The Peter Principledescribes organizations becoming mediocre as a result of policies where people are rewarded for competence with promotions into roles they may or may not be competent at or even interested in. Often referred to (somewhat simplistically) as “promoted to one’s level of incompetence”.
The Dilbert Principledescribes an “inverse hierarchy of competency” where and organization’s best and brightest need to be at the ground level actually doing the work, while the stupid and incompetent get promoted into management or project management roles doing easy work like tracking schedules and buying the team donuts.
My question is whether there is a similar economic principle to describe the following phenomenon at an industry level:
Public perception of rapid growth and financial success attract more and more people looking to make a quick buck to a particular industry. The initial pioneers were brilliant visionaries who built companies in their basement and many of those who followed were the best and the brightest who shared their vision. But at some point, the industry started attracting people who are less skilled or even inept, looking to make a quick buck. Many of these people had the connections or ability to con their way in even if they didn’t have the competency.
At some point, the industry suffers under the weight of a critical mass of incompetent charlatans.
For real world examples:
The Dot Com crash in the late 90s. While the tech bubble produced the likes of Apple, Microsoft, Google and Amazon, it eventually collapsed under the weight of every idiot and his brother dropping out of school to found a startup and the greedy VCs who gave them money.
Similarly, Wall Street was once known as a stodgy, dull business of old white guys running banks. But I recall in the years up to the 2008 financial crisis, it became this industry of young d-bags ordering bottle service in expensive clubs.
The TV show Silicon Valley presents a similar view of the current tech industry as a bunch of flakey billionaires and wannabees living off the past successes of early adopters.
There is a term which must have been extensively studied: Bubble. Most often mentioned in the context of the financial industry but it can apply to anything from tulips to gold prospecting to Bitcoin. Bubbles usually burst when amateurs looking to make a quick buck can no longer find a greater fool.
Tangentially, you might want to watch the move STARTUP DOT COM for an example of the incompetents trying to save a few hundred or thousand dollars on lawyer fees to do due diligence and ended up losing everything by contracting with a business that was already bankrupt. (I may be hazy on the details, been years- but that is the story)
A friend once told me a way to identify this, on an individual company level:
when they change their name from either the founders’ name (‘Hewlett-Packard’) or a name that identifies the business they are in (‘International Business Machines’) to something vague & general … sell their stock.
Seems to have some relevance – he’s become quite well off using this as one of his investing guidelines.
I’ve long felt there is a similar phenomena that works in art and entertainment. When a genre is new or unpopular, the only people who work in it are those who feel an attachment to the genre. They have either a love for the genre or they see opportunities to explore its potential.
But once the genre enters the mainstream, people begin working in it because they see it as a convenient avenue to personal success. They’re in the genre because they want to become famous or rich.
I’ll point tout that both the Peter Principle and the Dilbert Principle are comedy/satire. In the same vein you have Parkinson’s Law (work expands to fill the time available for its execution - and corollaries) also written as satire. Cecil Northcote Parkinson wrote quite a bit of satirical commentary on business and organisations. Like a lot it contains elements of deep truth.
But none of the above are “economic principles”.
Sadly I don’t think floods of easy money are unique in attracting incompetence and corruption. There are plenty of third world nations where corruption is endemic and incompetence abounds, and yet there is barely money to keep everyone alive.
You might say there is a supply and demand problem when money is easy. Supply of competence and morality is limited. Once you have all there is, things go downhill.
I’ve heard “As hire As, but Bs hire Cs”, to sufgest that early on, founders and visionaries know how to recognize talent, and hire it. Once you reach a certain size, you have to start hiring “good enough, but not great” . . .And those guys can’t hire for shit, because they don’t know talent whe they see it.
It’s like the difference between Nirvana and Nickleback.
MichaelEmouse - I thought about “bubble” or the “industry lifecycle”. I think with a bubble, the premise of the industry, product or market itself is fundamentally flawed, but some initial success causes a vicious cycle of irrational exuberance.
Industry lifecycles are more about the natural consolidation of companies and saturation of the market as an industry matures.
Bubble is certainly on the right track though.
I did see that film years ago. I actually worked for one of the firms mentioned (Sapient) shortly before the events of the film. The main thing I remembered from the film was the greed, bickering and infighting between the founders that IIRC led to the failure of the company.
The Peter Principle is actually not satire. It’s a legitimate (AFAIK) management theory based on the real concept that when people are promoted based on competency in their current role, they frequently may lack the skills of the new role. For example, being a good engineer does not mean you will be a good manager of engineers.
I’ve heard that as well. I’ve also heard similar management maxims of “hire people smarter than yourself”. There’s even a quote by Steve Jobs (I think) “It doesn’t make sense to hire smart people and then tell them what to do, We hire smart people so they can tell us what to do”.
The problem is that a practical matter, Steve Jobs is going to have a hard time finding a thousand other Steve Jobs to work with. Those guys are off starting their own companies. Plus what sort of “A” would condescend to work for a “B” or “C” manager if they had any other choice?
Or you have what I have heard is a common complaint at Google, because everyone wants to work for Google and they only hire the “best and the brightest” you have a company where even the lowest tech support job is performed by Stanford PhDs.
One could argue that it has become a more accepted idea, but the original 1969 book was most certainly satire, and IMHO not all that good a book. I suspect Peter was trying to emulate C.N. Parkinson, but he was never in the same class. You need to be British to have the dry sense of humour needed. The book was written as a psuedo-academic tome, but was not based on real research. Just observation. This isn’t to say the principle is bad, or should be dismissed. But, a bit like Murphy’s Law, and others, it has a life way past its origins. In a few decades it is possible that we will see sagely written articles from major management schools based upon Scott Adams’ Dilbert.
I have a deep suspicion that almost everyone that cites the Peter Principle, including those that have done work based upon the idea, have never read the original.
Another side to this is accumulating incompetence resulting from job churn (layoffs, hiring, etc.). HR hires, manager fires. Managers know where their talent lies, HR does not.
Example: Company A is nearing end of contract (or development) and begins layoffs, with the least competent out the door first. Company B is ramping up and HR hires the first available they see with the right resume buzzwords. Meanwhile Company A is hanging on to their best talent to ensure contract completion. When the last and most-skilled are shown the door, the good jobs are already taken. Rinse, repeat, and over time the truly skilled can lose the game of musical chairs, while the mediocre are still employed.
In the aerospace industry at least, most of us know some really skilled engineers who are out of work.
However much scholarly work did or did not go into the Peter Principle, it is a real and demonstratable phenomenon (at least in manufacturing where it is easy to calculate the cost of production). In my experience, it most often happens when someone goes from performing a function to supervising someone who performs that function. They tend to believe the way they had success is the only way to have success (especially in that function—but they also limit themselves to future advances because they insist upon running the new challenge using the tools that made them successful before, which are better suited to the previous challenge) they micromanage and insist no innovation is introduced – or even considered. It is easy to see how that person could become the most efficient manufacturer of buggy whips over time. The worst possible example is when the next promotion entails not just supervising his or her area of genuine expertise, but also other areas that are dissimilar and require different processes and results. Too often the newly assigned manager tries to apply the dissimilar process to the steps he or she knows and had success with before if they make sense or not.
Similar to the Peter Principle in my opinion, is a lesser known volume: THE CATT CONCEPT. It was written by a former neighbor who worked for Motorola at the time (Ivor Catt - Wikipedia ), who had invented what must have been the world’s first baby monitor when I was a kid. It was about ten by fifteen inches, and maybe seven or eight inches deep. He and his wife would put their two young sons to bed, then dress to go out. He would bring the box over to my parent’s home next door and plug it in, then give them a spare key in case something happened to the kids and go out for the evening. The next day the wife would come over and have a cup of tea and pick up the box. Pretty cool tech for 1968 or ‘69.
Despite my personal and brief connection to Mr. Catt as a child, the situations in his book are easy to spot once you are aware of them, and I could see them fooling an unenlightened boss for years on end. I have seen some of the techniques used by middle managers to great success and I am quite certain they never read the book. They just found a way to prolong their employment when they were quite redundant and dispensable, and the techniques are the ones Catt observed and listed in the book. https://www.amazon.com/Catt-Concept-New-Industrial-Darwinism/dp/B0026PV68M/ref=sr_1_2?ie=UTF8&qid=1524403933&sr=8-2&keywords=the+catt+concept
I think it’s used to explain why there can be a steep drop off. At first, you hire all As. Then, when the As run out, you have to hire some Bs. And if you could keep it there, it would be okay: Bs are good enough for almost everything: except they don’t know talent, so they hire Cs, and Cs are a disaster.
I’ve seen it happen the other way, too: you get a knucklehead in who makes dramatic changes, ignoring the veterans who know what they are talking about. Some variety of “if they don’t like it, they can leave!” is said, often with a smirk. So everyone with better options starts working their network and over a year or two, they leave. What’s left are the people that literally have no where else to go: it’s a miracle they have this job, and they aren’t going to leave without being fired, no matter how awful or dysfunctional it gets. Knucklehead can’t hire anyone at nearly the caliber of what he has lost, partially because all the rats running off the sinking ship send a pretty strong signal to other competent people.
This isn’t quite the same thing, but there’s the Dunning-Kruger effect:
Some of those people who are able to persuade investors to back their new company or who are able to persuade high-level executives to promote them are examples of the Dunning-Kruger effect. They actually believe themselves to be highly competent at what they’re doing, but they are actually pretty poor at it. They’re brilliant at talking other people into believing that they really are good at what they’re going to do. Someone who’s actually great at the job though knows their limitations and might come across worse in an interview because they don’t tell you how good they really are.
It could be just an example of regression to the mean, though not totally convinced.
Possibly there is actually nothing special about the industry in question, or exceptional about the people involved, it just happened by coincidence that the companies in that sector got lucky and did well for a while. What there wasn’t some process that kicked and dragged them down. All that happened is their “luck ran out”, as in the laws of probability kicked in (if you get four heads in a row tossing a coin, it doesn’t mean your fifth throw will be a head) and they reverted to the usual levels of incompetence and corruption.
One of the original things the popularized the idea of regression to the mean in the 1930s was someone proposing something similar to the OP (though for companies not industries). Horace Secrist produced a detailed statistical analysis of companies performance, and noticed that a company that was successful in any given year was likely to fail shortly thereafter, and fall back to the average. Companies that weren’t exceptionally successful did not exhibit this drop. He was unfamiliar with the concept of regression to the mean, so wrote a book The Triumph of Mediocrity, proposing there was in fact a real mechanism at play that actively brought down companies that did well, as opposed to them simply “running out of luck” and returning to average performance. Other statisticians (who did understand the concept of regression to the mean which had been around for a while by then) disavowed him of this eventually.
That said not totally convinced it applies here, as we are talking about a small number of industries, not thousands of companies. There clearly is some kind of feedback loop in play IMO. I’ve seen it myself in technology fields like VR or blockchain*, initially the field is full of enthusiastic technical types who are invested in the idea of the technology and the concepts behind it. Once the field becomes successful and lots of money starts to be invested in it, then those original technical innovators quickly become outnumbered by basically hucksters who know the buzzwords and practically nothing else.
You could argue the whole field is basically a scam, but thats off topic.
Malcolm Gladwell wrote this treatiseon management’s obsession with hiring “A” talent and why it’s a bunch of horse shit.
The short version is that companies often hire “talent” based on some arbitrary criteria (like getting an MBA from Wharton). Those identified with “talent” are then given opportunities, ones they are often unqualified for. When those ventures fail, often the “talent” is just shuffled off to the next venture and the failure is chalked up to “learning experience”. Which then begs the question, what use is “talent” if it is not tied to actual outcome?
Person A has a brilliant idea. He has figured out how to do (or make) something that hasn’t been done (or made) before. Person A decides to profit from the idea.
Person B has a brilliant idea. He has figured out how to take advantage of Person A’s luck by “getting in on the game”. (Person A wasn’t lucky, person A was smart - but person B can’t tell the difference.)
HR doesn’t hire, managers make hiring decisions. Do you mean that HR can do a poor job of filtering so the hiring manager isn’t presented with good applicants?
You are correct. I was using a shorthand version of this. HR does not (and cannot) know the intricacies of each job’s requirements, and must rely on resume words. The pool of applicants they present to the hiring manager may not be the best for a particular job.
