Tech CEOs are incentivized—by us—to take risks, and layoffs are a consequence of them.
There’s continuing anger at tech CEOs as layoffs continue. I’ve noted before that the layoffs aren’t mathematically significant, just good for attention grabbing headlines. I’ve also argued that workers shouldn’t blindly follow CEOs and companies and then cry foul when it doesn’t work. There’s yet another, important reason the CEOs aren’t to blame: sometimes you need to miss a flight.
When I was working at Harvard Business School the professors I worked with looked at the world as a combination of time, cost, and risk. One of them made a comment about having missed a flight but suggested that it was a good thing. I grew up where my family would have maybe one flight a year for a vacation. We would get to the airport early since missing the flight could mean missing a whole day of vacation–try telling an eight-year-old there’s going to be one less day at Disney World. Of course, you get to the airport early. Once I became a frequent business traveler, I understood the lost productivity sitting around an airport. I regularly get to airports with minutes to spare and once in a while miss a flight, although as a solo travel with status it’s easier for me to get rebooked. These professors taught me that if you're not missing a flight occasionally, you’re not optimizing but are being too cautious and spending too much time sitting around waiting.
Another famous version of this mindset is that your very last check should bounce. The problem is you don’t know exactly when you’re going to die. It’s hard to time it perfectly, so it may mean you start bouncing checks months before you die or that you die with some cash left in the bank.
We tell people to take calculated risks. If someone hits 100% of their goals year after year conventional management wisdom is that the goals weren’t being set high enough.
We tell people to take calculated risks. If someone hits 100% of their goals year after year conventional management wisdom is that the goals weren’t being set high enough. This is to say nothing to the big, hairy, audacious goal (now more commonly called a stretch goal) made famous in the book Built to Last. CEOs are held to not just the same, but even higher standards.
We get ahead in our careers by showing wins. The more wins and the bigger the wins the better. The ideal manager would understand the odds and payoffs for all options and would always pick the projects with the highest expected value. In reality it's more akin to the famous coin flip investing analogy. In this experience where a thousand people flip coins Those who get tails to sit down and stop playing. Six flips in you’re left with about 16 people who got 6 heads in a row. They’re not better coin flippers, just statistically lucky ones, but we hire them to flip our coins. (In the analogy the coin flippers are stock pickers.) There are enough people taking enough big risks that some succeed and so they get hired to keep taking those risks. (I can’t tell you how many times I’ve come across Nelson “Big Head” Bighetti, people who were just in the right place at the right time and get credit for simply standing aloft the rising tide.)
The honest, professional coin flippers, the ones on Wall Street, will tell you no one can predict macroeconomic conditions with any certainty more than twelve months out.
In this particular instance what the tech CEOs generally got wrong were macroeconomic conditions. The honest, professional coin flippers, the ones on Wall Street, will tell you no one can predict macroeconomic conditions with any certainty more than twelve months out. And that’s to say nothing of shocks from global events. While Putin's westward expansion was evident since 2014 (if not earlier) no one could have predicted the next phase would start in 2022. Market crashes, oil shocks, and leaders dying all cannot be modeled. Had the CEOs been too conservative they may very well have been tossed out by the boards for missing out on a growth opportunity.
I have plenty of criticisms of corporate CEOs. They’re overpaid, have misaligned incentives, focus on short term goals and ignore long term costs, don't pay attention to externalities, get undeserved golden parachutes, and often aren’t really held accountable for bad decisions. But in this case, I don’t think it was a bad decision.
In a private memo internal to Goldman Sachs, Fisher Black argued that people shouldn’t be held to the outcomes, as they were random coin flips, but rather judged for whether they made the right decision with the information available at the time. In other words, they should be rewarded for betting on the 60/40 coin, even if it came up tails, and likewise that they should not be rewarded for getting heads when it came from a 30/70 coin. Few companies do this because of the streetlight effect.
Even in the case of Meta and metaverse, there may be a link to the macroeconomic condition. I’ve always thought the metaverse was stupid. One day we may have some cool, useful VR, and that begins with not so useful, mediocre VR. While I don’t believe meta itself was a good bet (he said with 20/20 hindsight) the act of taking a big bet may have made sense. There are arguments that this would have been the right time for Meta to make some type of big bet. (And to be fair, I also think blockchain and cryptocurrencies are incredibly stupid and have actively avoided them since 2010–and yet they continue to defy logical gravity, so my prescience isn’t perfect.)
I have my objections to CEOs and even a personal dislike of some of the specific big tech CEOs. I have no problem criticizing them, but criticism should be justified. In this case the CEOs made reasonable decisions, with the information they had at the time. No doubt some CEOs made bad decisions, but it’s not clear that they all did. If you did get laid off I am sorry for that, but remember that you need to own your career.
Even a goddamn baby knows, in craps, you never bet on the hard ways! But what if that baby was promised a golden parachute if he misses?
If you got into a car with a drunk friend who is driving, he may have crashed the car and he bears full responsibility, but don’t claim ignorance when you saw him down four drinks before you got in. When you take a job, go in with your eyes open. Look at the company, its prospects and products, and your own judgment of macroeconomics conditions, and then do the best you can, for you, knowing that even a 90/10 coin comes up tails sometimes, that’s the way the world works.
The CEOs are incentivized to take the big bets and at times do so when your careers are on the line. The CEO is incentivized by the board who are incentivized by the Wall Street analysts and funds, who are incentivized by the investors; that’s you, me, and anyone with money in a 401k. Don’t hate the player, hate the game. It’s the board and ultimately the investors who need to change the game.
In the meantime, know how the game is played. Even a goddamn baby knows, in craps, you never bet on the hard ways! But what if that baby was promised a golden parachute if he misses? He might take that bet, but you still shouldn’t. Their incentives are not yours, and their career and your career are different. Optimize for your career. They're going to optimize for their own careers, and I can’t blame them when I just recommended that you do the same.
It’s critical to learn about corporate culture before you accept a job offer but it can be awkward to raise such questions. Learn what to ask and how to ask it to avoid landing yourself in a bad situation.
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Groups with a high barrier to entry and high trust are often the most valuable groups to join.
