course, never get caught between a venture capitalist and her incentives.

Two: Liking/Loving Tendency

…[W]hat will a man naturally come to like and love, apart from his parent, spouse and child? Well, he will like and love being liked and loved… [M]an will generally strive, lifelong, for the affection and approval of many people not related to him.

One very practical consequence of Liking/Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend (1) to ignore faults of, and comply with wishes of, the object of his affection, (2) to favor people, products, and actions merely associated with the object of his affection (as we shall see when we get to “Influence-from-Mere-Association Tendency”), and (3) to distort other facts to facilitate love.

The application of this principle to entrepreneurs is obvious: entrepreneurs want to be liked just like everyone else, and wanting to be liked can be a major impediment to entrepreneurial success due to at least two major reasons.

First, an entrepreneur, like any CEO, has to make tough decisions about what her company will do, and those decisions will often run counter to the preferences of her employees. You don’t have to be involved in that many startups to find one where the entrepreneur knows she needs to make a tough decision — such as change strategy, or cancel a flawed project — but can’t quite do it because employees won’t like it. Of course this always backfires: employees also don’t like leaders who don’t make the tough decisions that have to be made.

Second, an entrepreneur, like any manager, has to fire people who aren’t great or who aren’t right for the tasks at hand. This naturally makes people not like you, particularly the people you fire. But again, not doing this backfires: nobody great wants to be in a company populated by mediocre or ill-fitting peers.

I think these pressures are intensified in a small company versus a larger company, because in a small company everyone tends to know everyone else and people naturally form strong personal relationships within the group — so the desire to be liked is stronger, and the perceived risk from making decisions that people won’t like is higher.

A specific form of this dynamic in a startup is when you have multiple founders, of whom one is the CEO. The founder who is the CEO inevitably discovers that it becomes very hard to stay close personal friends with the other founders. As they say, it’s lonely at the top — if you’re doing your job right.

Finally, some entrepreneurs have emotional resistance to pursuing a strategy that does not meet with immediate approval from press, analysts, and other entrepreneurs. This is worth watching carefully — if everyone agrees right up front that whatever you are doing makes total sense, it probably isn’t a new and radical enough idea to justify a new company.

Three: Disliking/Hating Tendency

In a pattern obverse to Liking/Loving Tendency, the newly arrived human is also “born to dislike and hate” as triggered by normal and abnormal triggering forces in its life…

As a result, the long history of man contains almost continuous war…

Disliking/Hating Tendency also acts as a conditioning device that makes the disliker/hater tend to (1) ignore virtues in the object of dislike, (2) dislike people, products, and actions merely associated with the object of his dislike, and (3) distort other facts to facilitate hatred.

If this is a problem inside your company, then you have bigger issues than I can help you with.

However, I think this dynamic kicks in for a startup when thinking about competitors.

I see two destructive consequences of this bias in startups with competitors:

First, I believe startups often overfocus on their competitors. It’s the easiest thing in the world to orient yourself in opposition to another company in the same market, and to plan your actions based on what will cause damage to the competitor or block the competitor from getting business.

In the startup world, that often leads to multiple competitors engaged in a shooting war in a market that’s still too small for anyone to succeed.

I think it’s much better for a startup to focus on creating and developing a large market, as opposed to fighting over a small market.

So when your startup’s competitive juices get flowing — especially for the first time — and you find yourself fixated on a competitor, be sure to take a step back and say, is this really what we want to be focused on right now — is the market we’re both in really large enough to warrant this? If so, sure, go for it, guns blazing. But if not, stepping back and thinking about how to focus instead on creating a large market might be more valuable.

A variant on this dynamic is letting your competitor determine your strategy by watching what he does and then making countermoves. The issue here is that it’s highly likely that neither one of you actually knows that much about what you are doing yet — since you are in a new market, by definition — and while you know you don’t know that much about what you’re doing yet, you only observe your competitors’s deliberate actions as opposed to seeing their equivalent or greater level of internal confusion. So they seem like they know what they’re doing, and so you fall into assuming they know more than you do, when they probably don’t.

Second, when you are in a truly competitive situation, this bias can easily lead you to underestimate your competitor by, as Mr. Munger says, “ignoring virtues in the object of dislike”.

His product sucks, his salespeople aren’t as good, his venture capitalists are those morons who backed that large datacenter vendor that went bankrupt — and so on.

Notably, this attitude can become cultural in your company very quickly. I think that if you’re in a shooting war, even if you privately think your competitor is an amoral pinhead, that you establish a tone that says, we’ll assume that he’s highly competent and has many fine virtues, which we will respect and then systematically target with our own strengths and virtues until we have killed him.

Four: Doubt-Avoidance Tendency

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision.

It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do…

So pronounced is the tendency in man to quickly remove doubt by reaching some decision that behavior to counter the tendency is required from judges and jurors. Here, delay before decision making is forced. And one is required to so comport himself, prior to conclusion time, so that he is wearing a “mask” of objectivity. And the “mask” works to help real objectivity along, as we shall see when we next consider man’s Inconsistency-Avoidance Tendency…

What triggers Doubt-Avoidance Tendency? Well, an unthreatened man, thinking of nothing in particular, is not being prompted to remove doubt through rushing to some decision. As we shall see later when we get to Social-Proof Tendency and Stress-Influence Tendency, what usually triggers Doubt-Avoidance Tendency is some combination of (1) puzzlement and (2) stress.

This is probably a good one for entrepreneurs. You’d better not have a lot of doubts about what you are doing because everyone else will, and if you do too, you’ll probably give up.

Of course, an entrepreneur’s doubt avoidance is only a plus right up to the point where it becomes pigheaded stubbornness that interferes with her ability to see reality, particularly when a strategy is not working.

In my view, entrepreneurial judgment is the ability to tell the difference between a situation that’s not working but persistence and iteration will ultimately prove it out, versus a situation that’s not working and additional effort is a destructive waste of time and radical change is necessary.

I don’t believe there are any good rules for being able to tell the difference between the two. Which is one of the main reasons starting a company is so hard.

Five: Inconsistency-Avoidance Tendency

[People are] reluctant to change, which is a form of inconsistency avoidance. We see this in all human habits, constructive and destructive. Few people can list a lot of bad habits that they have eliminated, and some people cannot identify even one of these. Instead, practically every one has a great many bad habits he has long maintained despite their being known as bad. Given this situation, it is not too much in many cases to appraise early-formed habits as destiny. When Marley’s miserable ghost says, “I wear the chains I forged in life,” he is talking about chains of habit that were too light to be felt before they became too strong to be broken.

[T]ending to be maintained in place by the anti-change tendency of the brain are one’s previous conclusions, human loyalties, reputational identity, commitments…

It is easy to see that a quickly reached conclusion, triggered by Doubt-Avoidance Tendency, when combined with a tendency to resist any change in that conclusion, will naturally cause a lot of errors in cognition for modern man. And so it observably works out. We all deal much with others whom we correctly diagnose as imprisoned in poor conclusions that are maintained by mental habits they formed early and will carry to their graves…

And so, people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong…

As Lord Keynes pointed out about his exalted intellectual group at one of the greatest universities in the world, it was not the intrinsic difficulty of new ideas that prevented their acceptance. Instead, the new ideas were not accepted because they were inconsistent with old ideas in place…

We have no less an authority for this than Max Planck, Nobel laureate, finder of “Planck’s constant.” Planck is famous not only for his science but also for saying that even in physics the radically new ideas are seldom really accepted by the old guard. Instead, said Planck, the progress is made by a new generation that comes along, less brain-blocked by its previous conclusions…

One corollary of Inconsistency-Avoidance Tendency is that a person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity. After all, it would be quite inconsistent behavior to make a large sacrifice for something that was no good. And thus civilization has invented many tough and solemn initiation ceremonies, often public in nature, that intensify new commitments made.

This goes hand-in-hand with doubt-avoidance, and again is usually a plus for a startup, since it leads to greater commitment on the part of the entrepreneur and the team. (And yes, I am in favor of blood oaths for startups.)

Perhaps this bias is most relevant to how new markets develop. Sometimes you get lucky — you bring a new product to market, and the target customers all go, great, we’ll take it! However, often you get a level of resistance from the market that can be puzzling — “can’t they see that our new product would be better for them than what they have now?”

This in turn leads to the odd dynamic you often see where a startup will field a new product, nobody wants it, and the startup goes belly up. Then three or four or five years later, another startup launches with a very similar product, and this time the market says, hell yes!

I think this is something that every entrepreneur needs to watch very carefully. Sometimes it’s simply a matter of timing — and if people just aren’t ready for a new idea, you usually can’t make them ready, and you have to wait for them to change or for a new generation of customers to come along.

My favorite way around this problem is the one identified by Clayton Christensen inThe Innovator’s Dilemma: don’t go after existing customers in a category and try to get them to buy something new; instead, go find the new customers who weren’t able to afford or adopt the incarnation of the status quo.

For example, when the personal computer was invented, the desirable market was not the universe of people who were already buying computers — a.k.a. mainframe and minicomputer buyers — but rather the universe of the people who couldn’t afford a mainframe or minicomputer and therefore had never had a computer before.

Similarly, the desirable market for Hotmail in the early days was not existing email aficionados who were already using sophisticated email desktop software, but rather the universe of people who were coming on the Internet for the first time who didn’t even have email yet and for whom web-based email was by far the easiest way to start.

Conversely, one of the reasons that today’s consumer Internet companies have the wind at our backs versus our peers 10 years ago is that a whole new generation of consumers has come of age in the last 10 years for whom the Internet is their primary medium — time and demographics are on our side now. That makes life a lot easier, let me tell you. Meanwhile, the average age of television viewers continues drifting higher and higher…

Six: Curiosity Tendency

This is, frankly, an odd one for Mr. Munger to include, since it’s primarily a plus, and he doesn’t really identify a downside.

The only important thing I can think to add — aside from the importance of hiring curious people — is that lack of curiosity can be a huge danger to a startup in the following way: often, your initial strategy won’t quite work, but you can learn as you go based on other things that happen in the market and eventually iterate into a strategy that does work. Obviously, insufficient curiosity can prevent you from seeing the new data and lead you to continue to pursue a losing strategy even when you wouldn’t have to.

To be continued…

Brad DeLong on trade and wages

Berkeley econ professor — and non-conservative — Brad DeLong on the highly controversial topic of how trade with lower-income countries like China affects, or does not affect, US wages:

…To what extent are rich countries obligated to open their markets to poor countries when the consequence is falling wages for the poor in the rich–bearing in mind that the poor in the rich are often wealthier and have more opporunity than the rich in the poor? To what extent do rich countries do themselves well–serve their national interest–by opening their markets to poor countries even when the consequence is falling wages for the poor in the rich?

…First, between 1950 and 1997 trade and wages weren’t an issue: our foreign trading partners raised their own relative wage levels at least as fast as globalization enhanced their influence, and there was no net effect of trade on wages–no link from greater openness to the global economy to greater inequality here at home.

Second, at times between 1950 and 1997 trade and wages became a political issue as a way of distracting attention from true problems. The voters of Michigan in 1985 did not want to hear that the problems of Michigan’s manufacturing industries were home-grown–in the fecklessness of management and in the Reagan administration’s budget deficits that pushed up interest rates which pushed up the value of the dollar and made the goods they made uncompetitive on world markets. They wanted, instead, to hear that the Japanese were doing something clever and illegitimate [certainly a widespread assumption in Wisconsin when I was growing up in the 1980’s -Marc].

Third: since 1997 or so the link between expanded imports and wage inequality has become real, as our imports now embody a much larger amount of factors competing with our own lesser-skilled than they used to. How large? I don’t think we know. Paul Krugman [also a non-conservative -Marc] is now writing a paper for the Brookings Institution in which he essentially throws up his hands at the question. But there are two points worth noting: (a) the effects of trade on pre-tax wage inequality are much smaller than the effects over the past generation of changes in the tax system on after-tax income inequality; (b) the effects of trade on inequality of opportunity are much less than the effects of educational inequities on inequality of opportunity.

Fourth, to the extent that we in the United States begin thinking of trade restrictions as a way to fight inequality, we are setting ourselves up for extraordinary trouble late in this century–extraordinary damage to our long-run national security.

Think of it this way: Consider a world that contains one country that is a true superpower. It is preeminent–economically, technologically, politically, culturally, and militarily. But it lies at the east edge of a vast ocean. And across the ocean is another country–a country with more resources in the long-run, a country that looks likely to in the end supplant the current superpower. What should the superpower’s long-run national security strategy be?

I think the answer is clear: if possible, the current superpower should embrace its possible successor. It should bind it as closely as possible with ties of blood, commerce, and culture–so that should the emerging superpower come to its full strength, it will to as great an extent possible share the world view of and regard itself as part of the same civilization as its predecessor: Romans to their Greeks.

In 1877, the rising superpower to the west across the ocean was the United States. The preeminent superpower was Britain. Today the preeminent superpower is the United States. The rising superpower to the west across the ocean is China. that was the rising superpower across the ocean to the west of the world’s industrial and military leader. Today it is China.

Throughout the twentieth century it has been greatly to Britain’s economic benefit that America has regarded it as a trading partner–a source of opportunities–rather than a politico-military-industrial competitor to be isolated and squashed. And in 1917 and again in 1941 it was to Britain’s immeasurable benefit–its veruy soul was on the line–that America regarded it as a friend and an ally rather than as a competitor and an enemy. A world run by those whom de Gaulle called les Anglo-Saxons is a much more comfortable world for Britain than the other possibility–the world in which Europe were run by Adolf Hitler’s Saxon-Saxons.

There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China. There is nothing more dangerous for America’s future national security, nothing more destructive to America’s future prosperity, than for Chinese schoolchildren to be taught in 2047 and 2071 and in the years after 2075 that America tried to keep the Chinese as poor as possible for as long as possible.

While I am far less certain than Brad and a lot of other smart people that the United States is fated to lose its position of economic preeminence in this century, I certainly agree with Brad’s strategy, and I am continually surprised and alarmed to run into many well-meaning people who believe the opposite strategy would be optimal.

Ning passes 200,000 social networks

Today I’m delighted to announce that Ning just crossed 200,000 social networks for the first time!

For those of you new to this blog, Ning is my third company, cofounded with Gina Bianchini. We enable you to create your own social network for anything — in two minutes, for free. Think of it as creating your own MySpace, Facebook, or Youtube — but around any topic you want, with whatever set of features you want, and as public or private as you want.

People are using Ning today to create and run social networks around practically every topic you can possibly think of.

And as of today, they (you) have created more than 200,000 networks on Ning.

 

What’s the significance of 200,000 social networks to Ning?

Number of networks is our primary public metric, both because it’s important in its own right — the more networks on Ning, the more new people who are drawn to Ning to join an existing network and then perhaps create networks of their own — and because it’s a leading indicator of overall usage of Ning.

We’re experiencing 0.5%+ day-over-day growth of number of networks on Ning, which means that we’re adding more than 1,000 new networks per day — and that’s accelerating.

In fact, at our current growth rate, we’ll cross 300,000 networks in a matter of weeks.

Based both on this rapid creation of new networks and rapidly increasing use of existing networks, we are seeing even stronger growth in number of registered users (1.0%+ per day) and page views (1.5%+ per day), as well as uniques.

Here are some additional interesting facts that come out of this:

     

  • Over 70% of the networks on Ning are active, as defined by “used in the last 30 days”. This is a considerably higher percentage than we would have thought when we created the service, given that we make it so easy to create a network that you can do it in two minutes, for free — I would have assumed there would be more throwaways. It turns out that people really like using social networks!
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  • As that “70% active” statistic indicates, the long tail is most definitely alive and well on Ning — activity on the system as a whole is spread out broadly across the base of active networks. This continues even as the largest networks on Ning are getting much larger than ever before.
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  • There are now more — actually, a lot more — social networks on Ning than there are on the rest of the Internet in total, including all of the other services that let you create your own social network combined (i.e., all of our honorable competitors combined).
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  • Our growth rate continues to accelerate as the overall penetration of social networking across the Internet expands. As more and more people all over the world use social networking — including the big one-size-fits-all social networking services that many people use first — people become more interested in creating and using their own social networks for many topics that they care about. This is a very large market, and it’s growing very fast.
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  • Finally, fewer than 1% of our current networks fall into the adult category — a number that’s frankly surprisingly low, but one with which we’re just fine.
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If you’ve never experienced Ning, feel free to give it a shot by either going to theNing home page — from which you can create your own social network with a few clicks — or explore the Ning Blog to see lots of examples of social networks on Ning.

Disney’s Bob Iger beams a message back to 2001

Makin’ progress, makin’ progress…

Proclaiming the web “just as important as TV” for kids, Disney CEO Robert Iger urged fellow executives on Wednesday to join the digital revolution–or hire people who can.

“Hire new people,” Iger declared to nervous laughter during a morning keynote…

Iger also impelled media companies and marketers to shed their protectionist [hostile, enraged, psychotic, litigious, counterproductive, foaming-at-the-mouth] stances on new and emerging technologies. “Most classic brand managers look at technology with a deep-rooted aversion [fear, loathing, dismay, anger, denial, Future Shock],” Iger said.

“Technology is good,” he said [shortly before he was hit by a mysterious lightning strike from above], explaining how it allows brands to distribute more broadly, and to be more relevant in the marketplace. “You have to keep the consumer in mind and use technology to do that.”

Beyond corporate strategy, Iger took time on Wednesday to regale the audience of new- and old-media types with his personal adventures in online media.

He admitted to having a Facebook page, but only two friends in the hot social network.

“It’s important for executives to experience all of this,” Iger said…

Iger said his presence was more established within Club Penguin, the virtual world for kids that Disney acquired last August.

“I’ve got some pretty cool stuff in my igloo”–which, he said, boasts a flat-screen TV, a fireplace, and a basketball hoop. “I’ve never been to an igloo with a basketball hoop, which is pretty great.”

Meanwhile, elsewhere in the space/time continuum, the 2015 Bob Iger is giving another speech: “The web is way more important than TV for kids.”

[Source: Online Media Daily.]

I am so disappointed to discover that the Carlyle Group doesn’t actually run the world

There goes another illusion shattered.

Hat tip to Paul Kedrosky for pointing out the choice sentence in the story:

The secret to making money was borrowing massive sums.

You don’t say.

The story:

Carlyle Capital Corp. said late Wednesday that it expects that its lenders will seize its assets, causing the likely liquidation of the fund. “Although it has been working diligently with its lenders, the Company has not been able to reach a mutually beneficial agreement to stabilize its financing,” the fund said in a statement. [Well, thank heavens they were “working diligently” and not just slacking off.]

The fund’s likely collapse is a major black eye for Carlyle Group, the powerful Washington, D.C.-based private-equity firm whose executives own 15% of the fund [but not a big enough black eye that they felt the need to put up more capital and bail it out]…

The news comes just one week after Carlyle Group had pleaded with some of the world’s largest banks to hold off on margin calls and the liquidation of its mortgage assets. Several of the lenders, led by Deustche Bank and J.P. Morgan Chase & Co. ignored Carlyle’s request. Wednesday night, they began selling the fund’s $21.7 billion in mortgage securities, which were committed as collateral against huge borrowings.

By Monday, dealers had sold $5.7 billion of the fund’s $21.7 billion in assets, which were committed as collateral against huge borrowings.

Other dealers that sold off Carlyle Capital’s collateral included Merrill Lynch & Co. and Bear Stearns Cos., according to people familiar with the fund. But some other dealers who didn’t sell, including Citigroup Inc., had hoped to resolve the fund’s crisis amicably.

The fund’s collapse shows how Wall Street’s biggest players have begun playing hardball with some of their best clients. And they reveal how jittery banks have become about their own loan exposures. In the case of Carlyle, 12 banks had lent the fund about $21 billion, or $20 for every dollar of initial capital.

[Here’s the really cool part:] It also illustrates how the credit crunch has moved far beyond subprime mortgages. Carlyle Capital’s portfolio consisted exclusively of $21.7 billion of triple-AAA mortgage backed securities issued by Fannie Mae and Freddie Mac. They are considered to have the implied guarantee of the U.S. government and pay par at maturity.

Carlyle Capital’s investment strategy looked like easy money at first. The fund would exploit the difference between the interest earned on its investments in mortgage securities and the costs of financing those investments. [What could possibly go wrong?]

The secret to making money was borrowing massive sums. Carlyle Capital managed only $670 million in client money, but used borrowings to boost its portfolio of bonds to $21.7 billion. Until the dealers started selling off the fund’s collateral, it was about 32 times leveraged, a level one mortgage-company analyst called “astronomical.”

[Source: Wall Street Journal.]