Thursday, April 28, 2011

The Backlash Against Becoming Rich

The latest Perspectives article, "Demonizing the Rich", highlights a key irony: "While we applaud our children's and friends' success, when those success stories translate into wealth, we chafe and claim unjustness."

Two high-octane forces explain income disparity in the U.S. One, entrepreneurship, emerges from our freedom to conceive and execute new ideas. The other, large company executive compensation, roots itself in the evolution of the corporate system (particularly in publicly-traded companies), and executives simply being executives at the right place at the right time and wanting to preserve a comfortable way of life.

For folks participating in the first force, fortune gained is fitting, because they risk failure. For those participating in the second force, fortune gained is largely fortuitous.

The article underscores a genuine problem in how corporate boards too often pay their executives undeserved sums. At the same time, it warns that, in not recognizing the other force at play, populist action and the results this action seeks could harm the pursuit of completely justified gains in income.

Rather than unwittingly suppress the entrepreneurial opportunity many individuals enjoy, we should find ways to create the same opportunity for larger numbers of people.

Read "Demonizing the Rich" here.

Tuesday, April 26, 2011

The Twilight Zone of Health Care Investing

Writing in Perspectives, John Schaetzl, a long-time investment professional, notes a Twilight Zone opportunity where, by converging, non-profit philanthropic investors and traditional, commercial investors could greatly advance their individual agendas.

"Returns in socially-minded investments are expanding just as for-profit investments are shrinking—and at risk of further contraction," he observes.

The opportunity for coming together exists primarily in developing markets where returns are typically low and investment horizons long, and among early stage investments. "By contributing knowledge and credibility, foundations and other NGOs can smooth the road for for-profit investors, whose experience and expertise doesn't extend to developing markets and their maladies, if they become co-investors and share risk and reward."

The key for both sides cooperating is overcoming suspicion and misunderstanding of the other side's motives. Once in communication, however, the two types of investors can measure and adjust valuation for known differences.

Mr. Schaetzl's Twilight Zone concept takes into account a shifting investment landscape of decreasing returns in developed markets, elongating investment periods, and the massive volume opportunity manifest in the majority of the world's population.

But don't expect investors to realign themselves radically anytime soon. Habits and experience are strongly ingrained.

Those who do recognize the potential fortune of cooperation will likely gain substantially.

Friday, April 15, 2011

Factors Determining ACO Success

"Financial success or failure of an ACO [accountable care organization] will depend on meeting rules-based budgets set by the Centers for Medicare and Medicaid Services for each ACO’s population," note five senior executives from Milliman, the actuarial consultancy. "To be successful, the ACO will need to: (1) demonstrate quality, and (2) reduce spending below targets."

The executives, whose article appears in the Lyceum newsletter Perspectives, argue that, much more than quality improvement, risk analysis is most likely to generate necessary monetary savings—especially when, three years after an ACO program commences, CMS requires the organization to assume downside risk.

"Few organizations have sufficient assets for [their boards] to gamble on the ACO program’s financial downside without carefully assessing the risk. How should they evaluate this risk? Data is important, but data does not organize itself into risk analysis."

The biggest source of financial failure won't be insufficient data, the authors contend, but failure to calculate risk.

Read 'Factors Determining ACO Success' for more insight, including a view on which providers are best-positioned to gain from an ACO formation.

Monday, April 11, 2011

The Games of Behavioral Economics

In their book Scorecasting, Tobias Moskowitz, a professor of finance at the University of Chicago, and Jon Wertheim, a senior writer for Sports Illustrated, put many traditional sports beliefs through an econometric wringer.

Although the authors realize a natural audience in the legions of fans, their work should appeal to business leaders as well.  Loss aversion, conformity, omission bias, random chance, and 'the endowment effect' don't just impact sports. Human nature can be universally peculiar, and companies and industry participants that recognize and act on this fact gain strategic advantages.

Take, for example, health care and the design of accountable care organizations. The Department of Health and Human Services' 400-plus pages of rules establish tightly conforming structures. And why not? Care variation, we're told, contributes directly to an ineffective and cost-ridden system.

But, in narrowing variation, do highly-conforming structures limit much-needed innovation? Is HHS, in fact, ignoring some of behavioral economics' most powerful lessons?

Whether exploring the unlikely fortunes of an Arkansas high school football coach or the perennial misfortunes of the beloved Chicago Cubs, Moskowitz and Wertheim not only debug many long-held myths; they also challenge conventional thinking.

And since sports always make great analogies, many readers will naturally look to apply the book's revelations to other aspects of daily life, including work environments.

Read our review of Scorecasting here.