Evaluations

Recently, I attended a seminar at Callan College on being a trustee of a pension fund. Part of the training involved evaluating fund managers. Fund managers are the people you hire to invest the money in your trust fund. The instructors stressed how easy it is to be swayed into only looking at how much gain those managers have made over an annual or five-year basis, but that it is a mistake to evaluate only on quantitative measures. The qualitative factors are much more important, even though they are harder to evaluate. Some of the top fund managers have down times which are beyond their control.

It reminded me of people who are so short-sighted they want to evaluate teachers only on student test scores. They count only what is easy to measure and miss the most important factors. I’ve heard lots of people talk about the teacher who made a difference in their lives and I never heard any of them tearfully remember how Mr. Smith raised their test scores.

At the end of the training, there was a final exam. We students were divided into small groups to act as boards of trustees for pension funds. Each “board” was given a scenario which required us to make several decisions using the skills and principles we had acquired during our training. We then orally presented our decisions before a panel of judges consisting of our trainers.

Part of my group’s scenario involved hiring a fund manager and deciding on a fee. One option was a flat fee and the other was a smaller base fee with bonuses dependent on the amount of fund gains above a set minimum growth. Most of my group felt the bonus fees would encourage the fund manager to do better. I forcefully argued that we were hiring a professional and paying him a reasonable fee to do his best. Paying a bonus would end up costing us more without giving us more than a manager should be doing anyway. Upon evaluation, if we felt the manager was not doing what we felt was the professional work expected of him, he should be fired. If we needed to pay a bonus to get him to do what he was supposed to do, then we were not doing a good job of evaluating. As fiduciaries we should not be paying more than we needed for his best results.

Since I argued so forcefully, the group insisted I make the presentation to the judges. I was nervous. I understood that in the current business model, bonus is king, so I braced for the rebuke. But I believe you must stand on your principles, so I presented to the judges the same as I spoke to my group.

As I finished, the room was dead silent. Suddenly one of the judges slapped the table in front of him and exclaimed, “Absolutely correct! Never agree to a performance bonus!” To the nods of his fellow judges, he explained that paying a bonus will entice a fund manager to skew your fund assets toward earning the bonus, and then when the market makes a minor turn, you will end up with massive losses. You want a well-rounded, diverse portfolio. A bonus tends to skew your portfolio narrowly toward maximizing the bonus leaving you, as a trustee, worse off.

I was stunned. As I sat down, all I could think about was where are these people in the debate about tying teacher pay to test scores? We say we want our students to receive a well-rounded education but all we talk about are test scores in reading, writing, math and sometimes science. And the new mantra is to skew things even more by paying a bonus mislabeled as “merit” pay. It should be called what it actually is – child abuse. It denies students a well-rounded education and sets them up for difficulties later in life.

But who am I to criticize those titans of industry who depend on golden parachutes and manipulations to enjoy a bonus based on this quarter’s return? They brought us the financial miracle we see in our 401k accounts. Or, perhaps we need to reconsider…

Uncommon sense required.

I am a physics teacher. Classical physics is a bit strange. It is not easily isolated as part of our normal life, and so it is not commonly noticed. That is, it is not common sense. It requires uncommon sense to be understood. Galileo found out what it meant to challenge “common” sense and was lucky to be able to spend a good part of his life only under house arrest rather than the usual burning at the stake. Isaac Newton lived in a more enlightened time, but was still careful about how he framed his scientific discoveries. Too different a perspective was threatening and would be crushed. As we entered the 20th Century, sub-atomic particle physics defined a new sense of existence, far beyond weird or strange. In fact, Murray Gell-Mann used the descriptors “strange” and “charmed” to describe properties of quarks, the components of protons and neutrons in atoms. He was awarded a Nobel Prize for his work in physics, so he knew what he was talking about.

I just read his book, The Jaguar and the Quark. One of the stories in the book is about a scientist who is doing research on plants in the Amazon Rainforest. One day the scientist was returning to camp after collecting flora samples when he started thinking what it would be like to come face-to-face with a jaguar. After a bit, he had a funny feeling, turned around, and stared into the face of a jaguar which had been following him. Fortunately, after looking him over, the jaguar turned away and disappeared into the jungle.

The experience changed the man’s life. It was not like seeing a big cat on Wild Kingdom or at the zoo. This was not artificial, it was real. He had a new perspective on life, and many things he had thought important now seemed trivial. And some overlooked things rose in priority.

He was lucky. He experienced a paradigm shift and lived to savor the growth. Many of us are never able to let go of our traditions, our up-bringing, our prejudices. This is the lens through which we view the world and frequently it is used to describe how we view people of another color skin, but it is much broader. What is the proper way to treat the opposite gender? How about the stranger who knocks at your door? Or the person who has the opposite belief about abortion, gay marriage, or gun control? Is there one right answer? Many people believe there is, but if there was only one answer, we would not have the conflicts that currently exist. Rodney King had it right when he said, “Why can’t we all just get along?” But this didn’t come to him until he experienced the LAPD. Is that what it takes to believe in the humanity of all of us? To make it common sense?

Murray Gell-Mann says that what sets us apart from the jaguars or other animals is that we think about thinking. As soon as you deny any perspective but your own, you have stopped thinking and have moved to the level of the jaguar. If you want to know what kind of life that is, read about the life of Galileo.