An economist and a journalist join forces to make the often daunting topic of economics easily understood and digested by general audiences. It’s a fun and informative exploration of how the subject’s basic principles drive the minutiae of day-to-day existence.
What follows is a conversation with Jack Welch, the legendary former C.E.O. of General Electric. It was recorded in September for our recent six-part series, “The Secret Life of a C.E.O.”
Stephen DUBNER: This is Stephen Dubner. Is that Jack Welch?
Jack WELCH: Hi, Stephen, how are you?
DUBNER: I’m great, thanks. Thank you so much for making the time.
WELCH: No, it’s great. I’m an admirer of your book.
DUBNER: I’m told you have roughly an hour. Is that true?
WELCH: I’ve got as long as you have, up to an hour.
DUBNER: Fantastic. Okay, let’s go then. If you would, just say your name and what you do.
WELCH: Hi, I’m Jack Welch. I’m the executive chairman of the Jack Welch Management Institute, an M.B.A. program online, fully online, fully accredited, to change people’s lives, for working adults.
DUBNER: Excellent. You’re most famous as an author — wrote a couple of books that were very widely read and well-received — and of course, as longtime C.E.O. of General Electric. But let me ask you this: your background, Jack, is in chemical engineering, including a Ph.D. — not management or finance or anything like that. Now obviously, chemical engineering was useful for a company like G.E., especially back when you joined it. But can you talk for a minute about engineering as a background generally for leading a company?
WELCH: Well, I think critical thinking is always important, and an engineering degree leads you to critical thinking. So my view of a Ph.D. is you are always going down blind alleys to get a solution to a thesis; and it was the most helpful thing that I ever had. You’re not doing rote homework assignments, where the teacher feeds you and you feed it back. You’re working on unknown paths to try and find a solution. And that thinking is very helpful in management.
DUBNER: As you became a manager, were you biased toward other engineers in promoting them?
WELCH: No, I don’t think so. I don’t think so. I always look at the brightest, most aggressive, self-confident people I could find. And the third one was important, because they speak back to you. When you have a crappy idea, they tell you that.
DUBNER: Now what do you do if someone’s got all the smarts and talent in the world, but doesn’t have either the aggression or the self-confidence? You know, there are a lot of timid people out there with great ideas. How do you not waste their talents?
WELCH: Well, you don’t think about them for promotions, you think about them in terms of what they bring to the party. They’re very valuable. They provoke thought, but they’re not a counterbalance to your personality, generally.
DUBNER: Now you were pretty much a G.E. lifer, although you thought about leaving at least once. Talk to me about your rise through the ranks and why you wound up staying.
WELCH: Well, initially, I worked at G.E. for a year and a half, and I got my first raise. I was making $10,400. I remember to the day. And I got a thousand dollar raise. And I was happy with my thousand dollar raise — I was in a bullpen of about six engineer — until I came back from my raise and found out that they all got a thousand dollars, and I thought I was a hell of a lot better than them. And so I quit and moved my wife to Chicago, and we were planning on starting another life at another company. And my boss’s boss came up and persuaded me to stay the night of the going away party. And I stayed. And the company called the other company and paid all their expenses of recruiting me, and I stayed there.
Look, differentiation is part of my whole belief in management. And treating everybody the same is ludicrous. And I don’t buy it. I don’t buy what people write about it. It’s not cruel and Darwinian and things like that, that people like to call it. A baseball team publishes every day the batting averages. And you don’t see the .180 hitter getting all the money, or all the raises. Now that’s the purest form. Athletics is the purest form of differentiation, because it’s public. Everybody understands it, the fans understand it, the people understand it. Big business is more subtle and it’s more qualitative. So the precision isn’t there to differentiate. So judgment’s important. But you don’t win with a gang of mediocre players in business or in baseball.
DUBNER: Let me ask you this: I know that when you were ultimately appointed C.E.O. by Reg Jones — you write about that, it’s a really interesting story. You were very different from him. He was kind of buttoned-down, formal, classically trained, in a way, and British. And you were more scrappy, Boston-area, said what you thought, didn’t necessarily care that much how people received it. It was a fascinating hand-off from him to you, and it’s amazing that he saw in you what others may not have seen. I’m curious: you were there a long time before that day. I wonder how much you were motivated to stay, and rise, by your desire to change the way the company was run, because you and he both acknowledged that at the time you took over, G.E. needed a lot of change.
WELCH: Yeah, I had an enormous thirst to get my hands on it. And so obviously I was on the sidelines thinking of what I would do if I got it. And when I got it, I did it.
DUBNER: You make it sound pretty easy.
WELCH: Well, frankly it’s a lot easier to come up on a company and see its foibles from the bottom through the middle, than be brought in as a hero at the top and know nothing of the infrastructure or the vibes of the place.
DUBNER: That’s interesting you say that. We recently spoke with Satya Nadella, the relatively new C.E.O. of Microsoft; and that was a case where almost everybody wanted an outsider, because they felt there had been stagnation internally. But you’re saying — at least from your perspective of being the insider who was made C.E.O., you had all that institutional knowledge and leverage — you think that was a big advantage for you, yeah?
WELCH: I think Nadella has some of the same characteristics that I had in that regard. Maybe he’s more subtle than I was, but he has a lot of the same characteristics of sitting their, frustrated by the bureaucracy at Microsoft, and wanting to get at it, participate in the cloud more aggressively. And he’s done a very impressive job. But he had the benefit of being there.
DUBNER: When you first became C.E.O. of G.E., 1981, what were the biggest adjustments? Feel free to take your time on this answer, because G.E. already was a very large company; and from what I’ve read from what you’ve written, there were a lot of issues on a lot of different dimensions that you felt needed addressing.
WELCH: Well the biggest thing that summarizes it all: Reg Jones in his departure — and he was a hell of a guy, and he had the courage to pick me, and he was a statesman in Washington, and he’d spent a lot of time in Washington trying to help the country with tax policy and other things — but in this valedictory, if you will, he said, “Remember, we’re the Queen Mary in a storm.” And I, in my opening remarks, said, “We are a speedboat in the harbor, trying to move like hell around this place.” And that in a nutshell covers it all. We moved too slowly. We carried businesses that we could afford to. Some businesses had lost money for 10 years, 15 years — but we could afford it. And so we carried. But we couldn’t afford it any longer. The Japanese were coming. They were eating our lunch. The Japanese in the 80’s were the Chinese of the 90’s. And I.B.M. didn’t move, a lot of companies didn’t move. The auto companies didn’t move. And you had to move quickly. And don’t forget, it’s not the problem of the people that were there, because they were living in a world of the 70’s, when the world of the 70’s was nothing but competing against Japan, which is on the ground flattened, Germany flattened. The war had taken everybody out of the game. So they were living in a totally closed society to an American world, and they were doing fine. But that all changed with globalization. It started in the in the mid-70’s with televisions. And it moved to autos, and all these other things. And then the Chinese came with all their innovations and copies, if you will.
DUBNER: Now, in retrospect we could say — I don’t know if this is accurate or not, but in retrospect, it’d be easy to say that you, Jack Welch, were one of the relatively few who recognized this, or who saw it as it was happening, and therefore sought to adapt pretty fast. Did you feel that way at the time? Did you feel like you were peering a little bit into the future, at least reading the present well and making moves that you had to make?
WELCH: Well, that is how I became Neutron Jack, because the press, by most, we were ahead of the times. It wasn’t a burning bridge. G.E. looked okay. The best way to think about that was: we were doing $26 billion in sales, with $1.4 billion of profit. Twenty years later, we were doing a $150 billion in sales. With that low, we had 420,000 employees. Okay? With that first one. That was the early 1980’s. And at the end of the century we weren’t doing $25 billion, we were doing $150 billion, plus or minus; and we we’re making $15 billion, and we had 300,000 employees, instead of 420 or 450. So either we were fat before, and we needed to move, or something’s different.
DUBNER: So, let’s talk about the moves you made that resulted in the nickname Neutron Jack, along with all your other nicknames. When it comes to your management — and here I mean not so much strategic thinking, but managing your personnel, managing your divisions — talk about some of the biggest changes you made, and which you felt were most and least successful.
WELCH: Well, the most — you got to understand that fundamentally I had a set of values and behaviors. First of all, I think a C.E.O. must set a mission, a direction, work with a strong team with the characteristics I talked about, put it together — and candor carries the day. In the end, a successful business develops an atmosphere of truth and trust. And unless you get truth out there, you can’t act fast, people don’t know where they stand. It’s a sin that people come to work not knowing where they stand. Everybody who works for you must know where they stand, what their boss thinks about them, what the company thinks about them. This idea of false kindness is pure nonsense, pure nonsense. We had appraisal books that said everybody was promotable. Everybody. No one said what they thought of people and their performance. I don’t know if you’ve seen the new book by Ray Dalio.
DUBNER: Sure have. Yeah.
WELCH: I think it’s a hell of a book. Now, he may be an extreme, but where we’re both asking for truth. You want to get the truth, and you got to bust your butt and come at it ninety ways to get truth in a bureaucracy. It doesn’t live there.
DUBNER: Yeah. So you were famous for speaking your mind, being yourself. Now the phrase is called “radical candor.” It wasn’t called that then; they just called you names like Neutron Jack.
DUBNER: But I’m curious, when you look around now, the world, generally, and the business world specifically, have changed a lot. I mean just take one relatively small thing like social media, that really changes the vulnerability, let’s say, of a firm to public response. So do you — what you’re saying now, I know you believe it. I know it worked for you — do you think if you were C.E.O. today, though, you could be yourself?
WELCH: Absolutely. I mean I would be! I wouldn’t operate any other way. I mean, I might be more careful politically, because I don’t want to wade into that game. It’s fun now, because I’m a free citizen. So I can take a wing at everything. But I’d probably stay out of politics like I did then, and keep my opinions to myself.
DUBNER: But you think you could have as much “radical candor” today as you did back then, and you wouldn’t end up all over Twitter and being protested and shouted down?
WELCH: No, because the missing link in this whole thing is people understand “radical candor” is not cruel. The kindest thing you can do to somebody: tell them where they stand early in their careers, so they know they can adjust. And they can change or they can move on. They can be somewhere where they fit. One of the luxuries I had, which has not been told — my predecessor left me a hell of a balance sheet. So I was able to put in all kinds of things for soft landings for people. We put in benefits that no one ever had in terms of reductions of workforce. And look, I feel when we have to lay somebody off, it’s the manager’s responsibility in many ways, not the person — they hired them. They’re responsible for developing them. I have a phrase: love them on the way out — I teach this to my school — love ’em on the way out the way you love them on the way in. And I’ll tell you another one: a severance dollar is the cheapest dollar you’ll ever spend. Those two things, if you practice that religiously, you’ll stay out of trouble, you’ll be perceived as fair. Maybe not loved, initially, but people will come to respect you. That’s why I have an army of friends. Many people who I let go are some of my closest friends.
DUBNER: It’s interesting, at the same time as you are obviously increasing revenues a lot, you’re also cutting payroll a lot, and therefore obviously cutting employees along with payroll; but, you’re boosting severance. I know at the same time you’re also boosting stock options for people who were staying there. You were broadening the category of people who were eligible for that. But let me ask you this: even though you came in with a strong cash reserve, was your board at all reluctant when you said you wanted to give such generous severance?
WELCH: No, my board was a thousand percent behind me, and another point: you don’t ever want to work in a place as a C.E.O. without a board that makes you feel — and I’m probably 5’5” and bald as an eagle. And I always thought I was 6’4” with hair. The job of my board was to make me 6’4” with hair.
DUBNER: I know you had hair once, you were a good looking guy younger. Was that a trauma for you, losing the hair? It sounds like you haven’t quite recovered from it.
WELCH: No. No one likes losing hair! And there was a study last week, I don’t know if you saw Larry David‘s comments the other day. There was a study, professors at Princeton [Ed. Note: the study was done by the University of Pennsylvania] came up with the fact that bald men are more attractive to women. And he said, “[Bleeped.]” And they asked Larry David what he thought of it. And that’s what he said. And I would say the same thing.
DUBNER: Let me ask you this: for years and years, people were talking about the U.S. presidency as a C.E.O. position, how it should be run as if it were a C.E.O. position. Now we’ve finally got an actual C.E.O. as president. Before we get into the specifics of Mr. Trump, because I know you’ve interacted with him a good bit: what do you think are the pros and cons of electing someone to the presidency who is literally a C.E.O. coming at it from outside politics?
WELCH: It’s a hard game. I mean it’s a real hard game. As C.E.O., you can do a lot more and you get a lot more done in a quicker time than a politician can. That’s just the way it is. I’m not saying that’s good or bad, but that’s the way it is.
DUBNER: Are there any characteristics, though, of corporate life that you can port over to political life that a politician might not naturally be able to do, or might not think of doing?
WELCH: Get great people, set the values that you want for your talent. Look, the whole thing, whether politically or anywhere else, is get a team of smart winning people, get on the same page, work together as a family. We used to call ourselves the greatest little grocery store in the world. The grocery store is the perfect model. You know how to treat your customer, because you know ’em. You know when the lady’s son is going to college for the first time. And you know how to deal with them. Your customer satisfaction is overwhelming. You treat your employees well. The game is all about — now think about this politically. If you get customer satisfaction right, and you get employee engagement right, from that will come cash flow. In a politician, if you get customer satisfaction right, if you get engagement out of the bureaucracy right, you’ll get elected again.
I mean it’s that simple, but you’ve got to measure it. You’ve got to deal with it where it isn’t working. You’ve got to know which parts of the bureaucracy are not working. But you measure those things, and I measure my school, my school’s growing 35 percent a year. And we’ve got a net promoter score, you know what net promoter score is? 82. It’s higher than Costco, it’s higher than Apple, it’s higher than Amazon. And we only measure customers. The customer is our student. It’s not the damned faculty. And most universities — and you know this better than I — most universities see the customer as the faculty. The student is a detail who pays bills.
DUBNER: But on the other hand, let’s go back to G.E. and you have to care to some degree about the employees, obviously, you don’t want them to be miserable.
WELCH: No, I just told you the number one thing is customer-employee engagement. Employee engagement. When I took over, about 42 percent of the — not about — 42 percent of the employees bought into the program. When I retired, 94 percent would bet their life on the company. That’s what you want. You want engagement, you want them involved, you want them feeling part of a mission with a purpose. That’s what this thing is all about.
DUBNER: I’m curious, I know you played sports as a kid, you were pretty good. Sports teams, it turns out, along with the military are some of the few units in our society that are really good at creating bonds across all boundaries: race, you name it.
WELCH: I agree, I agree, totally.
DUBNER: And I’m curious whether you used that kind of thinking. I’m curious whether — you know, look a lot of kids are into sports, but I’m curious whether any of your experiences as a kid in sport you imported into the way you thought about managing and building a team; because, you know, look, we know it’s a cliche now to say, “It’s a team, teamwork, et cetera.” But a sports team is a real thing and it operates differently than most hierarchies. I’m curious to know how much of that you brought in.
WELCH: Let’s start with differentiation. I learned differentiation when I was 11 years old in the playground. They throw the bat up. You put your hand one over the other; and the person that tops the bat has the first pick. And I was 11, and the other guys were 15 and 16. And I was playing on the playground in a modest area, to say the least. And what happens to the worst player? He’s picked last and he goes to right field. That’s differentiation. I mean that hasn’t changed my mind from that first day I went to the playground. And what happens when you win as a team? You want to be in the loser’s locker room, or the winners’ locker room? What’s more fun? Where do you celebrate? Businesses don’t celebrate enough. I fought that battle for 40 years, celebrate more! Now I have a school where they celebrate like hell!
DUBNER: How do you celebrate?
WELCH: How? Go out. Pizza. Have a case of beer. Now I did it, at G.E., when we won a big contract, we’d open the bar at five o’clock in the building.
DUBNER: Let me ask, you know, it strikes me now hearing you talk — and let’s not forget the name of your second book was Winning — it strikes me that you might feel that some pieces of society, particularly American society, have kind of gotten sheepish about winning, and that we pay too much attention to the disadvantaged, however you want to define that. You think that’s a mistake? Am I characterizing your view correctly?
WELCH: Yeah, you’re right. Everybody gets a prize. Everybody gets the trophy. I couldn’t be more against that than anybody alive.
DUBNER: But on the other hand, everybody can’t win. So what do you do to make the people who don’t win, at least not unfairly treated? How do you balance that out?
WELCH: No, you want to make everybody feel better than the day they walked in. So everybody’s got to feel a participant. And you find ways to include everybody in the party in some way. Some get rewarded more than others. But we had 65,000 people getting stock options at the end. We started with 150. We had more people playing in the pot. More people making a million bucks. That’s all good stuff. It may sound crude, talking about money, but I think it works pretty well.
DUBNER: And it’s pretty important.
WELCH: I think so.
WELCH: It’s better than a plaque.
* * *
DUBNER: So you’ve been serving on the President’s strategic and policy forum. What’s your assessment so far of President Trump’s leadership style?
WELCH: Well, you know, that ended. The policy committee ended. All of them ended, over Charlottesville, everyone got nervous and they ran.
DUBNER: Oh, I didn’t know that was one of the business councils.
WELCH: I didn’t feel that way. I thought you’re better off inside the tent, staying on the commission, seeing him, making your position known, than being outside. So I was one of the two or three that disagreed. There were 16 of us on the commission. I wasn’t an active C.E.O. I was the only retiree on there. So I didn’t bang the table; but I thought it was a bad decision just to express your frustration. But I understand, if you got a lot of employees and they’re rebelling over it, you might want to get out of town.
DUBNER: Well, tell me why you didn’t think it was a good idea to shut it down and, relatedly, what you think of his leadership abilities and style thus far.
Even as birth rates were plunging across East Asia, Taiwan saw a 15.5 percent fertility spike in 1976, the Year of the Dragon. (Photo: Daniel Dionne/flickr)
Our latest Freakonomics Radio episode is called “How to Train Your Dragon Child.” (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.)
Every 12 years, there’s a spike in births among certain communities across the globe, including the U.S. Why? Because the Year of the Dragon, according to Chinese folk belief, confers power, fortune, and more. We look at what happens to Dragon babies when they grow up, and why timing your kid’s birth based on the zodiac isn’t as ridiculous it sounds.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. And you’ll find credits for the music in the episode noted within the transcript.
* * *
From an American perspective, the most amazing story of the 2018 Winter Olympics was the story of Chloe Kim, the 17-year-old gold-medal snowboarder from California. It wasn’t only that she was so young — and so, so good at her sport:
NBC Olympics: Ninety-eight-two-five! Chloe Kim, you are an Olympic Champion!
It wasn’t only that she’s so likeable, and so calm under pressure:
NBC Olympics: It’s so rare that people can live up to the hype! Chloe Kim absolutely did that today…
Nor was it just the fact that her Korean immigrant family, especially her father, had devoted themselves so thoroughly to her Olympic goal.
Chloe KIM: [From a “Visit California” ad] He’s helped me so much on this crazy journey — giving up his job, and like, being away from my mom, and being away from home for that much, just because of me.
No, the most amazing part of the Chloe Kim story is that her story was destined to happen. Why? Because Chloe Kim is a Dragon child. That’s right: she was born in April of 2000, during the auspicious Year of the Dragon. And that is what her father reminded her, by text, the day she was going for the gold.
Jong Jin KIM: I text her this morning, “This the time to be dragon.”
This is “the time to be a Dragon.” Did Kim really win a gold medal because she’s a Dragon child? Of course not! That’s now how the world works. …Is it? What if we told you that idea is not as absurd as it sounds?
* * *
Stephen DUBNER: So let’s start at the beginning. Tell us, first of all, what a Dragon baby is and why this was of interest to you as an economist.
John NYE: So, the Chinese zodiac is based on the lunar calendar, and they have a bunch of different animals for every year. People have heard of things like the Year of the Pig, the Year of the Rabbit. But of the Chinese zodiac, the only mythical creature is the Dragon.
That’s John Nye, an economist at George Mason University.
NYE: And traditionally, in Chinese belief, the children born in the Dragon year are smarter, luckier, more likely to be successful, et cetera.
Jin LI: Dragon represents power, leadership, and good fortune.
And that’s Jin Li, a professor of education at Brown.
LI: It’s extremely powerful for Chinese culture. The emperors, you know, ever since the beginning, claimed they are associated with these powerful creatures. Only his robe will have dragon on it.
NYE: There may be a lot of regional differences, in terms of superstitions about different years. The one that seemed to unite every place we looked at in which ethnic Chinese or Koreans, responded to this zoological signs, it seemed to be the Dragon was the common denominator.
DUBNER: John, what’s your zodiac animal?
NYE: I’m a pig.
DUBNER: And what are the fortunes or misfortunes historically associated with the year of the pig?
NYE: I believe pigs are stubborn but smart, tend to be very friendly, but also have other kinds of difficulties, due to their mixed, stubborn personality, as well as being very, very gregarious, but at the same time clever. Or something like this.
DUBNER: Now, we’ve only just met, but something in your tone of voice suggests that you’ve embraced your pig identity.
NYE: I’m not sure. I mean, I didn’t even grow up knowing about these superstitions, even though my father’s Chinese. I grew up in a more Filipino, Catholic household. So I only learned about these things much later on. Sometime in the mid-90’s, I started reading articles about the upcoming Dragon year, which was going to be 2000, and issues relating to baby booms in Taiwan.
For this part of the story, we need a demographer.
Daniel GOODKIND: I’m Daniel Goodkind. I’m an independent researcher from Arlington, Virginia.
Goodkind also works at the U.S. Census Bureau, with a focus on Asia, but he’s not speaking today in his official capacity. Anyway: Daniel Goodkind got interested in Dragon children a while ago.
GOODKIND: In 1986 and 1987, I was living in Taipei and I came across an article about an impending Dragon year baby boom that was going to occur in 1988. And there’s a cartoon in the middle of it, which showed a couple in bed looking rather exasperated, as three government figures were trying to lecture them that they should not try to time their births into the Dragon year.
They shouldn’t try because if too many parents chased the good fortune of the Dragon year, the resulting baby boom could swamp public resources.
NYE: There were a lot of news reports about hospitals being crowded. There were these pictures with eight babies lying outside in a rack in the hall.
GOODKIND: One thing they were concerned about was a rise in infant mortality because the births really pile up at the end of the Dragon year. But that’s also the time of the Lunar New Year. And that’s also the time that people are taking vacations, and people on maternity wards as well, and neonatal wards. So unfortunately, it appears that for complicated births, or preemies, they didn’t have enough facilities to take care of them. So infant mortality actually ticked up in 1976, at the end of that Dragon year.
Nineteen-seventy-six, 1988, 2000, and 2012: these are the most recent Dragon years. How big was the Dragon boom?
GOODKIND: Typically the rates of increase are about 15 to 20 percent, compared to the average of adjacent years.
NYE: So birth rates are plunging from the early 60’s to the mid-80’s in all these countries in East Asia. Amid this plunging birth rate — typical years are going down minus 2, minus 3 percent — the Dragon year saw, in Taiwan in ’76, a 15.5 percent spike. Singapore’s Chinese population saw an 8 percent spike. Malaysia’s Chinese population saw a 10 percent spike.
But there was one significant place the Dragon boom wasn’t happening:
NYE: You saw a Dragon-year birth effect in all East Asian countries or ethnic Chinese areas, except China.
GOODKIND: It’s only the Chinese societies outside, on the periphery.
Now, why would that be?
LI: I was born and raised in mainland China, under Communist rule.
Jin Li again.
LI: And one of the things they try to stay away from, or try to eradicate, is the old China.
The old China meaning pre-Mao and the Communist Revolution.
LI: And Mao Zedong stood at Tiananmen Square and said, “Now we have a new China.” So that means saying goodbye to the old China. Because that was understood, or was perceived, as old, backwards, not able to survive in the 20th century
Her parents, she says, knew all about the zodiac and the folk beliefs accompanying it.
LI: But, no, as a child, I didn’t notice. And yeah, you’ve vaguely heard, okay, if a girl was born the Year of the Goat, she would have trouble marrying. So what’s wrong with a goat? And my parents are just like, “Don’t even ask.” Because they’re afraid of, you know, being identified as a counter-revolutionary, and believing the old system.
NYE: And China was so poor and you know, when you’re very poor, you may not have a lot of time to worry about things like what each year your child will be born in.
But the Dragon boom was happening among Chinese populations outside of China. Now, the special status of the Dragon went back many centuries. So you might assume the Dragon baby boom went back too. But Daniel Goodkind found that was not the case.
GOODKIND: Based on the historical data that I’ve seen, and talking to historical demographers, there really doesn’t seem to be evidence until very recently. It’s really a new tradition, actually, to try to time births in the Dragon year.
Why only recently?
GOODKIND: Well, one factor obviously is the decline in fertility rates over time. When couples are having five, six, or seven children and they’re not using contraception, then the importance of timing a birth in or out of a zodiac year might be less relevant or maybe not easy to do. But these days, when people are having just one or two children, and a reproductive lifespan might be 35 years, there’s plenty of time there to play with. People have greater control over their fertility through contraception.
Goodkind started looking around at the places where the Dragon boom was particularly strong — places like Taiwan, Singapore, and Hong Kong. They all had a couple things in common: a lot of Chinese who’d left China after the Revolution; and strong economies.
GOODKIND: Incomes were going up everywhere. And also employment was going up, including for women.
Goodkind suggests that this Chinese diaspora didn’t like how China itself was ditching so many traditional practices.
GOODKIND: And I think that helped to increase the sense of Chinese-ness among those Chinese people outside of China. The government in Taiwan presented itself as the legitimate inheritor of Chinese culture, and that could have encouraged parents to see themselves as the preservers of Chinese culture, broadly defined. So this was just one tiny little slice of Chinese-ness. But it’s possible that that could have increased the incentive to time births this way.
It’s also possible, Goodkind thought, that being a minority immigrant creates an even stronger incentive to preserve your own cultural traditions. He was able to test this notion empirically, in Malaysia.
GOODKIND: I looked at the proportion of Chinese in each district, and I compared that to the size of the Dragon-year spike in those districts. And indeed I found that Chinese in districts that had a smaller proportion of the total population actually had a larger spike.
Eventually, however, as mainland China began to modernize, the Dragon boom began showing up in their fertility data too. John Nye again:
NYE: It’s only in 2000 and 2012 that you see it explode in China, to something like the levels you were seeing in Taiwan and Hong Kong before. It’s in cities which are growing rapidly and developing
DUBNER: Now, that strikes me as a little bit surprising. I would think that, I guess, the more modern or upwardly mobile parents would be a little bit less driven by that sort of belief, Year of the Dragon belief. Did it surprise you?
NYE: No, because the Dragon effect is showing up strongly in countries that are transitioning from being very poor to being very middle-class. You could argue that these developed parts in China are just now attaining the levels of economic development that you saw, say, in Malaysia or Hong Kong or Taiwan in the late 70’s. The second thing is, of course, we can’t rule out the fact that these areas also have greater access to media from Taiwan and Hong Kong, and which may also be affecting them.
GOODKIND: I think it intersects with a lot of issues in economics like preferences. You know, do people prefer carrots versus peas? Do they prefer — if they have more income — to go on vacations or buy a motorcycle? So this is all part of that consumer-choice framework. Do people prefer having a Dragon or a Rabbit or which animal?
NYE: And it may well be that as people grow richer, they’re looking for identity markers, and those identity markers, especially in a world that’s globalizing, may become far more important in the world today, for good and for bad. I would say a lot of this falls under a grand rubric of the whole debate about the secularization hypothesis, the idea that people become more secular, less religious, less spiritual, as they become more modern and richer. And over time that belief has taken some hits.
DUBNER: Okay, so you’ve written a couple of papers about Dragon babies. So let me ask you a kind of churlish question: why does your research matter?
NYE: Well, clearly, there are a number of issues here that are very important. What are the effects, in terms of education, the labor market, the marriage market — all these kinds of things are very important.
* * *
Starting in the 1970’s, certain populations in Asia began to experience a sizable baby boom every 12 years, during the astrologically propitious Year of the Dragon. All else equal, what parent wouldn’t want their kid to be born under a good sign?
NYE: So, as usual with economists, we sat around discussing this and sort of saying, “Well, what would happen?”
That, again, is the economist John Nye.
NYE: This should be bad for them, right? Because it’ll lead to crowding. But maybe not. Maybe people will think these people are important, they’ll be treated differently.
Indeed, you could imagine the Dragon boom producing all sorts of outcomes — for the Dragon kids themselves, but also for other kids. In fact, one study found worse health outcomes for newborns in Malaysia during Dragon years, presumably due to hospital crowding. Another study found that Chinese Dragon kids born in Singapore went on to earn less than non-Dragons, perhaps due to a more crowded labor market.
NYE: So your child may suffer a deficit, because you have more competition.
That’s one possibility, at least. On the other hand, you have to ask yourself: what if the kind of parent who’s methodical enough to time a kid’s birth to a Dragon year is also the kind of parent who’ll push their kids to be successful?
NYE: So when you argue about these things, you start thinking, “Well, how am I going to test this?” And that’s how the impetus came about for this.
“This” being a study that John Nye undertook with his colleague Noel Johnson.
NYE: And he had the idea of, instead of looking at, say, Taiwanese or people in Hong Kong, to look at Asian-American immigrants.
Using American data had a couple advantages — if, that is, the Dragon boom was even a thing among Asian-Americans. If so, the researchers could minimize potential crowding effects that might occur in smaller countries, like Taiwan, where the Dragon boom might strain classroom resources. And there were any number of ways they could slice and dice this robust American birth data.
NYE: And then we could look at the U.S. 2000 census.
DUBNER: So these are 1976 births, so people are going to be 23, 24 years old. Right?
NYE: Correct. Correct. At the time of the census.
DUBNER: Now, I would think, as a total layperson, “Now, wait a minute. The kind of people who are most likely to immigrate to the U.S. might have a different set of beliefs about the power, let’s say, of the year of the Dragon.”
NYE: Absolutely. So one of the things we wanted to do was compare the group you’re talking about to various reference groups, and in particular, the reference groups we were interested in is, we look in our data at Asian-Americans compared to other Americans born in the Dragon year.
Here’s what Nye and Johnson found: a five-percent spike in Asian-American births during the Dragon year of 1976. Not as dramatic as the spikes in Asia, but still significant. So they set about to investigate the outcomes of this cohort.
NYE: So basically the main comparison is to look at Asian-American immigrants, minus the non-Dragon-believing groups, who were born in the Dragon year, versus those who were also immigrants, but not born in the Dragon year. In addition, we want to make corrections for the fact that if you compare Asian-American immigrants, they tend to have the highest educational attainment relative to other groups in general, relative to Americans on average, and relative to other immigrants.
Since the Dragons they were looking at were only in their early 20’s, Nye and Johnson focused primarily on educational outcomes rather than later-in-life markers like income or marriage. So what’d they find?
NYE: We see that Asian-American Dragons have roughly a third more year of education. We’re talking three to four months more of education. If you only look at immigrants now — so you’re only comparing Asian-American Dragon immigrants to Asian-American non-Dragon immigrants, the difference increases to nearly half a year. That is a huge effect. Secondly, since in general Asian-American immigrants are roughly getting, say, call it 14 years of education on average — that means high school plus two years of college, a half-year average when people are averaging 14 years of education is basically saying 5 percent or 10 percent are finishing college who would never have finished college before.
DUBNER: So presumably that translates to a better income outcome, but you can’t actually tell that from your data, can you?
DUBNER: You’re looking at people just when they’re 22 or 23 years old.
NYE: We know from a lot of other research that has been well established, those with more educational attainment tend to do better.
So at least in the education department, the dire warnings about overcrowding and competition didn’t seem to have hurt the U.S.-born Dragon babies. Either that or these Dragon babies were so amazing that they overcame those obstacles and still performed better. In any case, they somehow seemed to have fulfilled their Dragon destinies. How? To figure it out, Nye and Johnson focused on a subgroup in their data who they suspected had the strongest belief in the Dragon idea.
NYE: So basically, we’re looking at non-Taiwanese Asians and Taiwanese Asians in California. In terms of income, gender distribution, age distribution, they have roughly the same characteristics. The biggest difference is, the Taiwanese groups tended to have a larger proportion of people who had bachelor’s degrees, and a larger number of people who were Dragons.
DUBNER: Tell me about the characteristics of the parents, I want to know everything that you know about the mothers and/or fathers of the Dragon babies born in California in 1976.
NYE: So that’s where we found the most interesting results. For this special subgroup we drilled down on, the Taiwanese moms in California who had had Dragon babies tended to be on average a little bit older, more educated, and higher income. The income is not so strong. The bigger effect is that they were more likely to have only children.
DUBNER: Which suggests?
NYE: Very strong selection bias. Now, here’s where we’re just sort of ball-parking it, right? We’re just guessing. But one way to think about this is that well-educated, higher-income older moms who are going to only have one child, not only want to have Dragon babies, but maybe have the freedom and the wherewithal and the lower opportunity cost of obtaining a Dragon baby.
DUBNER: Is this a case of that kind of parent being more likely to wait to have a baby, in the year of the Dragon — or is it that that kind of parent will have and will put more resources into the baby who happens to be born in the Dragon year?
NYE: Both of those are possible, that they’re willing to wait, and they’re willing to plan in a way that’s appropriate.
DUBNER: Yeah. I guess if the second one is at least somewhat true, then it sounds like what I would call a self-fulfilling prophecy, yeah?
NYE: Absolutely. I think that given that these are happening in countries that are becoming bourgeois, so to speak, middle-income countries, there is this sense in which part of what being modern and economic growth does is allow you to indulge your beliefs. The second thing is that it may well be that one evidence of this is wanted babies are more fortunate.
DUBNER: Well, wantedness is really a key word because there’s a lot of literature that shows that unwantedness is just a rotten start for any kid. Yes?
NYE: Correct. Correct.
DUBNER: What about if I have a kid and I’m not really paying attention to the year, and I happen to have a kid born in the year of the Dragon, and that kid might have been, let’s say, in the 95th percentile in the school system. But now, he or she is getting crowded out by all these Dragon babies and gets knocked down to the 85th percentile.
NYE: I would think that’s a bigger problem in relatively small societies like Singapore or Hong Kong, and it’s less of a problem in the United States, where they are already a minority, so they’ll be mixing with bigger groups.
DUBNER: It does suggest, however, in some places at least, a game-theory solution, right, which is that, well, if I know that all these other parents are going to be pumping out the babies during the year of the Dragon, then I can optimize by having my smart kid, you know, six months before or after. Yes?
NYE: Correct. Assuming that’s all you want.
The census data that Nye and Johnson used couldn’t tell them anything about how these Dragon kids were being raised. Whether perhaps there was some self-fulfilling prophecy..
Stephen DUBNER: Hello, it’s Stephen Dubner. Is that Satya?
Satya NADELLA: Yes, it is. Hi Stephen, how are you?
DUBNER: Great to meet you. Thank you. How are you?
NADELLA: Likewise. Thank you for having me.
DUBNER: Okay great. So, first of all, if you would, just say your name and what you do.
NADELLA: Satya Nadella, C.E.O. of Microsoft.
DUBNER: Very good. Now, Satya, the market cap of Microsoft has risen more than $250 billion during your three-year tenure. Microsoft employees are said to be happier now than they’ve been in quite some time. Everyone seems to love or at least like Satya Nadella. So, I want to know: are you enjoying yourself as well, or are you just leading the pack?
NADELLA: I think the time is right to hit refresh, because in some sense the idea that a lot of progress has been made is not how I look at it. I think, if anything, at least I hope for us, we are clearly grounded in all the things that we can do better — in terms of whether it’s the products we build, the capability we create, or the culture we have — and on all three fronts, I feel there’s a lot to be done. I’m proud of the progress, but it’s not sufficient. If anything, my entire purpose of this book, at least, was, look, this process is a continuous process of renewal. It’s not a destination that one reaches.
DUBNER: It’s no secret, and you make no secret of it, that a lot of people were hoping for an outsider to be appointed C.E.O. of Microsoft, but you’re a lifer. I gather there wasn’t a lot of enthusiasm internally when you were named. Talk about how that perception seems to have changed, at least as far as you can tell. Have people come up to you and said, “You know, I wasn’t so sure you were the right choice, but now I’m liking where we’re heading.” What do you hear?
NADELLA: When I think back at it, ultimately, I think anyone should evaluate people based on their ability to perform. And so I think that it is appropriate, whether it’s internally or externally, to be skeptical. And I think the board also did the right thing of looking far and wide and then saying, “Okay, let’s take the bet on this person.” As you said, I’m a consummate insider, but the one thing that I’ve tried to do, being someone who has grown up in Microsoft, is have as objective an outside-in view. In the end, the combination of the two, I think, is what helped me lead Microsoft.
DUBNER: Speaking of the board, let me just ask you one question I’ve really been curious about. Steve Ballmer, your predecessor, famously pushed to purchase Nokia, the fading mobile phone company, toward the end of his tenure. You voted against it, as you write in your book, but the deal wound up going through a few months after you were appointed C.E.O. So, I’m just curious how this works. First of all, why did the board select a C.E.O. who’d voted against this gigantic recent acquisition? I’m guessing they had asked you and discussed with them, in the interviews for the C.E.O. position, your position on Nokia. Correct?
NADELLA: Yeah, for sure. I mean, one of the things — I write about this in the book, but just to put the facts and make them clear — I was not a board of director at Microsoft. I was part of the management team with Steve. So, it’s not like I had a vote. Steve just went around the room and wanted to get the pulse of his leadership team, and we had a good debate. And, as I write in the book, I felt that it is important for us to do things — given where we were in the mobile space at that point, which was the number three slot with a huge gap between one, two, and three — to do something that was more unique, different, and differentiated. So, I was more in favor of that.
The Nokia acquisition, quite frankly, did give us some hardware capability, which we now deploy across the company in different ways. But I wanted to, after becoming C.E.O. in particular, focus our efforts on participating in mobility broadly defined. For example, this is again a lesson I learned, in fact, observing what Steven and Bill did, even with Windows. After all, we built Office for the Mac before Windows was even there. So, if you look all the way back into our own history, we have a precedent for how we can think about our software on other people’s endpoints. That’s in fact the start of our journey on mobility, but mobility is not about just the device. It’s the mobility of the human experience. So, at least, I had a vision of how we can think about playing it differently.
DUBNER: One more question about Nokia before we move, I guess, back in time, actually. So, shortly after you were installed as C.E.O. you shut down Nokia, which resulted in a total write-off of the purchase and about 18,000 jobs lost. I mean, that’s a pretty big deal to be handling both the mechanics of it and the emotion of it, shortly after you come in as a not-obvious choice as C.E.O. Just walk me through what that felt like on your way to accomplishing.
NADELLA: First of all, I think these hard decisions around what to pick and focus on is something that I believe a C.E.O. uniquely has to do. That’s not something that you can delegate. That’s not something that someone else can do on your behalf. I mean, ultimately, that’s your core responsibility, and especially taking those decisions that impact people’s lives and livelihood is not easy. It weighs very heavily on me personally. Therefore, I had to think it through. And then having thought it through and made the decision, we had to execute on it, to your point, where what was of paramount importance was to make sure that the employees being impacted were treated with dignity and were given all opportunities to find their next play, whether inside of Microsoft or outside. That was my real concern and priority. That’s where I poured my energy. But I knew that I had to make calls on what is it that we are going to do, and how are we going to define the core value propositions that we were going to create.
DUBNER: You grew up in India. Your father was a civil servant with a thirst for Marxist ideas, to some degree. Your mom was a Sanskrit professor, and, as you write, the opposite of a “tiger mom.” She was really interested in you having a balance between intellect and happiness. You write that you weren’t the greatest student, and then you did immigrate to the U.S. Something you write in the book that really I found fascinating: you’ve noted that you benefited from good timing or good luck in a number of ways. You write the convergence of several tectonic movements helped you along: India’s independence from British rule, the American civil rights movement, which changed immigration policy in the U.S., and the global tech boom. I know that’s a lot to look back on, but for you, for just one person, when you kind of look at that arc, and how unlikely it would have been on paper 50 years ago or so — I’m just curious how you assess this whole system and all these events that led to it. And, I guess, the natural next question would be: What are you trying to do to prolong or what are you trying to do to continue to create opportunities for people like yourself?
NADELLA: Yeah, that’s a very important piece here, because I think I’m a product of two amazingly unique American things. The first is this technology that reached me where I was growing up that even made it possible for me to dream the dream, and then the enlightened American immigration policy, that we like to debate, but it allowed me to come here in the first place and live the dream. So, I think that that’s what’s unique about us. That’s what makes us competitive. That’s what I think makes us even be the beacon of hope for people who need it the most. So, I believe we should preserve it. We should promote it. We should debate it, for sure, because there are things that we may want to change in how our immigration policy’s implemented, how complicated it is, or can be simplified. But with that said, I am someone who believes only in America would a story like mine be possible. So therefore, I look at it and say, “Wow, if that’s the case, then let’s make sure, I will at least, do everything I can to make sure I advocate for that.”
DUBNER: In addition to you, the C.E.O.’s of Google, Adobe, MasterCard, and many other big American firms are Indian-American and often immigrants, like yourself. How do you account for that massive success? Is there anything you all have in common? I’m just really curious about your view on that.
NADELLA: Well, I mean, of those companies, other than Sundar at Google, we all went to the same high school, even. So, I don’t know. Maybe it was the water. First of all, I think it’s one of those false positives that you can take too much out of, right? I think each of us have had our own unique story and unique path. It’s, after all, a country with a billion people, and.
DUBNER: But a relatively low immigration rate for most of the immigration history, correct?
NADELLA: That is correct. And, I’m not, in fact, a very deep student — although, I think there’s been a book written about high-skilled Indian immigrants, which at some point, when I get the time I will read and study. I think what you’re seeing here is that last part of that formula, which is there was this tech boom starting in the early 9’0s. There was a good supply of engineering graduates out of the country, and I think market meets supply. Demand meets supply, and the enlightened immigration policy I think is what made it possible. People who’ve come here have contributed. When I look at the South Asian immigrant population or any other immigrant population, whether it’s from China or Eastern Europe, and I look at Microsoft, the number of countries and nationalities that are represented and what they have all brought to American competitiveness is something that I think is only possible in this country — nowhere else. Where else will you found a company and, say, “Let people from 65 countries come here and all become great, contributing employees, and taxpayers.”
DUBNER: Yeah. Let me ask you to brag just a little bit — maybe more than you’re interested in, or maybe be a little bit more jingoistic than you’re interested in — but I’m just curious to know, as an Indian, is there anything about your upbringing, your culture, your family structure, your kind of familial appreciation for education, accomplishment, discipline — I understand that you kind of downplay it and say, “It might be a false positive,” and so on, but I think a lot of people listening around the world will want to say, “Whatever they are doing to succeed so brilliantly, if I could perhaps mimic just parts of that within my own family or so on,” I’m just curious to know if there’s anything that you would identify as necessarily Indian.
NADELLA: You know, I don’t know, quite honestly, Stephen, whether there is anything necessarily Indian. I do believe that there is a certain structure to the educational system of that country that I think I definitely benefited from and all the others you mentioned benefited from. The high school I went to I think was — the four or five of us who went there, we were very fond of the place because I think it was formative in very different ways. Shantanu was a debater. I was a cricketer, and we all learned different things there, but both of us are fond of that institution. I think more than anything else, it gave us the freedom to think, learn, and pursue bold dreams. But I don’t know that there’s anything uniquely Indian about it.
When I start to talk to people — for example, it’s amazing to see this generation of people who grew up after the Cultural Revolution, and, in fact, the first generation that went to college after the Cultural Revolution, they are the ones who immigrated, and many of them who work as my colleagues at Microsoft had a chance to learn a ton from them. Same thing from Eastern Europe, and when the Berlin Wall fell, and a lot of Eastern European countries started participating in our economy, and they came. I think each one of these societies — some of the best and brightest, people with ambition, people in tech — that’s, I think, the common thread here. And, in fact, the fact that the U.S. was able to tap into it — that’s the story that needs to be written, quite frankly, which is, which other place — I mean, think about the timing right? Oh yeah, the Berlin Wall fell, but where did they all show up? In the Silicon Valley. That’s, I think, what we should learn from.
DUBNER: It’s a great point. Let’s talk about your own family for a bit. You and your wife, who’s an architect, have three kids. The eldest, now in his early 20’s, has severe cerebral palsy. One of your daughters has learning differences that required her to go to school in Canada. So, that obviously had a huge impact on your family and on you as a person, especially as you were climbing the corporate ladder at Microsoft. Can you talk about how being a parent within that family changed your worldview as a manager? You write about the empathy that you learned to accomplish. I’m really curious to know what kind of contributions that parenting had to your ultimately becoming the kind of C.E.O. you are.
NADELLA: I think some of those moments and some of the learning from being a father, a parent, clearly have been defining moments for me all these “hit refresh” moments, when I which I write in the book — and, in fact, it was hard for me to write — because I wanted to write only the second and the third stanzas, which is about the technology and the future. But I had to look back and sort of ask myself, like, “Okay how did this come about?” Even the books, whether that’s Nonviolent Communication or Carol Dweck’s Mindset, were all books my wife introduced me to. But when I think about my son Zain’s birth, the thing that strikes me, quite frankly, ex-post is how naturally it came for Anu, my wife, what she needed to do. I was 29 years old. Both my wife and I were the only children of our parents. So, we were more concerned about, “Oh, how should we decorate our nursery? When will Anu get back to our job after our son is born?”
And, yet, on the 13th of August 1996 at 11:29, all our life changed. It took me multiple years to even understand what had happened because in some sense I was more about, “Why did this happen to us? What happened to me?” And it’s only by observing my wife really step up, give up her career, and do all things she was doing to care for Zain, that’s when I realized nothing happened to me. Really something has happened to my son, and it’s time for me to step up and see life through his eyes, and do what I should do as a parent and as a father. So that’s, I think, perhaps, the biggest lesson for me around empathy.
And I write about this in the book as well, which is I think empathy is only developed through your life’s experience. It’s not something that’s really endowed on you. But every passing year — with, perhaps, every passing mistake you make, you develop more of a sense of being able to see life through other people’s eyes — it’s going to make you a more effective parent, a more effective colleague, and a more effective partner. I think that’s at least what I’ve been able to learn from my own personal experience.
DUBNER: When you look back on your younger professional self, when you had less empathy than you later developed, do you see yourself as being professionally selfish and overly critical, or were you always a relatively nice guy?
NADELLA: It’s for others to judge, I guess. But I would say, it’s hard. I don’t think — even that interview question I write about, I always ask myself, at whatever 25 when I was interviewing, and somebody says, “What would you do if you see a baby on the street crying after having fallen down?” I answered, thinking this is some trick question, maybe there is some algorithm that I’m missing, and said, “I’ll call 9-1-1,” only to have that manager get up and walk me out of the room saying, “That’s the absolute bullshit answer. If you see a baby fallen down, you pick them up and hug them.” And I was devastated because I remember thinking about it and I said, “How could I not get that?” And that’s when you say, “Well, you know what, life has a way of teaching you.” And the question is — when that lesson is taught you learn from it versus try and say, “Whatever innate capability I have is the only innate capability that I ever have.”
DUBNER: Your wife presumably would have picked the baby up instantly. Correct?
NADELLA: Presumably, because, after all, that’s what came naturally to her with Zain’s birth. But I think she would also be willing to admit that it is, in fact, through her own life’s experiences that her abilities— For example, she was telling me the other day about how much she has learned — being a mother of a child with disabilities — on how to relate to others and especially new parents with children with disabilities. It’s not something that she grew up with or had an innate capability for, but it’s something that now she has definitely a much more empathetic view on.
* * *
DUBNER: Let me ask you about the future and the kind of things Microsoft is working on, which I know you’re very excited about and ultimately, the idea is that we’ll all be excited about it. Whether it’s for a person with disabilities being able to engage with others or the world more, or whether it’s for productivity et cetera, I’m curious to know what you see the future really looking and feeling and smelling like. You write that “we are hard at work building the ultimate computing experience blending mixed reality, artificial intelligence, and quantum computing.” So walk us through that a bit. What’s it look like? What does it actually do?
NADELLA: I mean this is the real fun part, right? One of the things about computing, unlike, perhaps, any other medium and especially software, is it’s most malleable. In other words, you create something from nothing, and it’s always changing. Mixed reality to me is that ultimate blending of the human experience with the computing experience. I mean, think about it: your field of view, right — what you see — is a blend of the analog and digital. That’s what you get a glimpse of when you wear the HoloLens, where I walk into my office and I put on my HoloLens, I have all these dashboards I’ve created with all these pie charts and what have you, that are just all floating around in my room. It’s an infinite screen room, and I think that in the future, obviously, what is now a form factor that looks like a big set of goggles will become just like a set of eyeglasses. So, I think the ability to blend analog and digital is what we describe as mixed reality. There are times when it will be fully immersive. That’s called virtual reality. Sometimes when you can see both the real world and the artificial world. That’s what is augmented reality. But to me, that’s just a dial that you set. And we have taken a pretty unique approach in thinking about this space, and so that’s one aspect.
In fact, just to give you a good example and your listeners a good example: at a conference just earlier this week, we demonstrated how fundamentally mixed reality changes collaboration. I mean, just imagine if your hologram was right here interviewing me as opposed to just on the phone. We showed Ford using mixed reality to change how they collaborate. In the past, Ford would create these clay models, which weighed 5,000 pounds, that needed to be moved so that people can critique the new car. Whereas now, they have essentially these sessions where people in manufacturing, design, sales can all look at the model, simultaneously annotate it, leave voice comments — I mean, it’s just a complete new way to collaborate.
In A.I., I think that the ability to reason over data and create intelligence is another amazing breakthrough. I give you again a very tangible example. A group of people came together at Microsoft and created this new app called Seen A.I. that anyone can download from the Apple App Store, in fact. It uses all of the cutting edge machine learning A.I. techniques around computer vision from our cloud and brings about the capability for someone with visual impairment to be able to see. In fact, one of my colleagues Angela Mills, whom I ran into recently, was telling me about how she has a visual impairment, and she uses that app now to confidently go into the cafeteria, order food. She walks in — and I had not even realized this could be such a challenge — which is, she said, “I can now walk into a conference room at work knowing that that’s the conference room that I’m expected to be in, instead of barging into the wrong meeting, for the first time.” To know that A.I. can actually help someone fully participate in her job, it’s remarkable.
And to finish it off, the arc on quantum, I brought up a Fields Medal winner in math, a couple of physicists, and a computer scientist earlier this week to talk about quantum and the progress we’re making there. But, ultimately, I believe in order to bring about some of these magical experiences in A.I. capability, we will have to break free of some of the limits we’re hitting of physics, really. I mean, Moore’s Law — even though we’ve grown transistors exponentially — that is becoming hard. And even if we grew the transistors exponentially, computing power was only growing linearly, but in order to reason over larger and larger amounts of data — I mean, think about the unsolved problems, right? We talk about global warming. What if there was a catalyst that could absorb carbon? We can’t. I mean, that problem cannot be solved — the organic chemistry problem that cannot be solved. It’ll take a classical computer the amount of time that has transpired between the..
It took $10 million and four months to freeze the ground to start building the tunnel that would become the Second Avenue Subway in New York. (Photo: Patrick Cashin/MTA)
Our latest Freakonomics Radio episode is called “Here’s Why All Your Projects Are Always Late — and What to Do About It.” (You can subscribe to the podcast at iTunes or elsewhere, get the RSS feed, or listen via the media player above.)
Whether it’s a giant infrastructure plan or a humble kitchen renovation, it’ll inevitably take way too long and cost way too much. That’s because you suffer from “the planning fallacy.” (You also have an “optimism bias” and a bad case of overconfidence.) But don’t worry: we’ve got the solution.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. And you’ll find credits for the music in the episode noted within the transcript.
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In 1968 — 50 years ago — the governor of New York State, Nelson Rockefeller, received a proposal he’d commissioned. It addressed the mass-transit needs of the New York City area. One centerpiece of the plan was a new subway line that would run from lower Manhattan, up the East Side, and into the Bronx. It was called the Second Avenue Subway. Four years later, Rockefeller and New York City mayor John Lindsay held a ground-breaking ceremony for the Second Avenue Subway. But not long afterward, the project was shelved because of a fiscal crisis. Years later, a new governor, Mario Cuomo, tried to restart it. But once again, the budget would not allow — and back it went on the shelf. By now, the Second Avenue Subway had become a punchline. A New Yorker would promise to pay back a loan “once the Second Avenue Subway was built.” It came to be known as “the most famous thing that’s never been built in New York City.” But then, along came a man named Michael — here, I’m going to let him say it.
HORODNICEANU: Michael Horodniceanu. If you look to see how people on Second Avenue would recognize me as Dr. H. No one is really willing to pronounce my last name.
Okay, let’s go with “Dr. H.” He is a longtime transportation scholar and executive. In 2008, he became president of Capital Construction for the Metropolitan Transportation Authority. And one of the first things he did was restart the Second Avenue Subway. By now it was 40 years since Governor Rockefeller’s original proposal. Dr. H. updated the budgets and estimates and finally got construction started. In 2010, a massive tunnel-boring machine began its work underneath 92nd Street.
HORODNICEANU: So they are about to start and they probed ahead into the rock, then suddenly the realization is that the quality of the rock was poor, in effect there was water going through there. So the decision was made that we have to freeze about — close to two blocks. It took us four months to actually freeze the ground. And it’s costly! On Second Avenue, we spent $10 million to do it.
Ten million dollars and four months just to freeze the ground just to start building the tunnel! Would New York City ever get its Second Avenue Subway? The reason this story became so famous is that it is such a grotesque example of a blown deadline. But surely you can identify. Surely you’ve been involved in something — maybe a work project, or a home renovation, even writing a paper — that was also grotesquely late? And painful? And expensive? Why are we so, so, so bad at finishing projects on time? And what are we supposed to do about it?
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This episode begins, as so many good things do, in Canada.
BUEHLER: All right, well, I’m Roger Buehler and I’m a professor of psychology at Wilfrid Laurier University.
That’s in Waterloo, Ontario.
BUEHLER: I study social cognition as well as judgment and decision-making.
Buehler has long wanted to know why we’re so bad at managing projects. His interest began during grad school, with a personal puzzle.
BUEHLER: Every night as I’d leave the office I would pack up my briefcase with jobs to do at home and more often than not I’d come back to the office the next day with all of it untouched. But every night as I packed up that briefcase, I was sure that my plans were realistic. So that was the puzzle. Why wouldn’t I learn from experience and get more realistic in my estimates?
DUBNER: In the beginning, did you think, “It must just be me, I must be the one who’s failing here”? Or did you recognize it as a generalizable phenomenon?
BUEHLER: Well, partly it seemed odd but then I noticed it in people around me, too. In fact, I remember some particular colleagues who were forever promising things and never coming through and noticing that, well, they seemed to believe it though when they’re when they’re saying it. It seems real. So it did start to seem like a more generalizable thing
Buehler and his colleagues were, of course, not unique. The phenomenon even had a name, courtesy of the psychologists Danny Kahneman and Amos Tversky. They had called it “the planning fallacy.”
BUEHLER: So the planning fallacy is a tendency to underestimate the time it will take to complete a project while knowing that similar projects have typically taken longer in the past. So it’s a combination of optimistic prediction about a particular case in the face of more general knowledge that would suggest otherwise.
You can imagine the value of being able to diagnose, and treat, the planning fallacy. We all plan for the future — whether it’s a huge infrastructure project or a research paper that’s due in three weeks. Wouldn’t it be nice to be able to plan better? So, first, Roger Buehler and some colleagues set out to measure the planning fallacy. Their first experiment used honors students who were working on their thesis projects. The researchers asked each student to predict when they’d submit their thesis.
BUEHLER: I know psychologists make use of students too much. But for this research, they really do have a lot of activities on the go and they’re kind of concrete activities often with clear deadlines, making them a nice population to actually study for this topic.
DUBNER: So let me ask you the largest and most impossible question: What’s wrong with us? Why is there such a gap between intention and behavior?
BUEHLER: Right. Well, my thinking on this has been guided by a distinction drawn by Kahneman/Tversky between two types of thinking, one being a kind of inside approach and the other being an outside approach. And the inside approach involves really focusing on the case at hand and trying to work out the details of that unique case. It’s like you’re developing a mental scenario or mental simulation of how you think that project will unfold. But the problem is that mental simulations often don’t provide the thorough and comprehensive representation of how things will go. They tend to often be kind of idealized. Oversimplified. And when people get into that frame of thought, they don’t entertain alternative ways in which things may go. They kind of get locked into one scenario. But then I would couple that with also people’s wishes and desires. So, generally when you’re planning something out, you’re planning to succeed. You’re not planning to fail.
This second tendency that Buehler is talking about — seeing the future in rosy terms — there’s a name for that, too. It’s called the “optimism bias.”
SHAROT: I think it’s a wonderful thing.
Tali Sharot is a cognitive neuroscientist at University College London.
SHAROT: There are so many positive aspects to having an optimism bias. In fact, in our research we see that the people without an optimism bias tend, in most cases, to be slightly depressed at least, with severe depression being related to a pessimistic bias where people expect the future to be worse than it ends up being. So I mean it’s a good thing because it kind of drives us forward. It gives us motivation. It makes us explore different things. It’s related to better health — both physical and mental health — because if you expect positive things, then stress and anxiety is reduced. So that’s very good for both physical and mental health.
Sharot believes in the optimism bias, and she believes it is rooted in neuroscience. Her experiments have repeatedly shown that the brain tends to process positive information about the future more readily than negative information. It’s easy to see how that could feed the planning fallacy.
SHAROT: So, for example, if I tell you, “You know, you’re going to get many more listeners this week than usual.” You’d say, “Oh, okay.” And you’d kind of change your estimate and think it’s going to be 10 million. But if I tell you, “You’re going to get many less listeners this week,” than I expect you’d say, “Well, she doesn’t know what she’s talking about.”
DUBNER: That’s exactly what I was saying in my mind, just so you know. Do you believe the optimism bias was, is baked in for legitimate or positive evolutionary purposes then? Or do you think it’s more of, you know, a little bit of a design flaw that we’ve learned can have some benefit?
SHAROT: So, I think it’s not a design flaw. And it’s a two-part answer. So the first part answer is, you know, it’s probably there because of all the positive aspects that I just mentioned. I mean we know that people who are optimists live longer. So we survive more. We’re more likely to find a partner. We’re more likely to have kids and all of that. So there is a clear survival benefit and a benefit to just progressing. However, as you imply, there are also these negative consequences, right. If we think everything’s going to be OK or better than what we anticipate, we might not take precautionary action. We might, you know, smoke when we shouldn’t and that kind of thing. So there are the negative aspects to it. But what our research shows is that it’s even better than what I just explained because the optimism bias is, in fact, flexible. So it changes in response to the environment. It can disappear under environments in a way that may be optimal.
Here’s what Sharot means by that. She and her colleagues run experiments in which they ask different kinds of people — firefighters, for instance — to assess the likelihood of bad things happening to them: getting divorced or being in a car crash or getting diagnosed with cancer. These are basically their wild guesses.
SHAROT: And then we give them information about the average likelihood of having these events for someone like them and then we ask them again.
Okay, so the firefighters would have their baseline guess and then they’d guess again after getting some statistical context. But there was another twist: they were also asked the question in two different environments: on days when they’d been fighting fires and during down time, when they weren’t.
SHAROT: And what we found was that when the firefighters were under stress, they learned more from this negative information. The more stressed they were, the more anxious they were — the more likely they were to take in any kind of negative information that we gave them, you know whether it’s about cancer or divorce or being in a car accident and so on.
Based on these results, Sharot argues that human optimism is both adaptive and mutable. So that’s good to know: the optimism bias may be a sort of evolutionary insurance policy against hopelessness and depression. And maybe it’s played a role in some of the astounding progress that humankind has made over the millennia — you’d have to be pretty optimistic to come up with space travel and aspirin and French cuisine, n’est-ce pas? But still, wouldn’t it be nice to also figure out how to get projects done on time and on budget? That is something that Katherine Milkman has been thinking about for years.
MILKMAN: I’m an associate professor at the Wharton School of the University of Pennsylvania.
Milkman’s Ph.D. is in computer science and business, but as an undergrad she studied operations research. Which means what?
MILKMAN: You try to figure out how to be more efficient about everything, using math.
To that end, Milkman has spent a lot of time studying, and teaching, the planning fallacy. And yet: this does not personally inoculate her against it.
MILKMAN: Well, I will tell you that it took longer to prepare to talk to you about this than I expected.
DUBNER: Like how long?
MILKMAN: I don’t know, like an hour.
DUBNER: Wow, yeah, that’s a lot.
MILKMAN: Yeah, but it’s planning fallacy. I was sure it would take, like, ten minutes.
In her research, Milkman has found that when groups work together on a project, a number of factors collude to form the planning fallacy.
MILKMAN: So one is overconfidence, or the tendency we have to think we’ll do things better than we will. We are overconfident for many, many reasons. One is that it makes us feel better about ourselves; we’re often rewarded for it. Imagine two people walked into an interview and one of them says, “I’m going to be great at this job, I’m great at everything I do.” And the other person says, “I hope to be great at this job, I try to be great at everything I do, but sometimes I fail.” I think most of us would respond more positively to the person who says, “I’m going to be great.” And that is a lifetime of feedback we give people, where we’re rewarding them for overconfidence constantly.
So there are individual biases like overconfidence. But with large projects, there’s also what’s called —
MILKMAN: Coordination neglect.
And coordination neglect is… ?
MILKMAN: The failure to think about how hard it is to put stuff together when other people are involved. And so that can make the planning fallacy bigger and badder when there are teams of people trying to finish work on time.
DUBNER: From an economic standpoint, this sounds backwards. You would think that larger size, theoretically, creates more specialization of labor, and ultimately higher productivity. Why doesn’t it?
MILKMAN: So when you staff a bigger team on a project, you focus on all the benefits associated with specialization, what you just mentioned. And what you neglect is to think about how challenging it is to get that work all back together into a single hole. So this engineer now has to talk to that engineer about how to combine their outputs into one integrated system.
And there’s one more component of the planning fallacy — a blatantly obvious one.
MILKMAN: It also relates to procrastination. Because of self-control failures, we put it off, and then that can make the planning fallacy a bigger issue. Because if you don’t start the project on time, because you keep putting it off, how in the world are you going to finish it on time?
DUBNER: And let me ask you this: what is, if we have any idea, the primary root cause of procrastination?
MILKMAN: Oh god, what is the primary root cause of procrastination? Like, get to the heart of everything I’ve thought about for the last 15 years in one question. I think the primary root cause of procrastination is impulse control. The fact that we tend to want to do what’s more instantly gratifying in the moment than what is better for us. And so we put off doing the things we know we should do, in favor of what’s instantly gratifying.
There is reason to believe that our impulse control is being tested today more than ever. With the revolution in digital communication has come a blizzard of notifications, alerts, messages, and more. While there are obvious upsides to the speed and magnitude of this communication, there are also costs: information overload is thought to decrease U.S. productivity by at least $1 trillion a year. What to do about all that wonderful, terrible digital distraction? We brought that question to Justin Rosenstein.
ROSENSTEIN: I’m the co-founder and head of product at Asana.
DUBNER: Okay. Asana — for those who don’t know what it is — let’s start with that.
ROSENSTEIN: Asana is software that enables teams to be able to work together more easily.
All right, but let’s back up. Rosenstein’s first job was at Google. Here’s how he envisioned that job before it began.
ROSENSTEIN: I’m going to be spending all my time working with these world-class engineers, world-class designers, figuring out great things that we can do to be able to make people’s lives better.
And he did work on some exciting projects.
ROSENSTEIN: I was the original product manager for Google Drive and helped co-invent a lot of that. I co-invented G-mail chat.
But the reality of working at Google didn’t match his vision of working at Google.
ROSENSTEIN: Literally the majority of the time was spent not doing work, not writing code, but was doing the work about work. It was making sure that the left hand knew what the right hand was doing. It was sitting in status meetings and preparing status updates.
At first, he thought he must have been doing something wrong.
ROSENSTEIN: There’s no way that this could be what everyone tolerates when they go to work and work in companies. And so I thought maybe this was something that was wrong with Google. Talked to people who worked at other companies and discovered to my horror, that no, Google was actually very advanced. Most companies were far less organized.
He looked around for software solutions. There were a lot — but none that did what he wanted.
ROSENSTEIN: What I really wanted was just a single place that I could go to see what is everyone on my team working on? And who’s responsible for which things? And what’s the sequence, and what are the dependencies between those things?
So, nights and weekends, he started hacking together some software to accomplish that.
ROSENSTEIN: And I just built it as something for me and a few dozen people that I worked with to use, but it grew virally within Google. And that really startled me, because Google has access to the best tools in the world. It was insane to me that there were so many people who were excited about what I had built.
But not long after, Rosenstein left Google — for Facebook.
ROSENSTEIN: At some point, I got a Facebook friend request from Dustin Moskovitz, who’s the co-founder of Facebook. And so eventually was persuaded that, yeah, it would be exciting to be a part of that. Actually one of the sad things about leaving Google was that I had to leave that tool behind that I had built inside Google.
DUBNER: Because it belonged to Google?
ROSENSTEIN: Because, yeah, it was the intellectual property of Google.
Rosenstein asked Moskovitz if Facebook had the same project-management problems he’d seen at Google.
ROSENSTEIN: And he was like, “You have no idea, I am tearing my hair out. By the time I get information about what the people in my own company are working, the information is so old that it’s wrong.”
By day, Rosenstein was helping invent Facebook’s “like” button. At night and on weekends, he and Moskovitz started talking about a software solution to help manage their workflow.
ROSENSTEIN: And at some point we started building it — we started actually implementing that solution. And this internal tool that we built at Facebook took off.
And they realized their solution wasn’t unique to Facebook, or Google, or just tech companies. What they’d developed, he believed…
ROSENSTEIN: We had developed a general solution that would enable any team to be able to work together more effectively.
DUBNER: So, this time did you own the I.P.?
ROSENSTEIN: That is Facebook’s I.P. and the work that we did there — actually Facebook still uses it to this day.
Rosenstein and Moskovitz eventually left Facebook to start up Asana.
ROSENSTEIN: What really made us decide that we wanted to leave Facebook, was really feeling like this was itself a Facebook-sized opportunity.
DUBNER: So I understand that you and Dustin, I guess, had an estimate for how long it would take to get the company up and running. I’d love you to talk about that and how long it actually took.
ROSENSTEIN: Yeah, we were hopeful, especially given that by this point, I had built some version of this twice. And we were like, maybe in about a year, we’ll be able to launch the first version of the product. And it took three years.
By now, Asana has a large and prestigious customer list. They’re one of dozens of companies that build productivity software; the market..
David Rubenstein, co-founder and longtime co-C.E.O. of the Carlyle Group, owns the first book ever printed in the United States. (Photo: Remy Steinegger/World Economic Forum)
What follows is a conversation with David Rubenstein, co-founder of the Carlyle Group, one of the most storied private-equity firms in history. We spoke with Rubenstein in August, 2017, for our six-part series, “The Secret Life of a C.E.O.” Since we spoke, Rubenstein stepped down as co-C.E.O. of Carlyle, but he’s still executive chairman.
Stephen DUBNER: Stephen Dubner, is that David Rubenstein?
David RUBENSTEIN: It is.
DUBNER: How do you do? So nice to talk to you. Thanks.
RUBENSTEIN: My pleasure.
DUBNER: I have to say, I’ve been watching a bunch of your TV interviews.
DUBNER: I’m so impressed.
RUBENSTEIN: Well, thank you.
DUBNER: I don’t mean to sound surprised, but your questions are good, and you don’t have notes.
RUBENSTEIN: Well, I can explain why I don’t use notes, but I can do it another time.
DUBNER: Go ahead. I want to know.
RUBENSTEIN: Well, if you have notes, you lose eye contact with the interviewee. And there’s a human tendency — you can see it in Charlie Rose or other people — if you have notes in front of you, you will inevitably have your eye look at them at some point, even if you don’t need to. And the second you do, you lose the eye contact with the person you’re talking to, and you lose the intimacy of a conversation as opposed to an interview.
DUBNER: You’ve just described the central conflict which led me to do radio instead of TV.
RUBENSTEIN: It’s not that hard, but I try to always intersperse some humor in it; because I find that humor keeps people interested. And so I’m always looking every three or four questions for something that I can interject, something that might be somewhat humorous and it helps a bit, but okay.
DUBNER: All right. First thing’s first. Are you a STEEN or a STEIN?
RUBENSTEIN: Rubenstein, but I don’t care either way.
DUBNER: All right. So if we could begin, just literally say your name and what you do.
RUBENSTEIN: David Rubenstein. I am the co-founder and the co-C.E.O. of the Carlyle Group, which is a global private equity firm.
DUBNER: Very good. And let’s start with a little bit of personal background first. Just tell us a little bit about growing up in Baltimore, your family, your schooling, etc. your aspirations, perhaps, etc.
RUBENSTEIN: Okay. I am the only child of two parents who both dropped out of high school. My mother dropped out of high school to marry my father. My father dropped out of high school to go into the Marines. They were 20 and 17 respectively when they married. I was born more than nine months later. And I grew up in a blue collar environment. My father worked for his entire career in the post office, never making more than $7,000 a year. So it was a very blue collar kind of environment, and it was a very segregated environment in terms of religion. In Baltimore, the Jews had to live in one narrow area of Baltimore, more or less. And so I really didn’t know anybody who wasn’t Jewish until I was about 13, because everybody who lived around me was Jewish. And then I went to public high school in Baltimore before I went away to college at Duke University.
DUBNER: You went to Duke on a scholarship of some sort, yes?
RUBENSTEIN: I did it was not a basketball scholarship, I can assure you. I was the only person in Duke’s history who got cut from an intramural basketball team when only four other people were on the team. But I did go to Duke on a scholarship. And I was an equal opportunity applier to colleges. Whoever gave me the biggest scholarship, that’s where I was going, and Duke gave me the biggest scholarship.
DUBNER: Your mother, I understand, desperately wanted you to become a dentist. That was her dream for you, yeah?
RUBENSTEIN: Yes. My mother felt the highest calling of mankind was to be called a doctor. And she thought that being a dentist was better than being a doctor, even – you could still be called a doctor – because you didn’t have weekend hours. And my mother was a big consumer of dental services. So she always thought it was a good thing. I always said, “Well what happens if I get arthritis in my fingers? My career will be gone.” So I talked her out of my having to go to dental school.
DUBNER: Now I’m just curious. Growing up in Jewish Baltimore, when you watch some of those Barry Levinson films, what’s that experience like? Is it a warm nostalgia, is there a bittersweet there? Just talk to me about that for a second.
RUBENSTEIN: Well, Baltimore is a very family-oriented town. You know, if you were in the right families, you did well. And if you were in a lower family, you probably weren’t treated all that well. My family was not in country clubs. My family didn’t have the access to the wealth. So it was okay. And what you see in Barry Levinson’s film is largely true. I think there were a lot of elements of truth to that. It was, you know, you didn’t know any better at the time and – remember. But when I was growing in Baltimore Baltimore was the eighth largest city in the United States with a population of about 939,000. Now it’s not even the top 20 in terms of population sizes. So it’s shrunk a lot relative to other cities, and it’s had a lot of problems over the years. Today, it has a very high crime problem, very high, you know, illiteracy problem, very high S.T.D. problem. So there’s a lot of challenges in Baltimore. I have been living outside of Baltimore for roughly 50 years. I can’t really claim to be a Baltimore expert anymore. When I grew up, like most people who grew up in an environment, you don’t really know any better, you don’t know any worse. You think this is what life is about. And so I accepted what was there and, you know, like most children I enjoyed my childhood. I just didn’t realize until much later some of the things I didn’t have.
DUBNER: Right. After Duke, you went to law school at the University of Chicago. Became a lawyer for a bit. You wound up working in the Jimmy Carter White House, which is where you met your future wife. So describe that briefly, what you were both doing.
RUBENSTEIN: Okay. I’d always wanted to work in the White House, because I had been inspired by John Kennedy‘s inaugural address, giving back to the country. I was in the sixth grade when that speech was given. And so I always aspired to go back and give service to the country. I thought I could do it by working the government, and the White House seemed very appealing. I worked for Ted Sorenson who had written that great speech for John Kennedy. And after, I practiced law for a few years in New York. He helped me get a job, which ultimately led me to the Carter campaign. In 1976, I joined that campaign and Jimmy Carter was 33 points ahead of Gerald Ford; when I joined, Carter won by one point. So Carter often said, “What was your contribution?” But, as we have observed over many, many years, people work in White House staffs get their jobs because of working the campaign, not because of the merit. So at 27, I was the deputy domestic policy adviser to the president of the United States, a job I obviously wasn’t qualified for. My wife worked at O.M.B., and her job was to stop the spending of money. As a domestic policy person, I was in favor of spending of money. So we kind of had our disputes at the time.
DUBNER: Right. Now I’ve read that you stayed late at your job to make sure that your memos were on top of the president’s briefing pile.
DUBNER: Until your future wife found out and got a Secret Service agent to put her memos on top. Is any of that actually true?
RUBENSTEIN: It’s, for better or worse, completely true. What happened was – I did work late at night. I wasn’t married. At the time, my life was just working the White House. I couldn’t imagine anything more pleasurable. So I just had an efficiency apartment near the White House. I would work around the clock. I loved it, it wasn’t work. It was fun. But at late at night, I would bring in a second crew of secretaries to take memos or other things. And then at the end of the day, 10 o’clock, 11 o’clock, 12 o’clock – before I would go home, I would take into the president’s private study my memos, and bypass the staff system, and put my memos on top. So when the president came in the morning, he would read my memos first, because they were on top of the inbox. And that had the advantage of bypassing everybody else’s comments on my memos, which was a way of beating the system. When my wife-to-be found out about it, she beat me one time staying later than me. Her memo went on top. I was very upset and didn’t talk to her for several months, because she had beat me at my own game.
DUBNER: Do you consider that sort of. I don’t want to call it subterfuge, quite, but strategic positioning. Is that the kind of advice you would give to young people trying to get ahead in the world today?
RUBENSTEIN: It wouldn’t be something I would tell my three children it would be a good way to get ahead. But I would say sometimes you do things in life that in hindsight – with wisdom and gray hair – you realize probably don’t look so good. Everybody probably has some skeletons in their closet. I guess my skeleton is I went around the staff system at the White House, and for that I probably won’t get to heaven, but that’s the truth of what happened.
DUBNER: So unlike most C.E.O.’s we’ve been interviewing who run companies like Facebook or PepsiCo or Microsoft, I daresay that most listeners haven’t heard of the Carlyle Group, despite its $160 some billion in assets. And, additionally, that most listeners have no idea how a private equity firm like yours actually works. So can you explain it please?
RUBENSTEIN: The essence of it is this: private equity is a phrase that is used to explain the investing of money, typically in a company that is privately owned, i.e. it’s not public. And you spend three to five years improving the company, incenting the managers to work harder, do more efficient things, and ultimately, after three or five years, you sell or otherwise liquefy the investment. And the appeal of this industry and the reason it’s grown to be several trillion dollars under management, now, for around the world is that this is a business which produce very high rates of return. So to make it simple: if you put your money in the bank, you probably get 0.1 or 0.2 percent interest. If you put your money in a bond, you might get 1 or 2 percent interest. If you put your money in a stock market fund of some type, you might get 3 or 4 or 5 percent annual rate of return. In private equity, you’re trying to get 20 or 30 percent annualized rates of return. Now they’ve come down in recent years, but today probably it’s not unusual to think that people in my business can yield annualized net returns after fees of 15 percent or so per annum. So if you’re getting 0.1 or 0.2 percent in a bank account, and you’re getting 15 percent from people like me, you’re probably going to give us money. And so what we try to do is improve companies, make them more efficient thereby making economies more efficient. It’s now become a business that’s all done all over the world, though it’s only about 40 years old.
DUBNER: It also shed its earlier name “the leveraged buyout business,” which is seen as more I guess piratical or barbaric. Was that a conscious rebranding?
RUBENSTEIN: Well it was conscious, I think, in this sense: initially, the business was called “Bootstrap.” You were bootstrapping yourself, they were called Bootstrap deals. Then that was seen as a not very attractive name. So people then went to “leveraged buyouts.” Then the word “leverage” was probably seen as odious. So they went to the word “management buyouts.” Then the word “buyouts” was seen as odious. So they went to “private equity.” I suspect at some point, people will go with another name. But whatever you call it, the essence of it is: you get people who are highly motivated – because people in this business tend to get 20 percent of the profits on other people’s money – they are highly motivated to do a good job and get high rates of return for their investors, and they get 20 percent of the profit. So it’s a business that has spawned large firms like Blackstone, Apollo, KKR, Carlyle, among others. And it’s a business that I think is now operated all over the world.
DUBNER: One of those others, Bain which had employed Mitt Romney, which he helped start, Bain Capital. I believe that’s right. Mitt Romney.
RUBENSTEIN: That’s correct.
DUBNER: So it was demonized and considered kind of odious during the presidential campaign when he was running against Barack Obama. And private equity came to stand for rich investors buying up companies and killing off jobs in order to make them more efficient, more profitable. So that’s one perception. On the other hand, a friend of mine who happens to be in private equity will argue that you guys are the guardian angels of the economy, that you’ll swoop in with real money to pay for firms that nobody else wants. So, considering those are the two poles, how do you put it?
RUBENSTEIN: Well I hadn’t heard before the “guardian angel” phrase, but now that I’ve heard it, I guess I like it. I probably should stop using any other phrase and start using that one. I would say like most things in life it’s somewhere in between. In the early days of private equity, when Mitt Romney was doing what he did and he was accused of fairly or unfairly, it was a much different industry. People tended to focus on getting the highest rates of return. They didn’t worry about environmental concerns, they didn’t worry about E.S.G., or social governance kinds of things. Today the industry is one where environmental concerns, social governance concerns, tax concerns, all these kind of things are much more important. So Mitt Romney was accused of things that I think were probably somewhat unfair. He didn’t respond, because at times his polling data showed that any time he mentioned the phrase “private equity,” his polling went down, even if he had defended what he did. So he ultimately ignored it maybe to his detriment.
Today, I think private equity people think that, while we’re not perhaps guardian angels, we are providing a social service, and that social service is making companies more efficient, but more importantly than that, perhaps, the bulk of our investors are public pension funds. So they are policemen, firemen, teachers, and so forth – they are the largest investors through the various CalPERS of the world, or New York Commons of the world. And so we think that we’re doing good things, not only by making companies more efficient, but the real beneficiaries – the people getting 80 percent of the profit – very often are public pension funds.
DUBNER: How many companies does Carlyle own at the moment?
RUBENSTEIN: We own roughly 200 companies around the world on behalf of investors, about 110 or so are those in the United States and maybe about 90 of them outside the United States.
DUBNER: And can you think of any category of good or service, whether it’s clothing or restaurants or consulting or petrochemicals or software or weapons, that Carlyle does not own.
RUBENSTEIN: Yes. When I set up the firm with my partners, I said I didn’t want to do certain things that I found them antithetical to my own beliefs perhaps. So I didn’t want to invest in tobacco related products. We’ve never done that. I didn’t want to invest in firearms, guns. We’ve never done that. And I may have softened on this in recent years, but we never have and never wanted to initially invest in anything that was alcohol related. I can understand that some people may disagree with that and view that wine or related other alcoholic products aren’t as sinful as I may have thought at one point, but we haven’t still done those. But those are three things we haven’t done.
DUBNER: What was your objection to alcohol? I mean one thing that comes to mind is you do do a lot of business in the Middle East where alcohol has a kind of checkered access history. Was it a business decision, personal?
RUBENSTEIN: Well I don’t drink alcohol, so maybe that was the principal thing. I also felt that, you know, alcohol has its benefits, I suppose, but I felt that we might be criticized for investing in that area, and I didn’t think that was something we needed to do. Probably my partners may have a different view on it and we haven’t really seen a tract of investment in the area. So maybe we would do it in the future. We certainly wouldn’t do anything in tobacco, and we wouldn’t do anything in firearms. And there may be other areas that we probably wouldn’t do. But, you know, I thought for example, you know, one time we looked at a deal in an industry that you would think would be okay, which is to do video into hotel rooms. You know, it’s a nice business. But when you analyze it, it’s about 98 percent pornographic, at least at the time we’ve looked at this particular company. Maybe other things are different, because it tends to be that a lot of things that are at least making money that are being broadcast in the hotel rooms tend to have a, let’s say, X rating attached to them. So I didn’t feel comfortable with that, we did not pursue that transaction.
DUBNER: That reminds me of a comment you once made I believe speaking at Harvard Business School. You said, you compared private equity to sex. You said, “You realized there are certain things you shouldn’t do, but the urge is there and you can’t resist.” Can you give me an example – not the sex example, but the private equity example – of what you shouldn’t do but can’t resist.
RUBENSTEIN: Well sometimes prices may get very high, and you get in a competitive bidding situation. And if you’ve ever been in auction, you may know that, you know, you think, “Well I’ll just pay another 1 percent, oh, I’ll pay another 2 percent, I’ll pay another 3 percent.” And eventually you find you’re paying more than you really initially thought you would do. So sometimes people in private equity tend to, you know, maybe pay a little bit more than they originally intended to to get the asset. Sometimes it works out, sometimes it doesn’t. So that’s what I was trying to refer to in that comment at the Harvard Business School. Also, my view was that if you mention sex sometimes the students who are probably falling asleep during my speech would wake up. And sure enough, many people paid attention to that. In fact more people remembered that comment than anything else I said at that speech.
DUBNER: So what you’re talking about, especially with auctions, has been canonized in the economic literature as the “winner’s curse.” And empirically, it turns out that it can be a pretty bad deal. I’m curious how – over the nearly 30 years you and your partners have been doing this – I’m curious how your thinking has evolved in how you bid, how much you’ll pay, and what kind of things you’ve learned from past mistakes.
RUBENSTEIN: Well we’ve made plenty of mistakes, as everybody in this business has. And anybody tells you they haven’t made a mistake probably really isn’t in the business or isn’t being honest. I think generally, paying more than you want to pay by 5 percent even 10 percent isn’t generally the biggest sin. It’s maybe paying more than 50 percent than what you should have paid. But, generally the most important factor is getting a good business which can be improved by the good C.E.O. So if you buy a terrible business that can’t be turned around, no C.E.O. could turn around, that’s probably a mistake. If you buy a really great business, it already has a great C.E.O., there’s probably not much value to add. So what you’re looking for is a business that’s okay, but can be improved, and you’ve got a very good C.E.O. who can improve it. And then if you do that and work through the system for five years or so, you’ll probably get a reasonably good rate of return.
DUBNER: So as I understand it, you don’t sleep very much. Four or five hours a night. You don’t play golf. As you’ve said, you don’t drink alcohol, you don’t smoke. Is that sort of singular almost – well, it’s not quite fair to call it a monastic or slavish devotion, I guess, but it sounds like it from the outside. Is that kind of devotion necessary to run a company in the modern era, or is that just your set of personal preferences?
RUBENSTEIN: I hardly think it’s necessary, and many people who are wine aficionados are great running their companies, and they do a much better job than probably I’m doing. And many people who play golf do very well in running companies. So each to his own and, you know, the world is made up of many different people in terms of their taste. In my own case, I just never wanted to drink alcohol. I concluded that with respect to golf – I took it up when I was nine. I quit when I was 10. I realized that it was too frustrating and too humiliating, and as an adult, I’ve concluded the same. Because I have the view that if I have a business meeting with somebody, and they think that I’m competent and intelligent, if I were to go on the golf course, I would destroy the illusion of competence and intelligence. So rather than destroy that illusion, I just say that I might play putt-putt with them but nothing else.
DUBNER: I’m curious about the alcohol. In my experience, many people if maybe not most but many people who don’t drink at all have had some kind of experience or history in their family, a bad experience or history. Is that the case in your case?
RUBENSTEIN: I wouldn’t say that. I would say that my parents were not alcoholic consumers of any amount but I did notice that on New Year’s Eve, you know, my father might come back a little higher than I’d seen him before. But I think it was really a matter of discipline. I was in a youth group, and the youth group, kind of head of the youth group was a local judge in Baltimore. He was a big believer in not drinking alcohol, and I guess I just, you know, adopted that, as a way to please him or to please my parents. And so I just never was a consumer. Maybe I’ve missed many things in life by not consuming alcohol. I don’t know.
DUBNER: Yeah. And you have that in common with our current president,
Head Start — started in 1965 — is estimated to cost roughly $8,000 per year per kid, while Sesame Street costs $5 a year per kid. (Photo: Robert L. Knudsen/Official White House Photo)
Our latest Freakonomics Radio episode is called “Does ‘Early Education’ Come Way Too Late?” (You can subscribe to the podcast at iTunes or elsewhere, get the RSS feed, or listen via the media player above.)
The gist: in our collective zeal to reform schools and close the achievement gap, we may have lost sight of where most learning really happens — at home.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. And you’ll find credits for the music in the episode noted within the transcript.
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STEPHEN DUBNER: Hey, Levitt.
STEVEN LEVITT: Dubner, how are you doing?
DUBNER: Great. Welcome to New York.
LEVITT: Yeah, it’s good to be here.
DUBNER: We don’t often get to do this, sit down face-to-face.
LEVITT: Yeah, because the traffic in New York is so terrible that I stay away.
DUBNER: Why are you here? You meeting with the Pope today?
DUBNER: Alright. So, Levitt, I understand you’ve gotten into the early-education business?
LEVITT: Yeah, I think we regret it a little bit. Roland Fryer, John List and I went out and — really John more than us — started a pre-school, with the idea that if we were really smart and really thoughtful we could do things for three-, four- and five-year-olds that would change their lives and maybe could be used by other people to change a whole lot of lives all across the world.
Steve Levitt is my Freakonomics friend and co-author. He’s an economist at the University of Chicago. John List is a colleague there.
JOHN LIST: Stephen Dubner, how are you doing, my friend?
DUBNER: I’m doing great. Okay John, so tell us a bit about your work.
LIST: My primary research goes to the field and runs field experiments on issues like: Why do people give to charitable causes? Why do people discriminate against one another? Why do women earn less money than men?
List grew up in Wisconsin, went to college there and in Wyoming, then taught in Florida and a few other places.
LIST: When I moved to Chicago, I became very interested in public education largely because I saw the problems of public education all around me. I lived just south of Chicago in a city called Flossmoor. And right next to that is a city called Chicago Heights, and in Chicago Heights you have ninth graders who are reading at a fourth-grade level and doing math at a third-grade level. You have poor kids who just aren’t experiencing the value-added that children of the affluent experience. So, combining that with the fact that that’s sort of how I was raised myself — I was raised in public education and not in a wealthy family at all (my father’s a truck driver and my mother’s a secretary), so this was a sort of setting that I had been raised in — and I could see the problems in that setting, but they really came to fruition for me when I moved to the University of Chicago.
LEVITT: The demographics are about one-third white, one-third Hispanic, one-third African-American. It’s a relatively poor community. And the idea there was to look at state-of-the-art techniques for teaching kids reading, writing, and arithmetic — cognitive skills — and compare the outcomes of kids with another curriculum that emphasized non-cognitive skills like sitting still and expanding working memory and executive function and things like that.
Even though the school was a school, it was also very much an experiment.
LIST: So, our overarching theme is: let’s go into schools and use them not only to teach our kids, but to teach ourselves what works and why.
But the school wasn’t the only part of their experiment.
LEVITT: The more interesting piece of what we did was to get away from the idea of the school and say, “Well, schools only have kids for a handful of hours per day, but who, really, will mold kids through their lives are the parents.” And so, if we could take the parents of pre-school kids and have an academy where we actually teach the parents how to teach their kids, then maybe we could have a bigger and a longer-term impact on the kids.
DUBNER: So you set up also then a Parent Academy, yeah?
LEVITT: Yeah, so we set up a Parent Academy.
LIST: And this was in a large basement room in a K-12 school in Chicago Heights. We have two teachers in there. The parents arrive for a session, which is once every two weeks for 90 minutes, and it’s over a nine-month-long period. And we then incented the parents for things like their attendance at our early childhood sessions. They were incented based on the homework assignments that their kids handed in. They were incented based on the interim assessments that we actually conducted with their kids.
LEVITT: So, over the course of the school year, parents can earn up to $7,000.
DUBNER: Wow. So, you’re trying to help kids do better at school by essentially paying their parents to teach them to do better at school, yes?
LEVITT: Exactly. To take parents who care enough about their kids that they’re willing to show up to these classes and equip them with a better set of skills so that they could be better teachers to their kids — not just, say, the kid that was in our program but all the siblings — and to do that over a lifetime as opposed to just one year.
DUBNER: And why go to the parents? Why not just pay the kids directly?
LEVITT: Well, for one thing, the kids were three-, four-and five-years old so they wouldn’t understand the value of money. Maybe trinkets could have done it. But I think we really believed that the power of success lies in the parents.
Levitt and List were pretty enthusiastic about their experiment – and undaunted. How hard could it be to set up a pre-school and a parent academy?
LIST: Okay, so now is where the real problem starts.
LEVITT: It was one of the most difficult things I think we could have tried to do.
LIST: So, we have to make sure that the superintendent, of course, is on board.
LEVITT: And as economists I think maybe we weren’t fully equipped to make it — it seemed like it’d be easy.
LIST: We needed to secure state licenses to run a pre-K program.
LEVITT: The logistics are hard.
LIST: We need to develop a partnership with the community so the community trusts us and they will actually send their kids to our Parent Academy.
LEVITT: It’s just plain complicated.
LIST: We need funding. Funding for the teachers, funding for development of the curriculum, and we needed funding for the incentives.
DUBNER: Wow. Okay, a couple quick questions before we get on to longer questions. What’s all this going to cost and where’s the money coming from?
LIST: So this particular experiment cost nearly $1 million and the money came from Anne and Ken Griffin.
DUBNER: Who have a foundation in Chicago, yes?
LIST: This was a foundation in Chicago. It is no longer a foundation in Chicago.
DUBNER: You put them out of business with your Parent Academy?
LIST: We put them out of business. We spent all of their money on these interventions and they’ve gone broke, so now Ken’s trying to make more money and so is Anne and maybe, maybe they’ll send us some more in the future.
The truth is, the foundation shut down when the Griffins divorced. But the economists did get their money to run the pre-school and parent academy. So, what did the Griffins’ foundation get for all that money? How did the experiment work out?
LEVITT: It worked out okay.
Just okay? Today on Freakonomics Radio, we’ll hear about their results. We’ll also hear about other early-education ideas, some of which are really cheap. And some early-education ideas suggest that even pre-school may be too late.
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So, three economists, led by John List, decide to set up a pre-school in Chicago, with an experimental curriculum.
LIST: So, these are three-, four- and five-years olds, and our goal, of course, was to set up a program so we could measure how the children’s cognitive and non-cognitive — or executive-function — skills changed because of our program.
None of the economists knew much about this field.
LIST: So, essentially what we did is we started out doing a series of interviews of experts in early-childhood and development psychology. And we ended up hosting a two-day conference at the University of Chicago where we had the leading experts come in, and we talked about exactly what should the tools be that we use to measure cognitive and executive-function skills. And in the end, we settled on these assessment tools called Woodcock-Johnson on the cognitive side and on the non-cognitive side, things that measured operation span, spatial conflict and self-control.
The economists also set up a school for the parents of the pre-schoolers.
LIST: And here, we gave them a curriculum that was composed of both a cognitive component, which was called Literacy Express, and a non-cognitive component, which was called Tools of the Mind. So we combined these two curriculum, to try to push these two types of skills into the parents’, let’s say, minds, and then showed them how they could teach their children how to have these skills of self-control and to finish your homework.
And the parents, you will recall, were incentivized to do their work. A parent could earn up to $7,000 based on their own attendance and how well their kids did on homework and on assessment tests. So, what were the results of all this educational experimentation? What do the data have to say? Well, the research team is still working up the results on the pre-school curriculum. But as for the Parent Academy – John List, Steve Levitt, and Roland Fryer recently published a working paper on that project. The verdict?
LIST: Let’s jump right into the results.
LEVITT: These are huge, huge gains.
That is to say, incentivizing and teaching parents how to teach their kids really worked.
LIST: So, a first thing to note is we have huge differences across kids. Now, what I mean by that is that our program really, really helps Hispanic and white students and it doesn’t help blacks at all.
DUBNER: How disappointing was it to see that Hispanics and whites moved a lot and blacks didn’t?
LIST: Yeah, I think it’s a mixed bag. I think that when we started down this research agenda, part of our mission was, first of all, to learn about the racial achievement gap and learn about how we can lower that gap. Most of the time we lump Hispanic and African-American kids together, and we say, “What is the solution for minorities in public education?” And I think this particular result teaches us that the education production function across these two groups is very different and the solution will not be the same across African-American and Hispanic families.
DUBNER: Do you have any ideas for African-American families?
LIST: We have a few things boiling, but nothing that has popped up that moves African-American families.
LEVITT: And to be honest, we have no real theory for why that is. The two sets of parents were equally engaged in the program and we can control for all sorts of background characteristics and nothing really explains it. So to me that’s really a puzzle, and a puzzle that I don’t have an answer for.
But again, the Parent Academy did work really well for some students.
LIST: In just a nine-month program, we can move an Hispanic student from around the 30th percentile in test scores to above the 50th percentile in test scores.
LEVITT: These are bigger effects than almost any educational policy that is put into place.
LIST: So we’re getting results that swamp a result that you would get from a year-long program in a charter school. Now, that’s on both the cognitive assessments and the non-cognitive assessments.
But in looking carefully at cognitive skills versus non-cognitive skills, the researchers discovered something — something that was both a key to their success but also a warning sign.
LEVITT: Upon entry into the program, we tested kids to see where they stood in terms of their cognitive skills — how well they could, you know, do the alphabet and math and whatnot — and also their non-cognitive skills, about how well they could sit still and keep things in memory. And what was incredibly interesting to me in our findings is that for the kids who were below average on these non-cognitive skills — the ability to concentrate, to remember things, to kind of think their way through problems — the below-average kids made no progress in our program. So if you started behind, in terms of how ready you were to learn in some sense, then you got nothing out of our program. And that was true whether you scored high on the cognitive scores or not. So, kids could be really high achievers in terms of math and reading but gain nothing from our program if they didn’t have these sort of sit-still skills. But on the other hand if you were above average on these non-cognitive skills, you got huge benefits from our program. So what does this mean? Well, for one thing, I think it intuitively makes sense — that there’s a threshold for being able to learn. If the kids can’t concentrate, it’s hard for them to learn and no matter how hard the parents try it’s going to be hard to make gains. On the other hand, what it’s really valuable for from the perspective of public policy is that it really tells you where to target your resources.
So, what does the Parent Academy research suggest? Well, at least a couple of things. One: the fact that it worked — that at least some kids did better after their parents got tutoring – seems to confirm what Steve Levitt said earlier, that schools themselves may not have as much influence as we think.
LEVITT: Well, really schools only have kids for a handful of hours per day but who really will mold the kids through their lives are the parents.
Two: if a child’s ability to learn is so heavily influenced by what happens at home — and if the kids who came in with low non-cognitive scores at age three or four didn’t make cognitive gains — well, maybe the key here isn’t just what happens at home for a kid, but what happens at home well before a kid is even old enough to go to pre-school. In other words, what happens starting at age zero.
DANA SUSKIND: The brain, unlike any other organ that we have, comes out relatively underdeveloped.
SUSKIND: Unlike your kidneys — they function from day one, as they will for their entire lives — the brain is underdeveloped, and it’s absolutely dependent on what it encounters on its ride to full development. And it’s really in those first three years of life when a huge amount of the physical brain is built — literally 80 to 85 percent of it. And what is building those connections — those 700 to 1,000 new neural connections — is language.
SUSKIND: So when they come to me, they’re often shocked, because most children born with profound hearing loss actually have no family history of it, even though it’s genetic. So first you sort of wrap your arms around this overwhelmed family, because the baby has no clue, and start sort of explaining what we can do.
What they can do has changed a lot in recent decades.
SUSKIND: It’s really a golden age for children with hearing loss. What they can expect out of life is what any child with typical hearing can.
And that’s because of what people like Suskind now routinely do.
SUSKIND: What I do each and every week is I implant this technology into the baby’s cochlea, which is sort of a snail-like-shaped structure where the nerve part of hearing begins. Then about two weeks later is really when their hearing birthday happens. You think it’s when you do the surgery; I have to tell parents, “Look, they’re not going to hear you right after surgery.” But you know, two to three weeks later, the audiologist, with usually a whole gaggle of family members, are there to turn it on.
DUBNER: So they really flip a switch at some point, yes?
SUSKIND: They literally flip a switch.
AUDIOLOGIST: Now, again, keep your eyes on her. And within a few seconds it will go on.
MOTHER: Natalie! Natalie, honey. Hi! Hi, baby!
AUDIOLOGIST: Awww. She’s so happy.
MOTHER: Do you hear mommy? You hear mommy.
But Suskind learned that giving kids the physiological ability to hear didn’t mean they’d automatically succeed in learning language.
SUSKIND: You know, how do we learn language? It’s not like all of a sudden when a baby’s born they come out speaking in sentences and understand what you’re saying. Hearing is not the ear; it’s the brain. And it takes time for the brain to understand what those sounds mean.
That’s what Suskind came to understand during follow-up visits with her patients.
SUSKIND: If I do a cochlear implant on a child at 18 months, versus five years of age, it’s a huge world of difference.
That is, the older ones had a much harder time learning language. And that’s because the brain’s neuroplasticity — its ability to develop with new stimuli — is most acute when children are under the age of three. Suskind found that age wasn’t the only factor working against some kids. Poverty was also a big issue.
SUSKIND: When you take the Hippocratic oath, your responsibility doesn’t end when the surgery ends, right? It ends when your patients do well. And for me, that meant understanding that there were so many, what we call, social determinants of health outside the operating room, which were impeding how my patients did.
SUSKIND: Project Aspire is for children with hearing loss from low-income backgrounds. And as I was working on Project Aspire and learning, I realized, “Oh my gosh, what’s going on in my deaf population really just mirrors what’s going on in the typically developing population at large.”
And that led to Suskind founding another organization, called the Thirty Million Words Initiative, which gets its name from a remarkable study from the 1960s.
[MUSIC: The Atomica Project, “Bitterways” (from Self Notes)]
SUSKIND: Researchers Betty Hart and Todd Risley started off during the War on Poverty in Kansas City working with pre-school students, trying to sort of improve their vocabulary, trying to impact the achievement gap.
For the first time in human history, more than fifty percent of the world’s population lives in urban areas. Cities allow for the exchange of ideas, and generate remarkable innovations in business, art, and ideas. Cities are also home to millions living in poverty. Urban living can provide a pathway to a better life, but that’s not always the case for many people around the world.
CitiesX will give you a far-ranging look at the past, present and future of cities, with the aim of teaching you how to better understand, appreciate and improve urban areas. The course will explore key concepts of urban development by examining cities around the world, including London, Rio de Janeiro, New York City, Shanghai, Mumbai, Kigali, and many more.
The course includes a historical exploration of cities: how urban centers like ancient Rome resulted from consolidation of imperial power, how cities like Sao Paulo grew as important hotbeds of industry, and how cities like Seattle became hubs of technology and human capital.
CitiesX also dives into pressing social and urban planning issues like public health, transportation, zoning, gentrification, cost of living, crime, and congestion. The course includes interviews and insights from academics, policy makers, urban leaders, and city residents.
The analytical framework of the course comes from economics, but is enhanced by conversations with experts from other disciplines (including Sociology, Urban Planning, Journalism, Anthropology, History, Art & Music) to provide learners with a greater understanding of all aspects of urbanism.
Richard Branson left school at 15 and founded what would grow to become the multinational Virgin Group. (Photo: Gilberto Cardenas/flickr)
What follows is a conversation with Richard Branson, founder of the international conglomerate the Virgin Group. Stephen J. Dubner spoke with Branson in November for our special series, “The Secret Life of a C.E.O.” We will be releasing full interviews from that series as bonus episodes — one a week for the next six weeks. You’ll hear our lightly edited conversations with Mark Zuckerberg of Facebook, Satya Nadella of Microsoft, and others. Hope you enjoy.
Stephen DUBNER: Hello this is Stephen Dubner. Is that Richard Branson?
Richard BRANSON: I am. I’m Richard Branson. Yeah. Nice to talk to you.
DUBNER: It’s nice to talk to you, too. Thank you so much for making the time. How’s things?
BRANSON: Everything’s very good, thank you. I’m sitting here with a cup of tea in my hand and I wish we were talking in person. But anyway, nice to talk to you.
DUBNER: All right, so let’s begin. If you would just literally say your name and what you do.
BRANSON: Yeah. My name is Richard Branson and what do I do? I do everything Virgin.
DUBNER: Now, I’m sure most of our listeners are quite familiar with you, but just pretend there’s someone out there who lives in a cave who’s never heard of Richard Branson. How would you describe yourself to them — at least your professional self?
BRANSON: Well, I am an entrepreneur, I suppose you would also categorize me as an adventurer, and, hopefully, a philanthropist. So those are sort of my three main areas of occupation these days.
DUBNER: A tangential and very small question but one that I am curious to know. The Virgin logo is one of the most recognizable in the world, and I would argue one of the most elegant, as well. I’ve read a little bit about its history — I know it came from Virgin Records, and Roger Dean was the original designer, and then it morphed over the years. But can you just talk for a moment about the logo itself, and what it means to you, I guess?
BRANSON: Yes. I mean, I was 16 when I started off in business. So I was a virgin at business. And we were either going to call the company Slipped Disc records or Virgin Records. And fortunately we went Virgin, because Slipped Disc Airlines would not have been a great success, I think. And we started with a fairly, sort of hippie-based looking logo by Roger Dean. And then when we signed the Sex Pistols, we felt the logo was not going to be appropriate. And so we got somebody into the office, and we talked at great lengths about what we wanted. And I stood up to go to the loo, and I walked past him and he just scribbled on a napkin the Virgin logo. He just signed the word “Virgin,” and I said, “You don’t have to do anything more. We have our logo.” And it became the iconic logo of the last 50 years.
DUBNER: Was it in red originally?
BRANSON: I think the original scribble — I can’t remember whether he scribbled it in — with a red biro or a black biro. But anyway, it became red from day one. And we were fortunate to get that bold, bold, bold, color and the bold logo. Just very simple. I mean, it can be used tiny. It can be used large. You know, we’re just building three enormous cruise ships. And I’ve just seen the logo on the side. And it works, really, whatever size.
DUBNER: You know, obviously it’s not your last name. It doesn’t say Branson. But Virgin has come to mean almost Branson. I’m just curious, what is it — what does it feel like for you to see that logo on all these different things, whether small or you know, cruise ship size?
BRANSON: Well, I still pinch myself. I mean, I still get enormous satisfaction if somebody comes up to me and, say, they’ve just flown on a Virgin Atlantic or a Virgin America plane, and had a wonderful experience, or you know, worked out in about a Virgin Active club or being on a Virgin train, or booked a ticket on Virgin Galactic. And you know, I must admit, I sometimes think I’m going to wake up one day and just realize I’ve just had the most incredible dream. And I’ll be — you know, well, hopefully back as a poor student again one day. And starting all over again. But, yes, I’ve been very fortunate. I’ve had a extraordinary life. Just finished publishing my second autobiography, so that’s — I suppose — says it’s been pretty full. And yeah, it’s been an incredible ride, so yes. But — I appreciate every minute of it.
DUBNER: Now, your title — your official title, as far as I can tell, is “Founder, Virgin Group.” In addition to that, are you the C.E.O. of anything?
BRANSON: I used to be. But I’ve delegated pretty well all the C.E.O. roles. And I actually believe that people should delegate early on in their businesses, so they can start thinking about the bigger picture. If I’m ever giving a talk to a group of young businesspeople, I will tell them you know, go and take a week out to find somebody as good or better than yourself. Put yourself out of business, and let them get on and run your business day to day, and then you can start dealing with the bigger issues, and you can take the company forward into bigger areas, and you can — maybe if you’re an entrepreneur, you can start your second business or your third business. And so I think too many young entrepreneurs want to cling on to everything, and they’re not good delegators.
DUBNER: But it’s true also — at least I would argue, I’m curious to hear your take — that, you know, I think in the public perception, there’s sometimes not that much difference between the entrepreneur and the C.E.O. But in fact, the energy and the ideas and even the personality of the person who creates the firm is often very different from the energy and so on of the person to be executing and running the firm daily. Do you see that split in that way? Or do you think that’s a little bit of a misperception?
BRANSON: I think it’s more often than not that you’re correct. There are exceptions to the rule. I mean for instance, when we had a record company in Germany many years ago, the person who actually ran the record company was a true C.E.O. He was not an entrepreneur. He was great with people. He didn’t want to stray from his job of running the record company. And he did a fine job. Whereas in France, we had a guy called Patrick Zelnik, who was a C.E.O. but he was also an entrepreneur and he took the record company into Virgin Megastores, into all sorts of different businesses, a bit like myself. And he pulled it off. But you know, once he’d become a true entrepreneur, you know, the two of us sat down, and he then just found other people to be the C.E.O.’s who were perhaps less entrepreneurial, who would stick to their onions and do the day to day running well. Because it’s difficult to concentrate on looking after your people and also be, being an entrepreneur.
DUBNER: I know that once, when you were asked how involved you are in the mechanics of your businesses, you said, “I don’t understand these things completely,” and you said, “I’ve never been able to know the difference between net and gross.” I’m guessing you were exaggerating at least a little bit, or no?
BRANSON: Well, I’m quite badly dyslexic. And really bizarrely, it was on my 50th birthday that I was having a meeting with a group of executives. And I asked the question, “Is that good news or bad news?” when some figures were given to me. And one of the executives took me outside of the room and he had already prepared himself for this: he had a — some coloring pencils and he had a blank sheet of paper. He colored in this piece of paper blue, and then he put a net — a fishing net amongst it. And he put little fish in the fishing net. And he said, “Richard, I don’t think you know the difference between net and gross, and let me simplify it for you. The fish in the net are your profit. And the — all the fish that are not on the net are your gross turnover.” And hey, presto, I got it. And ever since then, I’ve been very swankily saying, “net profit and gross turnover.” As if nobody else knew it before. But the bizarre thing is that by then we had the biggest group of private companies in Europe. And I’d managed to build all these companies without knowing it. And I think that should be reassuring for all those kids who are failing their maths exams. It actually doesn’t matter a damn. What matters is, you know, have you created the best company, the best airline, or the best record company? And the best train company. And if you have created the best, your figures will add up at the end of the year, and you’ll have more money coming in than going out, and you can employ some accountants to work out the difference between net and gross.
DUBNER: Now, maybe it’s — maybe you’re a fluke, or maybe it’s a bit of a generational thing, maybe the world has just changed a lot. But you know, management has obviously become very, very professionalized in the last 20 or 30 years. And you know, M.B.A. programs are just exploding everywhere, there’s so — and so now, to be the C.E.O. of even a very small company, one is expected to be extremely well drilled in all the things that it sounds like you’ve really never had to be very good at. Do you think that that professionalization of leadership is in some ways a mistake, that someone like you had a lot of instinct and energy and appreciation for what you are trying to do with the company, and that some of that gets killed off by this professionalization of the leadership class?
BRANSON: I think it can be. I think if you feel a little bit lost in a company because of that should spur you on just to get out and run your own company. I mean, I’ve never had to report to anybody since I was — well, since I left school at 15. And that’s a luxury. And you know, I can do foolish things like, “Let’s start a spaceship company.” Which, you know, if I was working for a public company or a normal company, I would never have got it through. And so the great thing about being an entrepreneur — I think entrepreneurs are a class unto themselves. You know, they do not need that professionalism. They need a passion, absolute passion for what they’re doing. They need an absolute belief in what they’re doing. They need to be wonderful motivators of people. Inspirational leaders. And you know, those are sort of the key things that they need.
DUBNER: Can you talk a little bit more about being a wonderful motivator of people? By all reports, everything I read about you, it sounds as though most of the people who work with you and for you really like you. And that you — I don’t know about, go out of your way to treat your co-workers well, but you have a lot of policies that are very employee-friendly and so on. I think a lot of people out there, bosses — whether they’re C.E.O.’s or down — they’d like to be like that, and they’d like to motivate people. But it’s hard. Do you have any secret advice?
BRANSON: Well I mean, I think, I find that some American companies are anything but good at motivating people. And I find that hard to understand, because if you’ve got a happy, motivated group of people you’re working with, you can achieve anything. And you know, you can ride the good times together, you can ride the bad times together. If you treat your people badly, they’re not going to go that extra mile when things get tough. I just think you should treat your people in the same way that you treat your family. I mean, however you would treat your brothers and sisters or your children, the same should apply exactly to the people you work with. And it’s so much more pleasant. I mean you know, I mean a lot of our time we spend at work, and work should be fun. It should be enjoyable. And you should also have policies that follow through with that, so you know, if people want to work from home, let them work from home. If people want to work from home on Fridays and Mondays, let them work from home Fridays and Mondays. If people want to take a month off and go around the world, let them take a month off and go around the world. I mean, people will give everything back if you give them the flexibility and treat them like adults.
DUBNER: I hear you and I so want to believe that that’s the way to be. But the sceptic in me just thinks well, if every company let everybody work from home Fridays and Mondays and let them take a week off and go take balloon trips or climb a mountain that, you know, productivity would plummet and economy would fall apart. Why do people not exploit that, at your firm, at least?
BRANSON: Because they feel trusted. And also, look — let’s just look at this business of forcing people to come to an office. First of all, you’ve got maybe an hour or an hour and a half of travel time in the morning, another hour and a half of travel time in the evening. And, you know, when you’re at the office, it’s important that you say hello to everybody and that you’re friendly with everybody, so you use up another hour or two, you know, socializing with people. Then, because you’re not at home, you need to communicate with your family. So you spend another bit of time communicating with your family. And so the day carries on and you might get a couple hours of work done. If you’re at home, you know, you wake up. You can spend a bit of time with your family. And be a proper father, which is perhaps the most important — or mother — most important things that we can do in our life. But you can also find the time to get whatever your job is done, because you’ve got another four or five hours free to do it. And you know, we’ve never been let down by people that we’ve given that trust to. I think treating people as adults, giving people trust, is so important. And I mean — I’ll just give you one other example — slightly different. But I mean, we have a policy of giving ex-prisoners a second chance, and taking on as many people who’ve been imprisoned as possible into our Virgin companies. Because we give them that trust, not one of them have ever re-offended. And, we’re talking, you know like in Virgin Trains, I think we have 35 people. Well, the person who is head of our security at Virgin Trains, she comes out of prison on a Monday morning, works until Friday night, goes back to prison for the weekend, comes out. But she’s absolutely brilliant at her job. And somebody who will do everything they can for the company because the company has given them that second chance.
DUBNER: You have started and sold and shut down and grown many, many, many companies. Can you talk just for a moment about your overall win/loss record? I’m curious to know if you actually have ever tallied up the successes versus failures.
BRANSON: I haven’t. I mean we’ve never had a company go bankrupt. Because our reputation is everything. And we believe that if you can afford to, if a company is not working out, you must settle all your debts. And so you know, we’ve never had a bankruptcy, and that’s in 50 years, so we’re proud of that. And I think that’s really helped keep the reputation of Virgin. But obviously over 50 years things change. So you know, give you a very good example. We started off with record shops. And we built maybe 300 record shops around the world, Virgin Megastores. And then iTunes came along, and the internet came along, and people, sadly, didn’t see the need to go into record shops anymore. And so, we either sold or closed down most of those 300 record shops. There’s still a few left in the Middle East but that’s about it now. But, you know, that spurred us on to move into mobile phones and into new technology that was evolving. So rather — if mobile phones was going to put us out of business, cause — and games — people — a lot of kids were spending more time on games than music, then it was up to us to embrace it, and so we embraced that instead. And I think, you know, fortunately we’ve been ahead of the game over the last 50 years. So by and large, we’ve had many more successes than we’ve had things which we’ve had to say goodbye to.
DUBNER: Now, a lot of the businesses you’ve been in, including some of the ones you just mentioned there, are not businesses that you build from scratch, or even really necessarily run from the ground up, but they’re more partnerships. And the way you do business — and the Virgin Group is a little bit different than many other firms — you call it branded venture capital. Talk to me just about how that works and whether it was a happy accident or is that something that you decided strategically to pursue a long time ago?
BRANSON: Well, I think just to be slightly more accurate, we’ve generally speaking started by owning pretty well every company. So we start with 100 percent ownership in the companies. And then over the years, in order to then invest in new entrepreneurial ventures that I may have come up with, we’ll sell shares in the companies that we started. And sometimes we’ve sold 100 percent. But we keep a brand royalty in everything. So — and we keep in touch with the Virgin brand, we monitor the Virgin brand. We have a team of people who monitor it to make absolutely certain that anybody who’s running a Virgin company respects the fact that our reputation, for all of us, is all we’ve got. So generally speaking we’ll start with 100 percent ownership and then maybe over the years we’ll settle down and then put that money into new ventures.
DUBNER: Thank you for that clarification. Was that the case with Virgin Mobile? Was that a little bit different or no?
BRANSON: So Virgin Mobile, we own 50 percent of the company. So with Virgin Mobile, we didn’t have the resources to build out a network, and we also didn’t think that would be our strength. What our strength was, was marketing to the public, and the brand, and the whole proposition. So we did a deal with a company called T-Mobile and they took 50 percent of the company. They gave their infrastructure — their masks. And then we ran it on a day-to-day basis. We put the team in. And yeah, we built a pretty formidably successful company. And then we merged it with the biggest cable company in the U.K. And it became Virgin Media. So that’s how that worked out. And I actually — my new book, Finding My Virginity, I tell the story of how our partners in that one actually were, in our opinion, naughty boys and tried to steal the company from us. But anyway, we fortunately won quite a big court case on that.
* * *
DUBNER: Talk about your strategy for choosing the right C.E.O. for a Virgin firm.
BRANSON: Oh, Helen? Could I have another cup of tea? Thank you. Sorry, just being British, order some tea. Say that again?
DUBNER: No, take your time. I’d like to know your strategy for choosing the C.E.O. of a Virgin firm. What do you — what do you look for? How do you — how does the process work, and so on?
BRANSON: Well, we — first of all, ideally, we’d like to promote from within, because I think there’s nothing more discouraging for, say, a thousand people who work in a company for a so-called expert to be brought in from outside. And generally if you can’t find a good C.E.O. within a thousand people in a company, there’s something wrong in the first place. You should have deputies who are quite capable of stepping into the C.E.O.’s position. You know, I look for people who are fantastic motivators of people, people who praise people, who genuinely care about people, people who, you know, are not apt to criticize people. And — obviously they have got to be good at what they do. And then, you know, we let them get on with it. And we try not to second-guess them. And we accept that, you know, some things they’ll do differently than us. Some things they’ll do better than us. But you know, by finding somebody, that frees me up to have a life and move on to other adventures or other entrepreneurial things. And so I think we’ve managed to get a great team. Now, the other advantage of promoting from within is, you know what you’re getting. You know, quite often people bring in outside C.E.O.’s into a company and it can destroy the whole atmosphere of a company, and you know, the damage can be enormous. And the other thing is, we try to promote our C.E.O.’s, — if I give you two examples. There was a recording studio division and we had. And there was a excellent lady that cleaned the floors. Anyway, she ended up, a girl called Barbara Jeffries, running the whole recording studio division. And in Canada, we had an excellent receptionist who ended up being C.E.O. of our foundation in Canada. And so I think again, you mustn’t always put people in boxes based on their job. You’ve got to think that people are often capable of far more than meets the eye. And if you promote people above what they’d expect, they will give everything back.
DUBNER: You’ve been quite outspoken about supporting women in business leadership. A lot of Virgin companies have or have had female C.E.O.’s or managing directors. But as I’m sure you know well, overall —especially in the States — there’s relatively very few female C.E.O.’s, especially of big companies. What do you think is the issue there? And — obviously it’s not an easy problem to address. But what do you think is the issue and what you think are some smart steps to begin to address it?
BRANSON: I think that when you have a company dominated by men, they’re apt to think of their fellow men as the next potential C.E.O., rather than a woman. I mean it — and therefore, my own instinct is that the only way of actually solving this, you know, in a relatively short term, is to force things upon companies. So, in Scandinavia their government has said that companies have to have 40 percent, 40 to 50 percent, females as board directors of companies. And you know, initially that was difficult, because there just weren’t enough obvious candidates to fill all the places. And a lot of women had a lot of different roles on a lot of different companies, the same women. But in time, people have realized how much better those companies are run. I mean, women, you know, let’s say a supermarket chain, women have an awful lot more knowledge than men on supermarket chains. And maybe they shouldn’t. But they do. And so on. I mean, you know, women are a breath of fresh air actually, in most most areas. So I think we need to kick start it, it needs to be forced on companies. I’m not sure that a lot of women agree with me on that. I’ve asked women and they say, you know, “We’ve got to fight our own corner.” But you know, personally, I’m..
Gina Raimondo is one of just 15 Democratic governors in the country. (Gina Raimondo/Flickr)
Season 7, Episode 25
This week on Freakonomics Radio: Gina Raimondo, the governor of tiny Rhode Island, has taken on unions, boosted big business, and made friends with Republicans. She is also one of just 15 Democratic governors in the country. Would there be more of them if there were more like her?
David Rubenstein has seen every kind of C.E.O. transition imaginable. Now it’s his turn to step down. (Photo: The Aspen Institute/flickr)
Our latest Freakonomics Radio episode is called “Letting Go.” (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.)
If you’re a C.E.O., there are a lot of ways to leave your job, from abrupt firing to carefully planned succession (which may still go spectacularly wrong). In this final episode of our “Secret Life of a C.E.O.” series, we hear those stories and many more. Also: what happens when you no longer have a corner office to go to — and how will you spend all that money?
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post.
* * *
There’s pretty much one way to come into this world — but a lot of ways to leave it. There are good deaths: like dying peacefully in your sleep, in old age, in your own bed. And … bad deaths — sudden or tragic or brutal. You can die by accident or on purpose; from a common cause or a rare one. Also: ambivalent deaths, and undramatic but nonetheless sad deaths. Like I said, a lot of ways to go. It struck me, now that we’ve reached the end of our “Secret Life of a C.E.O.” series, that the same could be said for C.E.O.’s. There are a lot of ways to go. Some of the C.E.O.’s we’ve been speaking with — they went the hard way, for sure:
Carol BARTZ: They thought, “Well, we’ll just fire Carol.”
Ellen PAO: The board didn’t have the stomach for it. And that ended up being the reason why they asked me to leave.
Others have stepped down on their own terms, in their own time:
Ray DALIO: When I undertook the process of transitioning, I said, “Well, I think that this is going to go quick, maybe two or three years.”
And there’s been a lot of in-between:
Steve BALLMER: I got kind of riled up about that topic and I didn’t think it was handled well.
Jack WELCH: The reason I left was not that I was tired.
Today on Freakonomics Radio: letting go of the corner office. From the planning stages …
Indra NOOYI: The day you become C.E.O., you have to think about grooming a successor.
To the relief:
Richard BRANSON: I mean, you can maybe get just a little bit too many selfies in a day.
Now you’ve got the freedom to speak your mind:
WELCH: Well, I give him a D-minus on management practices.
Also: what do you do with all that money?
BALLMER: I own a basketball team.
David RUBENSTEIN: I bought the Magna Carta.
And: the afterlife of the C.E.O.:
BARTZ: Uh, I am going to have a quesadilla.
* * *
We’ve spent the past several episodes speaking with the C.E.O.’s, past and present, of Facebook, Microsoft, PepsiCo, General Electric, Virgin, Yahoo, the Carlyle Group, Bridgewater Associates, and Reddit. Also, the academics who know them best. The first episode looked at what a C.E.O. actually does, and why they’re paid so much. We followed that with a look at how our C.E.O.’s got to the top. Next was an in-depth conversation with Indra Nooyi of PepsiCo, a conversation that was turned into a global meme called Lady Doritos. The episode after that was — fittingly — about crisis management; and then a look at why female C.E.O.’s are so rare, and why they’re often asked to run companies that are in trouble. On today’s episode: the end of the road. It’s a road that, from what we’ve been hearing, is fairly exhausting.
NOOYI: Today I woke up at 4 a.m.
BRANSON: I was starting a company without financial resources.
RUBENSTEIN: I try to read two books a week.
BARTZ: I fought so hard against that, and fought, and fought.
The worst way to go, I think we’d all agree, is involuntarily. That’s what happened to Carol Bartz, who was fired from Yahoo after just a couple of years. The chairman of the board fired her by phone.
BARTZ: He didn’t have the nerve to see me face to face. Now, I’d like to think he didn’t have the nerve because he knew I would probably punched him out.
Ellen Pao was interim C.E.O. of Reddit. She says she was pushed to aggressively grow the company.
PAO: I had warned the board like, “This is going to be pretty ugly. It’s going to be a mess for a while.
It was a mess. Pao lasted just eight months.
PAO: At the end of the day I think the board didn’t have the stomach for it.
But she’s still working — back in venture capital, where she came from.
PAO: I am the chief diversity and inclusion officer at the Kapor Center, and a venture partner at Kapor Capital.
Carol Bartz, who pretty much came out of retirement to run Yahoo, stayed there this time. And she’s enjoying life:
BARTZ: I love quesadilla. I just think it’s so simple. Tortilla, cheese, and whatever you have.
And, for the pleasure of being fired from Yahoo in 2011, Bartz walked away with a compensation package of roughly $16 million. Golden parachutes are standard issue for fired C.E.O.’s. Here’s Jeff Sonnenfeld of the Yale School of Management.
SONNENFELD: You know, Carly Fiorina, who sliced shareholder wealth in half at Hewlett-Packard and created a chaotic, strategic pileup of computer carcasses and made the company larger and far weaker — she somehow had a huge package to leave.
A package that was reportedly worth something like $100 million. One reason C.E.O.’s are paid so much, both during their terms and even afterward, is that the job has become increasingly difficult.
RUBENSTEIN: You know, in the 1950’s, C.E.O.’s, basically they got the job and they could stay until they were ready to retire.
David Rubenstein is a co-founder and, until recently, co-C.E.O. of the Carlyle Group. It’s one of the biggest private-equity firms in the world.
RUBENSTEIN: I think it’s much harder today, because today you have much more scrutiny of what you’re doing. It used to be the case that activist investors were not taken that seriously by boards. Now an activist can, with 1 percent or 2 percent of the stock, really change who the C.E.O. might be or change the direction of the company. I think the scrutiny, in terms of everybody in social media watching what every company is doing all the time, is much greater than it used to be.
Today, the scrutiny, and the pressure, can be relentless. Even for someone who’s had great success, like Satya Nadella.
NADELLA: Thank you so much.
Nadella, the C.E.O. of Microsoft, isn’t close to retirement: he’s only 50, and got the job just three years ago. Already he’s been credited for pulling the company out of a serious stall. Microsoft’s market cap has risen roughly $400 billion since Nadella started.
NADELLA: The idea that a lot of progress has been made is not how I look at it. We are clearly grounded in all the things that we can do better — whether it’s the products we build, the capability we create, or the culture we have — and on all three fronts, I feel there’s a lot to be done. I’m proud of some of the progress, but it’s not sufficient.
DUBNER: Obviously, the role of C.E.O. is vast, and there are many duties and obligations. There’s deal-making. There’s strategic planning and customer relations and technical elements — you are, after all, an engineer — and daily personnel management. Can you rank for me your different duties from least favorite to most?
NADELLA: I have to admit, the most favorite is when I get to meet these engineers who know no fear or no conceptual boundary and can dream of the most impossible things. It’s no question. I mean, for me, that’s when I get energized. And I’d say my least favorite thing would be when someone says, “Come, just do these ribbon-cutting type of things.”
DUBNER: And would you say podcast interviews rank closer to the ribbon-cutting or the meeting with engineers?
NADELLA: You know, talking to you is one of my great pleasures.
DUBNER: All right, now I know you’re a good liar because that sounded very credible.
One reason that being C.E.O. is so hard is that, as Indra Nooyi told us, when you’re the C.E.O., you are “it.”
NOOYI: You are “it.” When you become C.E.O., overnight you are the person calling all the shots. It’s a very daunting job.
Daunting and, potentially, lonely.
NOOYI: Incredibly lonely.
BARTZ: People don’t talk about this a lot — but it is a very lonely job.
Carol Bartz again.
BARTZ: There’s really no one you can talk to about concerns in the company. The board is there, and many times there’s at least one or two board members that are pretty easy to confide in. But for the most part, you know, they show up six times a year. And also it’s a little dangerous to talk about today’s problem, because then they never forget it. And so, you know, they keep asking, “Well, how is such-and-such doing?” And you’re like, “Oh my god, that was put to bed six months ago! I should never have said anything.”
Nicholas BLOOM: It’s hard for C.E.O.’s, I think, to get fully candid advice because they’re there at their own on the top.
BLOOM: It’s hard for them to talk with their peers. Remember there’s anti-trust. So, if the C.E.O. of McDonald’s would start to talk to the C.E.O. of Kentucky Fried Chicken, they’d be taken to court. So they can’t really talk that well to their peers, so who can they talk to? The people below them who are never fully honest. We’ve seen it over the centuries, millennia, with kings that are lonely at the top. They surround themselves with courtiers and advisers. And on the one hand, they want honest advice. On the other hand, they have a tendency — particularly in medieval England — to chop the heads of the people that didn’t agree.
As I said, this sentiment came up in several interviews. But not every interview.
WELCH: All that crap about lonely at the top — it’s nonsense. Pure nonsense.
That’s Jack Welch, former longtime C.E.O. of General Electric.
WELCH: No, it’s not lonely at all. That’s the biggest myth in the world. You’ve got your friends there, you’re all sharing everything you have. I mean rarely do you have such an opportunity at a job to totally change lives, make people rich, send their kids to college, get vacation homes? I mean, it’s a turn-on. I used to call guys in my office and give them a million bucks. Do you realize how good that feels? And some of them would cry. Here’s a million dollars’ stock. They go home thrilled. Think of the party they’re having in their house that night.
BRANSON: No, I don’t get lonely. I mean, I love people.
That’s Richard Branson, founder of the Virgin Group. He started with one record shop and now has dozens of companies, including the space-travel firm Virgin Galactic.
BRANSON: Maybe I’m lucky, I don’t know. But I mean, there are occasions, because I’m a recognizable face around the world, that I can maybe get just a little bit too many selfies in a day.
DUBNER: Is that why you want to go to space? To avoid all that?
BRANSON: Well, maybe that’s why I live on an island, anyway.
DUBNER: You’ve admitted that Virgin Galactic may not be the best bang for the buck when it comes to maximizing profits. You also admit that the Virgin board has not been thrilled with the endeavor. Why is this so important to you?
BRANSON: You only live once. And there are millions of people who would love to become astronauts, who would love to go to space. Me included. And I love a challenge.
Perhaps the biggest challenge for any C.E.O. is the transition. Whether it’s sudden and involuntary; or a well-executed succession plan.
NOOYI: The day you become C.E.O., you have to think about grooming a successor.
Indra Nooyi has been C.E.O. of PepsiCo since 2006.
NOOYI: How do you, you know, take people and give them bigger assignments?
It wasn’t always thus. The process of grooming and choosing a successor wasn’t always so … methodical.
SONNENFELD: When I started doing this work in the 1970’s, virtually every C.E.O. would have some version of, “Oh, that’s taken care of, that’s right here.” And they’d open up a drawer, and pull out an envelope: “well, the name’s in here.”
Jeff Sonnenfeld again.
SONNENFELD: Who is that person? Shouldn’t we all know who that is? Certainly we on the board should know. What’s the training that person has? What’s their preparation, and what are the alternatives? Have we benchmarked some people against the outside? That was the way things were in the 70’s.
What about the 80’s?
SONNENFELD: In the 1980’s, people were being stacked, whether or not it was through mergers or whatever, commitments were being made. Okay, this person will be the next C.E.O. We were coming out with some very recipe-like H.R. practices , that somebody is ready now, and ready in five years, and whatever.
And who was responsible for writing these successor recipes?
SONNENFELD: There was often a czar of some sort, of executive development, that would report directly to the C.E.O., that had tremendous king-maker or queen-making power. You were worried about that person. They were legendary. They could derail people’s careers. There was a lot of personal prejudice and ethnic and gender, racial bias, often built into those roles. So that was a real problem in the 80’s.
Okay, glad we’re out of the 80’s. What about the 90’s?
SONNENFELD: Then, you know, we started to see the supremacy of certain functions — that, with all the deal-making frenzy, that somehow finance had this primacy and C.F.O.’s had raced past C.O.O.’s.
One firm that participated in that deal-making frenzy was General Electric, under Jack Welch. He stepped down in 2001, having run G.E. for 20 years.
DUBNER: You’d been there a while, and you were getting on in years, but I’m guessing if you’d really wanted to you could have powered through some more years. How do you know as a C.E.O. that it’s time to go?
WELCH: The reason I left was not that I was tired. The problem was you have expectations in the bureaucracy; and the expectations of these talented, wonderful people. I didn’t do it because I was tired or bored. I loved it. I did it because it was the right thing to do for the rest of the people. And I would have expected it when I was there. That there’s a certain rhythm; and 65 was the rhythm in G.E.
Meaning Welch was going to be 65 years old and it was time for someone else to have their turn at the top. He and the G.E. board meticulously plotted his succession. Their candidate list began with two dozen names. “Over the next four years,” Fortune magazine reported, “Welch tried to fill the gaps in all the candidates’ resumes and test their ability to grow.” Finally, the two dozen were narrowed down to three. After another round of auditions, Welch and the board made their decision.
WELCH: I told the two guys that weren’t gonna get it — I told all three, six months before, “All three of you are going to have new jobs. One of you’s going to be running G.E. And two of you are gonna be C.E.O.’s elsewhere.”
The two who didn’t get the job indeed wound up as C.E.O.’s elsewhere. Jim McNerney at 3M and, later, at Boeing. And Robert Nardelli at Home Depot and, after that, at Chrysler. The man who did get the G.E. job? Jeff Immelt, who would go on to run G.E. until 2017. His record was, at best, mixed. The firm’s value fell a great deal. Some blamed Immelt; some blamed economic forces; and some blamed Welch for having built a conglomerate with so many moving parts that it was unsustainable. Welch famously pushed G.E. well beyond its manufacturing and technology roots into businesses like insurance and financial services — businesses that G.E. has since sold off.
DUBNER: I’m just curious, did you regret that you had to take on so much of financial services to drive profit? Because …
DUBNER: You didn’t.
WELCH: No. I thought we had tons of leverage there. We had a great balance sheet. We had talent in financial services. We had our own homegrown financial management program where we could put people. We build great businesses. And I would still be in it if I was running it.
DUBNER: Oh really that’s interesting. So you wouldn’t find those —
WELCH: Wells Fargo is doing beautifully with the assets they bought.
DUBNER: Yeah, well, it helps when you’re making up a fake million accounts here and there. Right?
WELCH: Well, that that’s not — that’s not the businesses they bought.
DUBNER: So you’re saying that you would not have the divested the financial-services stuff if you were still runn—?
WELCH: No, I’m not saying that. I am saying that I might not have gotten in the trouble that they got in by exploding in real estate, but that’s second-guessing. You can’t second-guess a C.E.O. That happened eight years after I left. That’s the normal tenure for two C.E.O.’s. To talk about what I would have done or what somebody else would have done when I was there is unfair.
DUBNER: In 1999, not long before you retired from G.E., you said that your ultimate success would be determined by how well your successor grows the company over the next 20 years. When you said that, G.E.’s market cap was up north of $450 billion. Now it’s almost 20 years later, it’s just north of $200 billion. So talk to me about that. I know that you …
WELCH: I don’t talk about that.
DUBNER: You don’t. Why not? I mean it’s public record — I mean …
WELCH: You can comment on it in any way, where you want. But I’m not — I haven’t commented on my successor once in 20 years. And I don’t intend to comment now. You can judge me any way you want, on whether I picked the right guy or not, you gave numbers. And one, from those numbers, would question how well I did. But I’m not commenting. And I — if you want to give me a black mark, give me a black mark. I did the best I could. I picked the guy.
DUBNER: I’m curious whether you carry over this tradition from the U.S. presidential tradition, where it’s kind of standard for the former president to stay out of things, or did you come up with this on your own?
WELCH: My predecessor came up with it. He never commented on me. And I radically changed everything he did. And he sat quietly and was a friend.
The transition from Jack Welch to Jeff Immelt was considered so sensible, so thorough, that business schools taught it as the perfect example of how to search for, and install, a successor. Oh well. It doesn’t mean it wasn’t sensible and thorough, or that Immelt was the wrong man. It just means that business is hard — and most big firms throughout history do lose their mojo. The C.E.O. who recently replaced Immelt, John Flannery — he’s not having a very good time either. When we spoke with Welch, G.E.’s market cap was just above $200 billion; it’s since fallen to roughly $130 billion.
* * *
RUBENSTEIN: Generally, the companies that are going to make it are the companies that have a C.E.O. founder who has driven the company for the first couple of years.
That, again, is David Rubenstein of the Carlyle Group. He’s worked with, and seen, every kind of C.E.O. transition imaginable. In medium-sized firms looking to get bigger; in big firms looking to reboot; and — what he’s talking about here — in startups that outgrow their C.E.O. founders.
RUBENSTEIN: And then you bring in a C.E.O. who’s better at managing a more mature company than somebody who’s getting it off the ground.
DUBNER: What about when the startup C.E.O. wants to stay and plainly isn’t the right person for the job, how do you handle that?
RUBENSTEIN: It can be a very complicated conversation. Typically outside investors may have the majority voting stake or the majority of the board by years three or four, and they might have the ability to vote out the C.E.O. But it’s not pleasant. So sometimes you give the C.E.O. different responsibilities.
BRANSON: I’ve delegated pretty well all the C.E.O. roles.
And that, again, is Richard Branson of the Virgin Group, a conglomerate with many companies in many industries. Branson started Virgin when he was a teenager; now he’s..
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