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Alfred Rappaport and Todd Buchholz take sides on risk-taking
What caused the 2007–2009 crash?
Obsession with short-term gain is killing the economy, says Alfred Rappaport.
Two San Diego authors have recently written books. One tsk-tsks risk-taking and the other celebrates it. Yet you can agree with both premises.
La Jolla’s Alfred Rappaport, professor emeritus at Northwestern’s Kellogg School of Management, has written Saving Capitalism from Short-Termism, published by McGraw-Hill, with a foreword by John C. Bogle, founder and retired chief executive of Vanguard Group, the world’s largest no-load (no sales commission) mutual fund group.
Alfred Rappaport: Look long term.
Rappaport argues that the 2007–2009 crash wasn’t caused only by excessive debt and speculation, combined with a mortgage bubble. Financial management’s obsession with short-term performance is also to blame. Companies think only about next quarter’s earnings, and that’s all that securities analysts, institutional investors, rating agencies, appraisers, mortgage lenders, and banks are concerned with.
“An essential cause of the epic collapse was a collection of perverse, short-term financial incentives,” writes Rappaport. “These faulty incentives drove a chain of private sector accomplices to take reckless risks with other people’s money.” Such risk-taking led to the collapse of financial institutions such as Bear Stearns, Lehman Brothers, Merrill Lynch, and the insurance behemoth AIG.
But this short-termism doesn’t only affect Wall Street; it’s a disease among almost all companies. Indeed, writes Rappaport, “With the possible exception of Berkshire Hathaway [the corporation led by Warren Buffett], no company today is close to being a full-blown, long-term, value-creating company.”
At a long-term, value-creating company, management allocates corporate resources “to maximize the present value of long-term free cash flows,” writes Rappaport. That statement requires some explanations: “present value” is the current worth of a future stream of money. “Free cash flow” is the cash that a company generates after paying for items essential to expanding its business. It’s the cash flow (money-in minus money-out) that’s available for distribution to stock- and bondholders.
Companies can always do such stupid things as slash research and development to jack up short-term earnings. Such moves can put the company’s future at risk. Corporations and Wall Street should focus on long-term free cash flow, not short-term earnings, which tell little about a company’s value, writes Rappaport. Earnings don’t account for the cost of capital, exclude cash outlays essential to growth and, worst of all, can be manipulated by management. Earnings calculations include all kinds of estimates and assumptions that can turn out to be very wrong — almost always overly optimistic.
Rappaport has suggestions for getting management to think long-term. Trouble is, such reform requires uprooting the greed that besets our society. That won’t be easy.
Todd Buchholz: Work makes us happier.
But Todd Buchholz, San Diego author and economist, says risk-taking is the natural state of things. His new book’s titillating title is RUSH: Why You Need and Love the Rat Race. We all dream of peace and quiet, but they are alien to our nature, argues Buchholz. We will be much happier staying stressed, pressed, and obsessed with our work. “The good life is full of stress and angst,” writes Buchholz.
He marshals evidence from scientific studies and quotes Shakespeare, Kierkegaard, Keynes, Freud, Twain, Camus, Kafka, Aquinas, Kant, Salk, and Galbraith, along with Woody Allen, Yogi Berra, and Donald Trump.
The book is hilarious, as Buchholz finds anecdotes to support his theses. President Cal Coolidge and his wife are visiting a chicken farm. Mrs. Coolidge asks how a small number of roosters can lead to so many fertilized eggs. The farmer says that the roosters perform their procreative tasks dozens of times a day. “Would you please tell that to Mr. Coolidge,” she says. Cal then asks the farmer if the rooster services the same hen each time. The farmer says no. “Would you please tell that to Mrs. Coolidge,” gloats the president.
Buchholz argues that work and the anxieties that come with it cause the brain to produce endorphins, which kill pain; serotonin, which keeps us happy; dopamine, which makes us more talkative and excitable; and adrenaline, which makes us drive a golf ball farther, among many things, and enhances other performances.
“Our minds and bodies need some stress,” says the author. What’s more, “Our frontal cortexes want us to try different things.” Buchholz says, “Neuroscientists report that when a person begins to take a risk, whether it’s gambling or ginning up the nerve to ask a pretty girl to the prom, his left prefrontal cortex lights up, signaling a natural high. Alpha waves and oxygenated blood surge to the brain. Sitting alone in a pup tent does not yield the same effects.”
Buchholz heaps contempt on those he calls “Edenists,” who believe that all we need to be healthy are peace and quiet. Forget Utopia and ignore the “happiness gurus,” says the author, pointing out that studies by several scholars who claimed they found peaceful tribal societies have been discredited.
Some of his proclamations will generate arguments from physicians. For example, he says, “I suspect that slow walking causes obesity almost as much as obesity causes slow walking.”
Critics will also note that Buchholz generally ignores people who dislike their work. Oh, he feels sorry for coal miners. But he doesn’t spend much time on people who are bored stiff on assembly lines, who hate their bosses, who know they will never be promoted but can’t leave their jobs because they have to earn a living. “Work makes us happier, more eager to wake up the next morning,” says Buchholz, but a lot of nine-to-fivers will argue the point.
It’s said that Europeans work to live and Americans live to work. This book, as delightful as it is, could use more comparisons of different cultures.
Buchholz’s book will be loved by type A personalities (whom he mentions only once in the book) and work addicts. Most surprisingly, he doesn’t include himself among the type A’s. I have interviewed Buchholz many times but met him only once, when we shared a podium. His credits include White House economist, Harvard teacher, coproducer of the Broadway hit Jersey Boys, author of eight books, TV personality, and essay writer for such publications as the Wall Street Journal, Forbes, and the New York Times. He is a high achiever, multitasker, and hard worker with a competitive personality. He loves his work and doesn’t understand those who don’t love theirs.
Here's something you might be interested in.
Alfred Rappaport and Todd Buchholz take sides on risk-taking
What caused the 2007–2009 crash?
Alfred Rappaport and Todd Buchholz take sides on risk-taking
What caused the 2007–2009 crash?
Obsession with short-term gain is killing the economy, says Alfred Rappaport.
Two San Diego authors have recently written books. One tsk-tsks risk-taking and the other celebrates it. Yet you can agree with both premises.
La Jolla’s Alfred Rappaport, professor emeritus at Northwestern’s Kellogg School of Management, has written Saving Capitalism from Short-Termism, published by McGraw-Hill, with a foreword by John C. Bogle, founder and retired chief executive of Vanguard Group, the world’s largest no-load (no sales commission) mutual fund group.
Alfred Rappaport: Look long term.
Rappaport argues that the 2007–2009 crash wasn’t caused only by excessive debt and speculation, combined with a mortgage bubble. Financial management’s obsession with short-term performance is also to blame. Companies think only about next quarter’s earnings, and that’s all that securities analysts, institutional investors, rating agencies, appraisers, mortgage lenders, and banks are concerned with.
“An essential cause of the epic collapse was a collection of perverse, short-term financial incentives,” writes Rappaport. “These faulty incentives drove a chain of private sector accomplices to take reckless risks with other people’s money.” Such risk-taking led to the collapse of financial institutions such as Bear Stearns, Lehman Brothers, Merrill Lynch, and the insurance behemoth AIG.
But this short-termism doesn’t only affect Wall Street; it’s a disease among almost all companies. Indeed, writes Rappaport, “With the possible exception of Berkshire Hathaway [the corporation led by Warren Buffett], no company today is close to being a full-blown, long-term, value-creating company.”
At a long-term, value-creating company, management allocates corporate resources “to maximize the present value of long-term free cash flows,” writes Rappaport. That statement requires some explanations: “present value” is the current worth of a future stream of money. “Free cash flow” is the cash that a company generates after paying for items essential to expanding its business. It’s the cash flow (money-in minus money-out) that’s available for distribution to stock- and bondholders.
Companies can always do such stupid things as slash research and development to jack up short-term earnings. Such moves can put the company’s future at risk. Corporations and Wall Street should focus on long-term free cash flow, not short-term earnings, which tell little about a company’s value, writes Rappaport. Earnings don’t account for the cost of capital, exclude cash outlays essential to growth and, worst of all, can be manipulated by management. Earnings calculations include all kinds of estimates and assumptions that can turn out to be very wrong — almost always overly optimistic.
Rappaport has suggestions for getting management to think long-term. Trouble is, such reform requires uprooting the greed that besets our society. That won’t be easy.
Todd Buchholz: Work makes us happier.
But Todd Buchholz, San Diego author and economist, says risk-taking is the natural state of things. His new book’s titillating title is RUSH: Why You Need and Love the Rat Race. We all dream of peace and quiet, but they are alien to our nature, argues Buchholz. We will be much happier staying stressed, pressed, and obsessed with our work. “The good life is full of stress and angst,” writes Buchholz.
He marshals evidence from scientific studies and quotes Shakespeare, Kierkegaard, Keynes, Freud, Twain, Camus, Kafka, Aquinas, Kant, Salk, and Galbraith, along with Woody Allen, Yogi Berra, and Donald Trump.
The book is hilarious, as Buchholz finds anecdotes to support his theses. President Cal Coolidge and his wife are visiting a chicken farm. Mrs. Coolidge asks how a small number of roosters can lead to so many fertilized eggs. The farmer says that the roosters perform their procreative tasks dozens of times a day. “Would you please tell that to Mr. Coolidge,” she says. Cal then asks the farmer if the rooster services the same hen each time. The farmer says no. “Would you please tell that to Mrs. Coolidge,” gloats the president.
Buchholz argues that work and the anxieties that come with it cause the brain to produce endorphins, which kill pain; serotonin, which keeps us happy; dopamine, which makes us more talkative and excitable; and adrenaline, which makes us drive a golf ball farther, among many things, and enhances other performances.
“Our minds and bodies need some stress,” says the author. What’s more, “Our frontal cortexes want us to try different things.” Buchholz says, “Neuroscientists report that when a person begins to take a risk, whether it’s gambling or ginning up the nerve to ask a pretty girl to the prom, his left prefrontal cortex lights up, signaling a natural high. Alpha waves and oxygenated blood surge to the brain. Sitting alone in a pup tent does not yield the same effects.”
Buchholz heaps contempt on those he calls “Edenists,” who believe that all we need to be healthy are peace and quiet. Forget Utopia and ignore the “happiness gurus,” says the author, pointing out that studies by several scholars who claimed they found peaceful tribal societies have been discredited.
Some of his proclamations will generate arguments from physicians. For example, he says, “I suspect that slow walking causes obesity almost as much as obesity causes slow walking.”
Critics will also note that Buchholz generally ignores people who dislike their work. Oh, he feels sorry for coal miners. But he doesn’t spend much time on people who are bored stiff on assembly lines, who hate their bosses, who know they will never be promoted but can’t leave their jobs because they have to earn a living. “Work makes us happier, more eager to wake up the next morning,” says Buchholz, but a lot of nine-to-fivers will argue the point.
It’s said that Europeans work to live and Americans live to work. This book, as delightful as it is, could use more comparisons of different cultures.
Buchholz’s book will be loved by type A personalities (whom he mentions only once in the book) and work addicts. Most surprisingly, he doesn’t include himself among the type A’s. I have interviewed Buchholz many times but met him only once, when we shared a podium. His credits include White House economist, Harvard teacher, coproducer of the Broadway hit Jersey Boys, author of eight books, TV personality, and essay writer for such publications as the Wall Street Journal, Forbes, and the New York Times. He is a high achiever, multitasker, and hard worker with a competitive personality. He loves his work and doesn’t understand those who don’t love theirs.
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