Monthly Archives: February 2014

Bean counters turned risk managers

In a previous post I wrote about the Titanic as an example of disaster of project management, drawing from a conference I attended.

At the end of the post I reminded the theory of safety in systems seen as layers of cheese with some holes in them. The speaker did not enter into risk management, but rather in communication, teamwork and leadership, nevertheless she acknowledged the side of risk management to the case.

"What management is", by Joan Magretta.

“What management is”, by Joan Magretta.

While reading the book “What management is”, by Joan Magretta, I recently came across the case of the Ford Pinto which I did not know:

In the 1970s, the Ford Pinto taught the nation the basics of cost-benefit analysis. The car had a design flaw in the gas tank that caused at least fifty-nine deaths. Rubber liners would have fixed the problem at a cost of $137 million. But careful calculations of the benefits – all costs associated with those burned and killed down to the flowers at the funeral – only added up to $49.5 million. Cost-benefit analysis said it just didn’t pay to redesign the Pinto. The lesson at the time seemed pretty clear, and many baby boomers grew up suspicious about management and its methods. […] (excerpt from “What management is”)

You may see in the article of the Wikipedia here more references to the case, including an apparently famous article at the time, Pinto Madness, which appeared in the Mother Jones magazine. Some excerpts from that article:

Because assembly-line machinery was already tooled when engineers found this defect, top Ford officials decided to manufacture the car anyway […]

For more than eight years afterwards, Ford successfully lobbied, with extraordinary vigor and some blatant lies, against a key government safety standard that would have forced the company to change the Pinto’s fire-prone gas tank. […]

Ford waited eight years because its internal “cost-benefit analysis,” which places a dollar value on human life, said it wasn’t profitable to make the changes sooner. […]

I place myself the same question again: Have we progressed since then?

And again: Today we like to think that yes. More requirements regarding safety are put into projects. Regulations are passed to ensure safety. Risk management is used as part of project management to ensure that the kind of decisions taken at the time of the Ford Pinto today they are taken without overlooking the risks behind them.

However, I wanted to remark this time the need and criticality of placing safety at the driving seat of cost-benefit analysis, of evaluating risks and mitigations, budget reductions, targets setting, etc. As Charles Munger uses to say all these frameworks and mental models together may create a lollapalloza effect, that is the confluence of incentives and biases acting together may result in the overlooking of serious risks which down the road (after the fact) would seem impossible to have been overlooked (as in the cases of the Titanic or the Ford Pinto).

I believe this takes the utmost importance especially in an industry like aerospace, where the words “safety first” cannot be just a phony industry mantra.

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Time Value of Money

In courses about finance in the past, as part of job-related investment projections, for personal investments and as part of exercises related to posts in this blog I have discounted cash flows several times. Discounted? To those not initiated: it is about the time value of money.

Many course of finance start with the explanation of time value of money. You can find Wikipedia’s article here.

I recently came across the most descriptive and ancient (to my knowledge) explanation of the concept.

A bird in a hand is worth two in the bush”, Aesop, 600 B.C.

Seeking Wisdom: From Darwin to Munger, Peter Bevelin.

Seeking Wisdom: From Darwin to Munger, Peter Bevelin.

I found it while reading “Seeking Wisdom: From Darwin to Munger”, by Peter Bevelin, in which the author retrieved a passage from Warren Buffett’s 2000 Letter to the Shareholders of Berkshire Hathaway [PDF, 93KB, pg. 13]

Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

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Penosa encuesta de Metroscopia

Me encuentro hoy en El País con la siguiente encuesta “Autoubicación ideológica de los electores”:

Fuente: Metroscopia para El Pais,

Fuente: Metroscopia para El Pais,

Dicha encuesta va acompañada de un artículo (“¿Hay espacio más allá?”) firmado por Jose Pablo Ferrándiz, sociólogo y vicepresidente de Metroscopia. Y por lo que parece, mal profesional.

Viendo la encuesta me llama la atención que indiquen que hay 342.967 electores de extrema derecha (10), los mismos que prácticamente extrema izquierda (1) o derecha (9). Miro en detalle los números y veo que han preguntado exactamente a 100 personas.

La encuesta indica que la población de electores es de algo más de 34 millones de personas. Me llama la atención lo pequeño de la muestra, y me pregunto por la confianza de la muestra que han tomado, y así que se lo pregunto

Como no espero respuesta, decido hacer los números.

[Por cierto, cuando digo arriba “mal profesional”, en parte lo digo porque ya es poco profesional no adjuntar los datos de la muestra: número de encuestados, nivel de confianza e intervalo de confianza… pero veremos que no los incluye por algo]

Usando un simple calculador podéis ver que para un nivel de confianza típico de entre 95% y 99% con una población de más de 34 millones de electores, el hecho de haber cogido una muestra de solo 100 personas hace que el intervalo de confianza esté entre + / – 10-13%.

Es decir, lo que Jose Pablo no nos dice es “un 10% de los electores se ubica en el centro derecha (6) con un intervalo de confianza de más o menos 10%, podrían ser 0% o 20%, vaya usted a saber. Esa es la frase que echo en falta en su artículo donde llega hasta el punto de desgranar como se califica un 2% o 6% de la población (más menos 10%...)

El último detalle que me ha encantado es la nota del final: “* La diferencia hasta 100% corresponde a no sabe y a no contesta”. Lo gracioso es que las cifras de porcentajes que han dado sí que suman 100%, y por tanto la nota final sobra. Todo el mundo ha contestado y el único que no sabe aquí es Jose Pablo.

¿A quién debemos poner en solfa? ¿A El País? ¿A Metroscopia? ¿A su vicepresidente Jose Pablo Ferrándiz? ¿Al becario? ¿…?

NOTA: Al final dudo de si con los 100 encuestados se han limitado a preguntar a “electores” y aleatoriamente. Capaces de haber preguntado a menores de edad, extranjeros, y solo a familiares y amigos…

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