Saturday, September 19, 2009

Buy High, Sell Low

If you want a good example of how overconfidence leads to mistakes (and very expensive ones at that), check out Floyd Norris's column in today's New York Times. Usually, we see overconfidence at work in individual errors; here, we see it at work on the corporate level.

Norris's column focuses on the allure created when publicly traded companies buy back their own stock (parenthetical comments below are my own):

"One reason investors have viewed buybacks as a positive was that they indicated corporate management and boards were confident (there's that word!) that their share prices were low and that the company would not need the cash for a possible downturn in business.

"Unfortunately," Norris concludes, "there is little evidence that is the case."

Records show that companies typically buy their own stock at the top of the market -- a colossal waste of money. He cites the case of American International Group. In 2007 it spent $6 billion buying back its own stock. In the first quarter of 2008, it spent another $1 billion. And then? Ka-boom. The bottom fell out of the market. Today, AIG would be broke without a massive federal bailout.

And AIG is no exception. Home Depot did the same thing. In the third quarter of 2007, Norris reports, it bought $10 billion of its own stock at an average price of $37 a share. By early this year, the price had fallen to $18. You talk about do-it-yourself investing!

Yessir, Home Depot: You can do it. We can help. Next time, just hang onto the cash.

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Tuesday, September 8, 2009

Swiss Cheese and Medical Errors

There's no real reason to single out medical errors from all the other types of errors in the world, except for one: they kill a lot of people. According to a leading study on the matter, about 98,000 patients in the U.S. die each year from medical mistakes.

This doesn't cause much of a public outcry, though, because most medical mistakes are buried with the patient. On the rare occasion when an error is revealed, blame is usually attached to an individual doctor or nurse (or both).

But if you want to understand why this approach to blaming individuals doesn't stop future errors from happening over and over again, read Josie's Story, which is reviewed here. The book is written by Sorrel King, whose 18-month old daughter, Josie, died from complications from treatment in 2001 at the world-famous Johns Hopkins Medical Center.

From the review:

"As Ms. King notes, the problem is often not a single doctor or nurse or misplaced decimal point on a medication vial but rather faulty systems and communication breakdowns."

Exactly. Most mistakes can be best understood by what experts on human error call the "Swiss cheese effect." Basically, errors are like the holes in slices Swiss cheese; for an error to happen, all the holes in various slices of the cheese have to line up. When they do, an error gets through.

Anyone truly interested in reducing errors in any workplace -- whether it's an operating room or a factory floor -- should take note.

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