My friend Bob Kerns blogged about Stephen Wolfram’s “Alpha” project. The project aims to take on Google by creating a web-retrieval engine that can answer specific factual questions directly. Type in, “how many angels can dance on the head of a pin?” and it will go out to the Web, retrieve the answer, and tell you. Bob doesn’t think Alpha will be able to challenge Google. I agree.

I’d never heard of Wolfram’s “alpha” before, but the sensationalistic headlines, in my humble opinion, show a total misunderstading of Google’s business model.

Google is in the advertising business, not the search business. Search is one of many distribution channels they have for that advertising. It lets them offer targeted ads, because what people search for can be used to target ads to people who might want to buy a product or service.

They’ve also figured out that if they give away products that involve high information content (mail, word processors, spreadsheets, etc.), targeted ads can be delivered unobtrusively in the margins, deduced from the information a person is working with.

It makes sense for Google to develop better programs in the information-processing space than Microsoft and give them away for free, since that drives eyeballs to Google’s ads. You’ll notice Google isn’t building the G-Box 360; there’s no information content there to be analyzed and monetized.

The Google phone gets you more deeply involved with your Google platform on mobile devices. My guess is that it’s a just-in-case move, anticipating the possibility that mobile devices will develop into a big chunk of the information processing market (and thus advertising eyeballs).

Alpha may be able to answer factual questions directly, but it’s not necessarily even in the same space as Google. Factual questions aren’t likely to be very good at generating enough context to do good ad targeting. If I ask, “what is the tensile strength of steel,” you don’t have much information to use to target ads. You don’t know why I want that information.

When I Google, however, I am typing in words associated with the actual information I need. I type in broader phrases, loaded with context. If I’m searching for “steel for skyscraper construction,” it’s easier for Google to find a host of relevant ads based on the query words and on the content of the top pages matching the query.

It’s the very fuzziness of Google’s search that makes it a good business for monetizing with ads.

You know, I just can’t help feeling outrage, depression, and cynicism at the Big Three auto companies asking for a taxpayer bailout. Twenty years ago, we read cases in business school about how American auto manufacturers had already fallen behind foreign imports in production capability, cost structure, and market responsiveness. At the time, this was not new information.

And now, the Detroit top brass are showing up to Congress, hats in hand, for mega-billion-dollar cash flow loans that they project will last them … oh, a few months. And they’ll do what, exactly, in those few months? Why in the world should we believe that the same people who willfully ignored their competitive situation for two generations have any relevant skills, abilities or motivation to fix any of the problems? Aren’t they exactly the people we know won’t solve the problem?

Yeah, they’re saying they’ll reduce their salary to $1 until the mess is cleaned up. How generous of them. Are they taking huge stock grants instead (Iacocca did, back when he reduced his salary to $1 when saving Chrysler. That part of the story doesn’t sound as noble, so it’s often glossed over)?

Even if they’re genuinely giving up their compensation, they’ve taken home seven- or eight-figure salaries for years. They’re way, way past the point of needing another dime as long as they live. What a sacrifice, to reduce their salaries. I say they’re not going nearly far enough. How about giving back a big chunk of what they’ve been paid over the last twenty years, since it’s now apparent they did a piss-poor job at CEOing.

Startups can’t afford the luxury of incompetent, overpaid CEOs

In the startup world, we don’t have much money to pay CEOs. So we look for CEOs who are passionately committed to the success of our idea, our customers, and our company. We give them stock options, sure, but honestly, that’s not what we count on to motivate them. We count on them loving what they do enough to go the extra mile. And not in a private jet. In fact, founder-CEOs often put in their own money to fund the company and work for free until the company is proven viable.

So here’s my proposal…

I’m happy to have taxpayers bail out Detroit, but with a condition: we auction off the CEO jobs at Ford, Chrysler, and GM. The highest bidder gets the job. They receive a total compensation package equivalent to a shift supervisor at one of their plants. No stock, no options, and no bonuses. If they want better health insurance, for example, they pay for it themselves. Why would anyone take this job? Simple. It’s the chance of a lifetime to do something that almost no one in the world will ever have the chance to do: reshape an industry.

It’s pretty clear to me that the logic of “pay the CEO big money” isn’t getting competent, committed people into the position. It’s getting incompetent leeches whose main interest seems to be in feeling self-important while relieving the company of the burden of millions of dollars of vaule.

By having people ante up real money to take the position, we would quickly narrow the playing field to people who genuinely care, are excited by the opportunity, and who are being driven by the challenge or the love of the industry, not by personal greed. And remember, this isn’t the string bean industry, it’s the auto industry. There are many superbly successful businesspeople in the world who are passionate about cars as an industry. I’ll bet we would be surprised at the number of excellent candidates who stepped forth.

I’ve had enough with this absurd logic that says, “you can’t motivate people unless you pay them.” That’s bull pucky. It may be true for assembly line workers, because those jobs are mind-and-body-numbingly dehumanizing, but when it comes to C-suite jobs, I’ve met hundreds of people in those jobs whose motivations have everything to do with passion, challenge, creating, and doing a job well-done. Most of them are already rich enough that they don’t need to work, anyway.

In fact, even Warren Buffett acknowledges this. He points out that the CEOs of Berkshire Hathaway subsidiaries are extremely successful, already independently-wealthy people. They don’t need money and aren’t motivated by it. That’s why they do such a good job.

The least we can do is take Buffett’s example and get CEOs motivated by passion, superb skill, and challenge to turn around an industry that’s had none of the above for a long time.

Be Thankful; It’s All in Your Mind

(A Financial Tailspin sucks! Don’t compound it.)

We’re going through some … interesting … times, financially. People feel insecure, established institutions are in desperate need of bailout (funny how attractive socialism becomes when you’re the one who needs the handout) and the world economy seems to be teetering on the brink. Now’s a great time to realize: it’s all in our minds.

I mean this quite literally. Have you seen “Money as Debt?” It’s an excellent 47-minute video on where money comes from. It tells how our current system came to be. It highlights flaws in the system and offers some alternatives, all with a tasty dose of conspiracy theory thrown in here and there(*). You can watch the video here: http://www.SteverRobbins.com/r/moneyasdebt

Money is literally nothing more than an idea. It’s a promise we make to deliver a good, a service, or more money at a later date. Why is Bill Gates a billionaire? Because the rest of us agree that he is. We also agree to give him our stuff if he gives us enough money. But it’s all an agreement. Because it’s an agreement, we take action on it, and it’s our actions that have real-world consequences.

“Don’t worry, be happy.”

Bobby McFerrin’s song, “Don’t Worry, Be Happy” is right on the money. At any given moment, you may or may not be able to control what’s actually happening around you. But you can always choose your attitude about it.

I was in a meeting earlier this year, discussing a key feature of entrepreneurship: the ability to see opportunity where others see problems. Just for jollies, I decided to try spending a week deliberately asking, “Where’s the opportunity here?” every time a problem cropped up. Every single time I asked the question, I was able to find an answer. Often, in mere seconds.

The housing bubble gave many time in an elevated lifestyle

Then I asked, “What’s the upside of the financial crisis?” You know, one answer is this: millions have had the chance to live far beyond their means for many years. While we don’t much care for the consequences, at least they got to enjoy a standard of living they couldn’t have otherwise afforded. I’m serious about this, by the way. Of course it’s natural to be upset when losing your job, your credit, your home, or your car. But being upset won’t change anything. It will just make you feel bad. You can also choose to feel thankful that you had those things to begin with.

Be a Thanksgiving Gratitude Geek

Are there problems in the financial world right now? Yup. And we can live through those problems giving all our attention to the downside or giving all our attention to the opportunities and the upside.

My suggestion to you: spend this Thanksgiving dwelling on the upside. Ask yourself, “what do I have to be thankful for?” and make a big long list. Help everyone around you do the same thing. They say what we need is more optimism in the economy. Optimism isn’t something “out there,” it’s one of the few things we have control over. So let’s exercise that control and see the glass as 10% full, not 90% empty. Because we can’t always change the outside reality, but we can certainly choose our inner reality.

Have a Happy Thanksgiving. Here are some of the things I’m thankful for:

• Friends and community

• Hot running showers
• Democracy
• My four-year-old iPod that still works great
• The chance to teach high school students at an after-school program
• Zipcar
• My podcast
• Friends and community

(*) I love conspiracy theories! I always like to remind myself that just because someone’s paranoid doesn’t mean the conspiracy doesn’t truly exist.

I am a proponent of free markets for the things that markets are good at. Markets are great at pricing things whose future attributes are relatively predictable by the market players, and that don’t require a decision-making time horizon greater than the market trade horizon. For example, markets are great at pricing stocks, because companies are ongoing entities and the market can judge performance over time (both past and possible future) to do the pricing. Furthermore, it’s not critical to society (or wasn’t prior to the current mess) that any one company continue to exist.

When it comes to something like oil, however, I believe markets are a really bad mechanism. The time horizon for market pricing is far, far shorter than the lifespan of the world’s oil supply. So pricing becomes based at best on marginal cost to produce, rather than on anything relative to the actual value to society. For example, according to the book “The Omnivore’s Dilemma,” about 1/3 of the world’s population only gets fed because we have genetically modified corn that requires special petroleum-based fertilizer. I would suggest that the market price of oil (to the extent that it’s a market and not simply OPEC’s arbitrarily-set price) doesn’t include any component that has to do with the future of the world’s food supply. Most (all?) market players just don’t know enough about the full supply chain of which oil is a part to price it properly.

This, in my mind, is where Government comes in. I consider the role of government to adjust the playing field so prices and practices result in what’s best for overall society long-term. Government is the only entity that can change things around to align the individual incentives (”how do I get rich?”) with the community incentives (”how do we do what’s best for us as a society?”)

Sadly, I’m not sure there’s anyone in Government who thinks that way. As far as I can tell, most politicians in Congress believe their job is to grab as much of the common pie as possible for their constituents, rather than representing their constituents in determining how to spend our community-wide fund on projects to benefit the entire community.

Meetings! I just love meetings … no, I don’t. I hate meetings. But perhaps that’s just because I’m no good at running them.

According to an MSNBC article today, Bush met with the leaders of 20 countries Saturday night. To quote the article:

“After the almost 40-minute meeting and his six-minute statement, the president left the White House for a nearly two-hour mountain bike ride in the nearby Virginia woods.”

Jeez. I really wish I had his meeting facilitation abilities. At a meeting with 20 world leaders, all of whom are undoubtedly known for their keen wit, brevity, and ability to grasp huge honkin’ financial issues in seconds, it would still take me 10 minutes to do introductions. After all, I like to spend about 30 seconds having each person state their name, the country they lead, and their form of government (”Parliamentary,” “Representative Democracy,” “Puppet Dictatorship,” etc.)

That would leave only 30 minutes for the meeting itself, clearly not enough time to lay out the mess, explain the economic issues and how policy can resolve them, etc. Whatever his other problems, it seems Bush is able to resolve a 20-country, unprecedented global financial meltdown in 40 minutes, just by talking for six minutes… astounding! Perhaps it’s the two-hour bike rides? They send enough oxygen to his head that he can think super-clearly.

This is what passes for world leadership.

We have the most advanced technology in history and the ability to feed every man, woman, and child on the face of the planet. Yet we’re still plagued by poverty, famine, gross wealth inequality, and violence. Our human abilities simply aren’t up to coping with issues of this magnitude. We’ve created systems so complex that even the major player (e.g. Paulson) can’t understand them. And our leaders? They’re as clueless as the rest of us, it seems.

So this whole meeting brings up only one major question: Where can I get a job that lets me take two-hour bike rides while the country—ostensibly my responsibility—melts down around me?

My biggest concern about Bush in 2000 was that every company he’s ever run, he’s run into the ground. That concerns me. Past behavior is, alas, the best predictor of future behavior.

“Shrub,” by Molly Ivins, recounted the messes prior to his being elected. At the time, I imagined he and his policies wouldn’t be the best for the country, but I honestly didn’t believe they could screw up an entire country.

And to be fair, he and his policies only exacerbated structural problems that had been in the works for years. Heck, Clinton’s the one who lowered Fannie Mae mortgage standards allowing the subprime mortgages to start to take hold. And the financially illiterate actually took out the mortgages. And the further financially illiterate (the financial and banking sector, as it turns out) bought the repackaged mortgages.

But at the end of the day, it’s the leader who needs to be seeing farthest. As is common knowledge by now, they didn’t bother to read the report entitled ‘Bin Laden Determined to Attack Inside the United States.’ And even though such minor folks like Warren Buffett have been warning about derivatives for years, their market ideology got well in the way of noticing that the numbers didn’t add up.

There’s not much I can do about it from where I sit. Except vote.

If what we want to do is point fingers, there’s plenty of blame to go around. At the end of the day, though, I hold the creators of the securities as being far more responsible than the home buyers.

Professionals should be held to higher standards

First off, the financial companies are supposedly professionals. That means they understand far more about how all this works. Bluntly, I hold them to a higher standard. If they’re going to take home billions in pay, I expected them to think through their investing decisions and security formation very, very carefully.

The financial community has gone wild in abstracting away risk and reward from underlying securities. And they’ve gotten very, very rich from that. But they’re professionals. If they buy a mortgage-backed security and are surprised that people can default on the mortgage, then they need to take full responsibility for that. Period.

Stocks and bonds and mortgages all represent actual entities in the world who are actually doing stuff. If you remember this, you can make intelligent decisions. Warren Buffett became the richest man in the world by doing this intelligently and sharing with everyone who cares to listen how he does it. When others in the finance community choose to ignore that underlying reality because it’s convenient, I can’t have much sympathy when the house of cards collapses.

(Upcoming crisis: if they buy a credit swap from someone who can’t actually guarantee the underlying loan, then again, they absolutely deserve whatever they get. Especially if they’re the ones who lobbied for non-regulation in the credit swap market!

My solution involves using eminent domain to reclaim every penny and every asset paid to every employee of the i-banks who created, traded, and sold these entities. then the taxpayers pay for the remainder of the bailout. Aren’t you happy I’m not in charge?)

Selling a financial product to numerically illiterate customers is bad business

Second, innumeracy. You can say all you like that it’s the dumb mortgage holders who bought dumb mortgages. And I agree. Only they weren’t dumb; they were simply ignorant. We don’t teach people anything about financial literacy in school. Even when I got my MBA, it took quite a while for the group of very bright (but non mathematical) students in the room to understand how to calculate simple financial concepts like “net present value.”

Most people don’t really understand the math of a variable rate mortgage, and certainly aren’t good enough at budgeting and forecasting future scenarios to realize what is and isn’t a good financial decision.

Again, the mortgage underwriters were professionals. For them to say, “we sold these to people who couldn’t pay, it’s their fault,” is simply absurd.

If you’re in the business of making loans and then carrying those loans on your books, it’s YOUR responsibility to make sure the loans can be paid off! Not because you owe the customers anything, but because Accounting 101 GAAP rules say that you don’t count on an asset’s value unless you’re highly certain it’s going to be worth that much.

If a bank writes a mortgage and chooses to relax its standards under the theory that it can sell the mortgage before the borrower defaults, then the bank is being irresponsible (not to mention implicitly defrauding the folks it sells the mortgage to).

The “2nd tier” buyers can also be smart about what they’re buying

The 2nd-tier people buying that mortgage from the bank are buying an asset they don’t understand. They’re free to ask for a payment guarantee from the bank to accompany the mortgage. They didn’t, and are then surprised that the default rates were higher. (These people clearly missed the whole Junk Bond crisis that had all these same elements.) If I have to buy insurance on my house in case there’s a fire, then the 2nd-tier buyers should also be smart enough to demand the bank guarantee the default rate that they claim their mortgages will produce. Or if the banks won’t do that, then the 2nd-tier buyers should at least look at the mortgages to make sure they’re as high-quality as the bank believes them to be.

Rating agencies don’t exempt finance professionals from due diligence

“But the rating agencies…” you begin to cry. Screw the rating agencies, people. If a buyer of a mortgage-backed security decides to trust a rating agency’s evaluation of a security that everyone admits is hard to value, then again, you’re consciously deciding to allow your business’s integrity to reside in the hands of the rating agency.

You could take a random statistically valid sample of mortgages and hire a bunch of interns to re-run credit and income checks to make sure the mortgages are sound. You could further ask whether you believe the borrowers can still repay after rates increase. It’s called “due diligence” but it requires admitting that there’s a physical reality that might get in the way of your free money-printing machine. It also requires doing legwork in the physical world, which the finance people were understandably loathe to do.

It wasn’t the consumers who came up with the idea that these mortgages were affordable

And lastly, the marketing of these mortgages were designed to persuade people to take them out. Well, it worked. And for banks and lenders to be shocked that their marketing worked, and then further shocked that their own lax standards put them in a position where their borrowers couldn’t repay is just hubris beyond belief.

So yeah, many consumers should have made better decisions. But they’re not professionals, they’re not financially literate, and they’re being subjected to $100,000,000 of marketing and sales tactics.

The mortgage writers and derivative creators are financially literate professionals who chose to ignore their own historical underwriting standards and sell mortgages that couldn’t be repaid. They then took these bad mortgages, repackaged and resold them to other institutions that didn’t bother to do real due diligence.

To me, the case is clear: if I have to blame someone, I’ll blame the industry of “professionals” who ignored the financial realities of their customers, invested in bad quality securities, eschewed due diligence, and generally took the profits when times were good and are now trying to shove away responsibility for their own decisions now that times are bad.

According to a New York Times article about Greenspan and his policies today, Greenspan is defending his stance on derivatives (he was pro-derivatives) by saying the whole imploding economy is because of people acting in bad faith in the markets, but the deregulated derivatives approach was somehow still “right.”

Mr. Greenspan is apparently living in a world without people. I’ve been aware of Wall Street and its tendancy to, er, stretch the boundaries of good and bad faith since Greenspan took office. In case he didn’t notice, we had a Savings and Loan Crisis, a Junk Bond collapse, Long-Term Capital Management’s collapse, the Internet bubble popping, then a wave of corporate scandals that even took down Arthur Andersen. Where was he during this 20-year march of greed that he could champion deregulation under the belief that people wouldn’t be greedy and would act in good faith without regulation to impose penalties when they didn’t?

How could he cling to a theory that depended, oh-by-the-way, on the naive belief that people would do the “right” thing even though the instruments let them become unbelievably wealthy by doing the wrong (but legal) thing?

I just don’t get it. And I find myself repeating it over and over in stunned disbelief. He actually believed that Wall Street would police itself, after having presided over several TRILLION dollars worth of corruption and greed with several successive financial instrument “advancements.”

I’m so very, very glad that the man is no longer making policy. Of course, having the head of an investment bank now in the position doesn’t exactly fill me with confidence. Goldman has a good reputation, but at this point, I’m not at all sure that anyone steeped in the financial industry culture for 20+ years has the objectivity to know whether the system is fundamentally broken (they have a vested interest in believing it’s not), or whether it simply requires some trillion-dollar tweaks to put it back in order.

I’ve been watching the election with bated breath. Well, ok, I’ve been watching it mainly with a feeling of disgust. There’s been hour after hour of talking heads evaluating the horse race and ignoring issues. Or at best, they whine about how the media is ignoring issues… while they—also the media—ignore all issues except whether the media is ignoring issues.

The scary part is the vapidness of the whole race. All of the candidates seem to be smart people. They can form complete sentences (most of the time), and they can combine the sentences into paragraphs. So already, they’re better than some of the gems we’ve had in the White House in times past.

But at this point, I’m truly scared. We have multiple crises in the U.S.: economic, environmental, and educational, to say the least. We need serious policies to address these problems, and policies that measure outcomes and change in the event the policies aren’t doing what we want them to do.

That would seem like common sense, right? Implement a policy and if it doesn’t work, change it? But we don’t operate that way. Most policies seems to be set ideologically, with little or no outcome monitoring. In the rare cases we do measure an outcome, we choose sloppy measures that can often drive more harm than good. (See: “No Child Left Behind” and “Test Scores” and “Teaching to the test rather than teaching children to think”, respectively.)

The current Presidential election is proceeding with the same utter lack of thought. No one’s asking what skills a President should have, how to measure the skills, and then examining the candidates against that measure. Instead, we’re just collectively blustering, slinging mud, and basically blathering on like idiots.

What I want in a President is wisdom. I want a President who is thoughtful, who seeks out a variety of views, and who makes decisions that seem appropriate for the circumstances. I don’t want someone who simply knee-jerk follows the party lines–the parties aren’t particularly competent, in case you haven’t noticed.

I would judge that by watching the way a candidate runs his or her campaign. I would look at the decisions he or she makes, who they talk to, whether they talk about the issues, policies, and solutions, or whether they stay solely on the “character” issues. (Yes, character is important. But it’s only one piece of the puzzle. I want character and competence, but the whole competence question seems to have vanished, except as an attack on character.)

So … we’ll get the politicians that our system selects. And we’ll get the politicians we deserve. By definition. I simply fear that what we deserve may not be the path we’d want.

On Twitter, I’ve recently alluded to my new job. I’ve started working at Babson College helping to facilitate a community-wide re-examination of Babson’s capabilities, strategy, and future direction. I will then be helping to implement the community’s recommendations.

This job is incredibly exciting. The new Babson president, Len Schlesinger, has been a colleague, friend, mentor, and originally professor of mine since 1989. He’s one of the most visionary people I have ever met, combined with a firm grasp of data and execution. In short, he dreams big dreams and has what it takes to make them happen.

He came to Babson to build on its strength in entrepreneurship (we’ve been #1 in entrepreneurship for the last 15 years), to take Babson to its next level. What that next level is will be defined by the community in our next four months of conversation.

This should be incredibly exciting! I will continue to produce the Get-it-Done Guy podcast and, of course, will be finishing the Get-it-Done Guy book as well. I hope to continue posting to this blog, though until the book is done and I have more time on my plate, my entries will likely be relatively fewer and farther between.

To hear Len discuss the tension between business pressures and the ethical dimensions of business leadership, listen to (1 hour) Leadership and Ethics Series: “Organizational Leadership in Search of the Triple Bottom Line: The ‘Victoria’s Dirty Secret’ Campaign.

I was reading Steve Salerno’s “anti-SHAM” blog as he was commenting on Hillary’s speech at the DNC last night. He didn’t think much of her story. She told a story of her success, he said, that may have been a tad… biased.

That got me thinking about how much our own stories do and don’t have anything to do with actual events. Certainly the book “Mistakes Were Made (but not by me)” by Carol Tavris, Elliot Aronson documents thoroughly how we distort our own memories to tell a story consistent with how we’d rather view ourselves.

This is my response to Steve:

Check out “The Halo Effect” by Phil Rosenzweig. In it, he basically discredits 99% of popular business books and research by pointing out that after-the-fact explanations where the outcome is known always come out the same, regardless of actual circumstances. The “halo” of known success (or failure) causes all the players to remember the past in a very specific way.

For example, ask people why XYZ Co. was successful and they’ll always talk about a visionary leader, good teamwork, flexibility, etc. You can predict those explanations with such certainty, apparently, that any research based on after-the-fact explanations is virtually worthless. (Because if you can predict in advance what people will say, then it obviously can’t be based on the actual situation.)

To avoid the halo effect, you would have to approach people in companies before success is known. Then ask them to describe the current environment. Then 10 years later (or whenever), see if their in-the-moment descriptions correlated with later business performance.

Though Rosenzweig limits his discussion to company success, I believe we also have a halo effect with successful people. We love the rags-to-riches, hard-work-and-skill-wins stories. No matter the truth of a situation, those are the stories we use to explain known success.

(Why is Bill Gates so extraordinarily successful? You’ll hear about strategy, ruthlessness, etc., etc. All the standard after-the-fact explanations. But that misses the point. There are lots of strategically brilliant, ruthless people who didn’t dominate the computer industry. In Bill’s case, mommy was on a board with the chairman of IBM, the head of Digital Research missed the chance to produce DOS so Bill was the 2nd choice, and IBM was stupid enough to let Gates keep all the rights to the software. Without those factors, all outside his control, he might have been just another 2-bit software developer. But that isn’t a story that we like to tell.)

When I look as objectively as I can at my successes and those of my friends (and many of my Harvard MBA friends have been very successful), I notice that hard work and skill seem far, far less important than, say, choosing the right industry, negotiating a compensation structure based on someone else’s work (e.g. paid as percentage of someone else’s transaction), and being lucky in your timing. Finance and entrepreneurship fit the bill.

But no one likes the story, “I made $100 million because I was frickin lucky.” That raises the question of whether the person deserves it, etc., etc., etc. We don’t want to challenge whether Gates deserves it because deep in our hearts, we hope we can make it big and don’t want to question whether or not we deserve it.

I’m sure Hillary frames her life as hard work, ambition, etc. And I can’t blame her. I suspect anyone in that position would frame their life that way. In part because of the halo effect, and in part because saying, “our achievements owe as much to luck as to skill” isn’t something many of us are willing to admit to ourselves.