Spero Consulting

Archive for April, 2009

What Should It Mean to Earn a Master’s Degree?

We don’t answer that ques­tion here, but shouldn’t one be required to mas­ter something?

It Was a Mat­ter of Time

Since early Octo­ber, we’ve won­dered when we’d see the first edi­to­r­ial crit­i­ciz­ing MBAs and busi­ness schools for their role in the ongo­ing finan­cial cri­sis.¹ In our mind, much of the blame should be shared between busi­ness types, i.e., MBAs, and so-​called “quants,” with the major­ity of the blame placed on senior man­agers who per­mit­ted lax con­trols and mis­aligned incen­tives to exist.

We didn’t write about it when the thought orig­i­nally occurred to us nor dur­ing the inter­ven­ing six months-​or-​so, but we’ve been tempted to write on any num­ber of occasions.

Two events occurred last week that moti­vated us to write today. First, our excel­lent, for­mer TA, Brid­get Ardoyno, wrote to us that she has been blog­ging at http://​econ​mom​.blogspot​.com, and that reminded us of teach­ing MBAs (but in a good way).

The Main Shortcoming

The other event was the appear­ance of an excel­lent opin­ion col­umn, How Busi­ness Schools Have Failed Busi­ness, in last Friday’s edi­tion of The Wall Street Jour­nal. The col­umn, by Michael Jacobs, lists three main fail­ings of busi­ness schools with respect to the teach­ing and the cri­sis, but in fact, his three are all exam­ples of the lack of the qual­ity instruc­tion regard­ing con­trol and incen­tives.² Basi­cally, incen­tive issues are a type of con­trol prob­lem that arise in decen­tral­ized orga­ni­za­tion, where sub­or­di­nates are per­mit­ted a degree of auton­omy to act as they see fit.

The Root Causes

There is much to like about Mr. Jacobs’s crit­i­cism of busi­ness schools. How­ever, while we real­ize that edi­to­r­ial space is limited, he ignores the two main causes of the prob­lems that he iden­ti­fies: (1) poorly-​prepared stu­dents, and (2) an over-​emphasis on enter­tain­ment and teach­ing rat­ings that moti­vates instruc­tors to offer sim­plis­tic lessons at the expense of sub­stan­tive learn­ing. The first is related to the pathetic under­grad­u­ate edu­ca­tions most folks receive and the sec­ond is, well, an exam­ple of an incen­tive prob­lem. (We’ll get back to both of these below.)

Incen­tive Prob­lems Are Easy to Iden­tify, but Dif­fi­cult to Solve

Incen­tives prob­lems are as nat­ural and as old as recorded his­tory: every­body wants what they want. In the Old Tes­ta­ment, were Adam and Eve any­thing if not incen­tive prob­lems? Cain? We could go, but there’s no rea­son. All of the indi­vid­u­als were free to act in a decen­tral­ized set­ting, and failed to live up to their responsibilities.

In the New Tes­ta­ment, Jesus dis­cusses incen­tive prob­lems on any num­ber of occa­sions. Two of our favorites: (1) the para­ble of the faith­ful and unfaith­ful ser­vants (Luke 12:41 — 48) and (2) the para­ble of the good shep­herd, (John 10:11 — 13). All con­sider the fallen nature of man and his (com­pletely nat­ural) self­ish behavior.

That being said, there is not a more com­plex topic to address in busi­ness schools – or any type of school, for that mat­ter – than incen­tives. That’s because the topic involves social (or multi-​party) sit­u­a­tions where one needs to be able to pre­dict how another party will respond autonomously and freely to con­trol mech­a­nisms like com­pen­sa­tion schemes.

Many of our read­ers already know that deci­sions can be cat­e­go­rized as games against nature – single-​person decision-​theory – and games against oth­ers, i.e., game the­ory. Gen­er­ally – though not pre­cisely – one can think of the inves­ti­ga­tions in the nat­ural sci­ences as exam­ples of single-​person deci­sions and inves­ti­ga­tions in the social sci­ences as exam­ples of multi-​person deci­sions, e.g., how does one respond to a sur­vey so how should the researcher inter­pret that response?

Incen­tive or agency prob­lems – and infor­ma­tion eco­nom­ics prob­lems in gen­eral – can often be mod­eled math­e­mat­i­cally using game the­ory or sim­i­lar meth­ods. In many of these prob­lems of inter­est to busi­ness stu­dents, one decision-​maker – say, the supe­rior or prin­ci­pal – is attempt­ing to max­i­mize his own expected sat­is­fac­tion or prof­its while ensur­ing that (1) the other per­son – the sub­or­di­nate or agent – is will­ing to par­tic­i­pate with him (in the social set­ting like a firm or orga­ni­za­tion) and (2) with full knowl­edge that the sub­or­di­nate or agent will do what’s best for himself.

Those two con­di­tions – par­tic­i­pa­tion and incentive-​compatibility – con­strain the principal’s abil­ity to max­i­mize his own expected sat­is­fac­tion, and the lat­ter prob­lem is espe­cially vex­ing to solve because it means that one of principal’s con­straints is the other person’s opti­miza­tion prob­lem. How do you do what’s best for your­self while real­iz­ing that the other per­son is also behav­ing oppor­tunis­ti­cally (by doing what’s best for himself)?

Objec­tively mod­el­ing these issues as math­e­mat­i­cal prob­lems tends to require a rather high level of sophis­ti­ca­tion, and solv­ing the resul­tant prob­lem – or even know­ing when a math­e­mat­i­cal solu­tion exists – requires an even greater under­stand­ing of advanced cal­cu­lus, opti­miza­tion, real analy­sis, and other math­et­i­cal the­o­ries and tech­niques.³

Very few MBA stu­dents are pre­pared to tackle those top­ics (and their appli­ca­tions) at that level of understanding.

Our Root Causes, Again

A larger set of stu­dents can han­dle sim­pli­fied illus­tra­tions and exam­ples of prob­lems that tend to be more numer­i­cal in nature. Often, when taught in con­junc­tion with a math soft­ware pro­gram, they can gain a keen under­stand­ing of the sub­tle issues that arise in the study of incen­tives, e.g., pay­ing more for more out­put isn’t nec­es­sar­ily opti­mal nor incentive-​compatible.⁴

Unfor­tu­nately, the root causes that we iden­ti­fied above – igno­rance and selfishness/​greed – make it dif­fi­cult for most instruc­tors to offer and suc­cess­fully teach such a course to MBA students.

We’ll empha­size the stu­dents’ igno­rance and not the instruc­tors’; instead, we’ll focus on their selfishness.

Most MBA stu­dents are poorly pre­pared to think clearly, abstractly, and quan­ti­ta­tively, and that makes it a chal­lenge to teach them either (1) quan­ti­ta­tive sub­jects or (2) top­ics that can be effec­tively mod­eled, illus­trated, or explained in a quan­ti­ta­tive manner.

Incen­tive prob­lems fall into the lat­ter cat­e­gory. (What we’d call) sim­ple math­e­mat­i­cal or numer­i­cal mod­els pro­vide (by def­i­n­i­tion) abstract illus­tra­tions of par­tic­u­lar phe­nom­ena and behav­iors. They’re rarely solu­tions to real world problems.

Most MBA stu­dents are not sophis­ti­cated enough to han­dle that dis­tinc­tion; they want recipes, not thought processes, and recipes are eas­ier to teach and grade. It’s not because the stu­dents are stu­pid, but it often is because they were poorly-​trained as under­grad­u­ates and in require, core classes. Per Mr. Jacobs’s essay, there’s gen­er­ally not much evi­dence of profs teach­ing compensation-​related recipes in busi­ness schools because of the lack of rel­e­vant incentive-​related courses. Thatt’s evi­dence of absence (of the courses), rather than an absence of evidence.

There’s much more evi­dence of that behav­ior in finance classes, where stu­dents want recipes for val­u­a­tion. They’ll take abstract mod­els, with either unre­al­is­tic assump­tions or very, very spe­cial­ized assump­tions and unwit­tingly (and unknow­ingly) treat them as very prac­ti­cal and pre­cise meth­ods that cal­cu­late the one true value of the thing.

Unfor­tu­nately, they’re often encour­aged to do so by their pro­fes­sors because it’s much eas­ier to teach numer­i­cal – though irrel­e­vant or mis-​specified – recipes than it is to teach (and grade) thought processes.

In fact, that ten­dency to dumb-​down teach­ing even extends to some fac­ulty mem­bers’ research agen­das. Dur­ing our aca­d­e­mic career, we attended any num­ber of sem­i­nars where we heard the pre­sen­ter jus­tify his or her overly-​simplistic and vac­u­ous model by argu­ing that “we want to be able to explain it to MBA students.”

Imag­ine if med­ical research were con­ducted in the same man­ner? Or any seri­ous field of inquiry for that matter?

From our per­spec­tive, it’s com­pletely ass-​backwards (and, in fact, its pres­ence goes par­tially to explain why we’re in the pri­vate sec­tor, today).

In an ideal words, the ped­a­gog­i­cal empha­sis would be on edu­cat­ing the stu­dents by attempt­ing to pull-​them-​up to a level that they had not antic­i­pated nor even known existed, and not pre­sent­ing dumb-​downed “research” papers for enter­tain­ment or pre­tense, but, hey, the lat­ter alter­na­tive is easy, and one can gen­er­ally gar­ner higher teach­ing rat­ings by not chal­leng­ing the stu­dents, espe­cially if that per­spec­tive and tech­nique is per­va­sive within the school. (We knew any num­ber of fac­ulty mem­bers at very expen­sive and seem­ingly pres­ti­gious insti­tu­tions who would pro­vide “sam­ple” or “prac­tice” exams before test dates – the actual exams would have slightly-​changed num­bers; who would sched­ule fre­quent guest speak­ers because “the stu­dents like it (and we don’t have to pre­pare);” and would show videos of fac­to­ries or what­ever once per week because, again, “the stu­dents like it (and we don’t have to pre­pare).” (Geez, it’s almost enough to make one cynical.)

Any­way, that com­bi­na­tion of poor prepa­ra­tion of most stu­dents and the mis­aligned incen­tives of b-​school pro­fes­sors make true learn­ing about these thorny and dif­fi­cult (social) prob­lems, which all firms and orga­ni­za­tions face, nearly impos­si­ble to achieve.

Why It’s Dif­fi­cult to Teach about Incen­tives Issues

It’s not just the math­e­mat­i­cal nature of the most com­pelling mod­els of incen­tives that makes teach­ing dif­fi­cult. It’s also because the prob­lems are not par­tic­u­larly robust. By that we mean, illus­tra­tions and exam­ples must be care­fully (and empa­thet­i­cally) con­structed, or they’re either (1) extremely stu­pid and un-​insightful, or (2) extremely spe­cial­ized, detailed, and so qual­i­fied (by assump­tions) that they need a very high degree of math­e­mat­i­cal under­stand­ing to com­pre­hend and solve (and they end-​up say­ing very lit­tle, anyway).

The fer­tile mid­dle ground requires instruc­tors and stu­dents to pos­sess a rather high level of eco­nomic rea­son­ing and strong math skills. We’ll avoid crit­i­ciz­ing instruc­tors, here, but unfor­tu­nately, many MBA pro­grams have de-​emphasized, elim­i­nated, or con­sol­i­dated micro­eco­nom­ics courses, and those courses are (or were) the best place to develop the req­ui­site level of eco­nomic rea­son­ing. In those courses and well-​designed incen­tives courses, there is no sub­sti­tute for a lot of hard work.

By the way, we unsuc­cess­fully tried to estab­lish just such a Con­trol & Incen­tives course at our last aca­d­e­mic employer, but there were no required econ courses and only a few very moti­vated, very curi­ous, or previously-​trained stu­dents would enroll in the elec­tive. (Too much work!) As a pub­lic ser­vice, we’ll attempt to put that course mate­r­ial on-​line in the near future.

But Dif­fi­culty Is Really No Excuse

It’s up to trustees and deans to ensure that schools and pro­fes­sors edu­cate MBAs, rather than attempt to be “pop­u­lar.” That’s true at both the indi­vid­ual level and the sum of the indi­vid­ual lev­els, i.e., the school level, where administration’s allow them­selves to be sub­jected to the whims of Busi­ness Week writ­ers and sur­vey respon­dents. As a fac­ulty mem­ber, we won our share of teach­ing awards while try­ing to do the right thing; so, there’s no sour grapes here, and we know that it can be done; how­ever, we sus­pect that the short-​term empha­sis will not change. There’s too much iner­tia and very lit­tle confidence.

From our self­ish per­spec­tive, it’s not as bad as it seems because that gen­eral fail­ure to learn and teach presents many oppor­tu­ni­ties for con­sul­tants who under­stand both incen­tives and risk – peo­ple like our­selves. (We’ve writ­ten exten­sively about both issues, espe­cially as they per­tain to the cur­rent finan­cial cri­sis. Please search the archives if you’re inter­ested. Our Illus­tra­tions dis­cuss many of these issues, too.)

Are you sure that your firm or orga­ni­za­tion isn’t about to do some­thing stu­pid with incen­tive pay or claw­backs or whatever?

We’ll likely con­tinue to revise and edit this post in the near future. (It’s long and there’s prob­a­bly a few typos, but then TQM is rarely optimal.)

Copy­right © 2009 Spero Consulting.

Foot­notes:

We heard a com­mer­cial on the radio today where an attor­ney crowed that he had “won hun­dreds of cases dur­ing the past sev­eral years.”

We sus­pect that he made that state­ment to sound impres­sive and absolutely suc­cess­ful. Oth­er­wise, why bother?

Being skep­ti­cal, our imme­di­ate reply to both the car stereo and the chair­man, who hap­pened to be in the passenger’s seat was, maybe it should have been, “Yes, dur­ing the past sev­eral years, we’ve won hun­dreds of cases out the thou­sands (or pos­si­bly tens of thou­sands) that we’ve tried.” Of course, that sounds a lot less impressive.”

If inter­ested in his ser­vices, wouldn’t the reader pre­fer to know the guy’s win­ning per­cent­age, rather than the absolute num­ber of vic­to­ries? We would; ergo, it seems nat­ural to infer that either the attor­ney has some­thing to hide or he can’t impute how an intel­li­gent per­son would respond to his advertisement.

Of course, he might be an excel­lent attor­ney with an impres­sive, albeit low win­ning per­cent­age, because he takes only the most chal­leng­ing cases. There is that pos­si­bil­ity, but then one would think that he might men­tion it.

Then again, per­haps he only wants to attract less bright, less demand­ing, and less skep­ti­cal clients because it’s eas­ier to over-​charge them?

Or maybe he thinks he can intim­i­date poten­tial adver­saries with his three-​digit vic­to­ries and reach more favor­able out-​of-​court settlements?

Per­haps we’re think­ing too much about it and should attempt some­thing more productive?

Update: we have a few newer posts, too: Swine Flu and Bank Stress Tests and Today’s WSJ Report­ing Errors per the Bank Stress Tests.

Spurred by news of swine flu out­breaks in Mex­ico and the USA, on Mon­day we wrote, A New Influenza Stress Test. In that post we asked whether bank­ing reg­u­la­tors will require stress tests/​scenario analy­ses that incor­po­rate such a pandemic.

Obvi­ously, the first-​order effect of human suf­fer­ing and loss over­whelm finan­cial impli­ca­tions, but respon­si­ble reg­u­la­tors and bankers should con­sider the impli­ca­tions of such losses as those flu-​related losses are pos­si­ble though at this point in time, not probable.

We’re revis­it­ing the topic because of an edi­to­r­ial in the Asian edi­tion of The Wall Street Jour­nal, Asian Wis­dom on Epi­demics, pro­vides rel­a­tively recent CBO esti­mates of the costs of such a pandemic:

“This human toll would in turn affect the econ­omy. A 2005 report by the U.S. Con­gres­sional Bud­get Office put the dam­age from a severe flu pan­demic to the Amer­i­can econ­omy at around 5% of GDP. Of this, around 3% would result from supply-​side inputs such as labor and logis­tics as up to three in 10 Amer­i­cans would miss three weeks from work due to the pan­demic. The remain­ing 2% decline in GDP would come from demand-​side fac­tors such as a decline in con­sumer, cor­po­rate and gov­ern­ment spending.”

Now com­pare that 5% to the GDP shrinkage/​growth rates used in the recent SCAP stress test­ing exer­cise: see page six of the SCAP doc­u­ment, which shows neg­a­tive growth of –3.3% in 2009 and slight growth in 2010 of 0.5% in the more adverse eco­nomic sce­nario. What would be the impli­ca­tions for sub­tract­ing another 5% from GDP? It’s not pretty.

God for­bid that such a dis­as­ter occurs, but does the reader believe that any­one in the Fed­eral Reserve, OCC or Trea­sury Depart­ment is con­tem­plat­ing the possibility?

We’re either too old or too skep­ti­cal – maybe there’s no dif­fer­ence – to give the ben­e­fit of the doubt.

This a new feature/​question that we might add/​ask on a reg­u­lar basis.

There’s a nice, short arti­cle on The Wall Street Journal’s web site enti­tled, Calpers to Vote Against BofA Board. The title is self-​explanatory.

The penul­ti­mate sen­tence in it is: “Bank of Amer­ica has already taken $45 bil­lion in cap­i­tal from the fed­eral gov­ern­ment, some of it to help the bank cover losses stem­ming from its pur­chase of Merrill.”

The final sen­tence is: “Share­hold­ers have also been up in arms about $3.6 bil­lion in bonuses that were paid ahead of sched­ule to Mer­rill exec­u­tives despite the bank’s mas­sive losses.”

Thus, we ask: which is more egregious?

Using the para­ble of the faith­ful and unfaith­ful ser­vants (Luke 12:41 — 48) as a guide, we’d have to say the latter.

If you attempted to visit us this morn­ing but couldn’t it’s because our shared server was down. Gen­er­ally, Fused Net­work offers excel­lent up-​time and excel­lent cus­tomer ser­vice, but this morn­ing was an exception.

By the way, if you’re inter­ested in our site and firm but haven’t seen our vis­i­tor loca­tion map recently, we encour­age you to view it. We don’t get mil­lions of hits, but as you can see, we’re get­ting a decent num­ber from all across the world.

Thanks for visiting.

We applaud Arlen Specter’s move to the Demo­c­ra­tic Party. It injects a small bit of hon­esty into pol­i­tics. In fact, his will­ing­ness to finally be truth­ful with him­self and his con­stituents comes as a sur­prise to us. We doubt that we’re alone in that assessment.

At least through the sum­mer (and maybe the fall)

Within the past two weeks, we read: (1) how Gen­eral Motors (GM) is seek­ing an addi­tional $5,000,000,000 ($5 bil­lion) from the fed­eral gov­ern­ment – they may have got­ten a bit less – and (2) how GM plans to close pro­duc­tion for thir­teen weeks this sum­mer but also plans to pro­vide work­ers with full pay dur­ing the pro­duc­tion hiatus.

The prin­ci­pals at Spero Con­sult­ing are not pride and are look­ing for a sim­i­lar deal. We would gladly accept a gov­ern­ment bailout to halt pro­duc­tion (of con­sult­ing ser­vices) for thir­teen weeks this sum­mer. More­over, we’d gladly accept our cur­rent rev­enue rate and forego the oppor­tu­nity to increase that rate in exchange for the UAW level of health and pen­sion ben­e­fits dur­ing that time period. Finally, we’re will­ing to extend the plan into the nice part of the autumn, too.

When con­tacted, Pres­i­dent Andy Spero stated, “We recall our days as a pro­fes­sor when we received a sum­mer research stipend and gen­er­ated noth­ing of last­ing value, we’re will­ing to revive that tra­di­tion so that GM work­ers do not feel alone or stig­ma­tized in any way. We’re here to help.”

Per the generally-​misnamed Reduc­tion in Paper­work Act, which we see men­tioned so fre­quently dur­ing tax sea­son, please Mr. Gei­th­ner, con­sider this post as a for­mal appli­ca­tion for stimulus/​bailout/​handout funds.

In the spirit of coöper­a­tion, and to encour­age quick approval of our appli­ca­tion by fed­eral author­i­ties, we’ll com­mit to pro­vid­ing at least two social ser­vices dur­ing those thir­teen weeks. Those ser­vices will include a (1) green pol­icy of car-​pooling to soft­ball games – we’ll take the van instead of the Sub­ur­ban – and (2) main­tain­ing the lawn and flower beds and gen­eral out­side appear­ance of the home at a level that enhances house val­ues in our lit­tle sec­tion of the Shire. Chair­man Jill Tay­lor com­mented, “Both ini­tia­tives are con­sis­tent with Obama admin­is­tra­tion poli­cies for energy usage and to increase hous­ing val­ues; so, we think this is a no-​brainer for the admin­is­tra­tion, espe­cially since Spero Con­sult­ing, and not GM, is majority-​owned by a woman. Why should we be dis­crim­i­nated against? We’ve never pro­duced a sin­gle internal-​combustion engine and except for the times when the Basen­jis get table scraps, we have strict poli­cies to con­tain both green­house and methane gases at world headquarters.”

We urge the gov­ern­ment to act before the firm com­mits to con­tracts this summer.

On a Lighter Note

Now, this is mostly in jest, but the Obama administration’s ongo­ing mis­han­dling of the Bush’s administration’s “harsh” inter­ro­ga­tion tech­niques of political/​religious ter­ror­ists coin­cid­ing with rev­e­la­tions from Andrew Cuomo’s inves­ti­ga­tion of Paul­son and Bernanke and “forced” merger of the Bank of Amer­ica and Mer­rill Lynch make us wonder.

To what extent will Mr. Cuomo go to get the truth? And would any­one com­plain if any of the par­ties were exposed to harsh inter­ro­ga­tion meth­ods, includ­ing, say, water­board­ing or con­trolled head-​slamming? (Despite what we wrote in What a Civ­i­lized Coun­try!, we’re sure that quite a few lib­eral investors in Mr. Madoff’s funds might for­sake their sen­si­tiv­i­ties and prin­ci­ples and opt for thumb­screws if given the choice.)

Speak­ing of lost prin­ci­ples, it is nice to see The Wall Street Jour­nal edi­to­r­ial page call the government’s response to the mort­gage débâ­cle last autumn “panic.” (See Bust­ing Bank of Amer­ica.) It would be still nicer if the edi­to­r­ial board would acknowl­edge its mis­takes in encour­ag­ing gov­ern­ment inter­ven­tion back in late Sep­tem­ber and early Octo­ber that cre­ated and extended the larger finan­cial cri­sis. We crit­i­cized the edi­tors sev­eral times, includ­ing in A Bet­ter Solu­tion (than a gov­ern­ment takeover) and Prin­ci­ples Lost and More, in which we noted the staff’s aban­don­ment of free mar­ket prin­ci­ples dur­ing its fit of hys­te­ria. Per­haps they did admit to their errors, and we didn’t see it.

God for­bid that such a sce­nario is real­ized, but one hopes that reg­u­la­tors are demand­ing and banks are prepar­ing sce­nario analy­ses of a swine flu pan­demic (on top of the ongo­ing global liq­uid­ity cri­sis and mort­gage débâcle).

We write “God for­bid” because the first-​order effect of the loss of life and human suf­fer­ing would be hor­rific, but such a nat­ural dis­as­ter would also be dev­as­tat­ing for home val­ues, mort­gages, and mortgage-​backed secu­ri­ties and could throw the coun­try or regions of the coun­try into a true depres­sion, espe­cially for those houses located in bor­der states and other areas with high con­cen­tra­tions of ille­gal aliens from Mex­ico. (We know that we’re re-​evaluating our desire for “authen­tic” Mex­i­can food.)

You know – or at least we infer – that the fed­eral gov­ern­ment didn’t/hasn’t con­sid­ered the pos­si­bil­ity of such dis­as­ters because it would have never had wasted/​committed so many tax dol­lars on dubi­ous res­cues and stim­uli if it had – that goes for both the Bush and Obama admin­is­tra­tions. Pru­dence – even government-​style pru­dence, if such a thing exists – would have dic­tated hold­ing some­thing in reserve. In addi­tion, as it relates to stress test­ing, the exist­ing SCAP (Super­vi­sory Cap­i­tal Assess­ment Pro­gram) doesn’t seem to con­sist of par­tic­u­larly neg­a­tive eco­nomic sce­nar­ios; so, we doubt if any­thing more neg­a­tive was contemplated.

We also know that prior to the cri­sis some firms did develop such health-​based sce­nar­ios, but we’d imag­ine that such a dis­as­ter would com­pound and mag­nify losses to an extent that few have con­sid­ered. (Ergo, the need for such analyses.)

By the way, we now have a way to define whether a sce­nario is extremely neg­a­tive: if when dis­cussing it, one feels com­pelled to pref­ace that analy­sis with “God forbid.”

For new read­ers, we had this to say about SCAP on Sat­ur­day: The Super­vi­sory Cap­i­tal Assess­ment Pro­gram.

Update: We have sev­eral newer posts on this topic, includ­ing a few on the need to include the effects of a poten­tial swine flu epi­demic on GDP in the sce­nario analy­ses and this one: SCAP, The Government’s Naïve Stress Test­ing Exer­cise.

We read the SCAP doc­u­ment pub­lished on the Fed­eral Reserve web site. It describes the government’s stress test­ing régime for the nation’s 19 largest banks. It’s all very inter­est­ing. (Well, not really.)

How­ever, we thought the most inter­est­ing sen­tence in the doc­u­ment was this one from the sec­ond para­graph on the first page: “A need for addi­tional cap­i­tal or a change in com­po­si­tion of cap­i­tal to build a buffer under an eco­nomic sce­nario that is more adverse than expected is not a mea­sure of the cur­rent sol­vency or via­bil­ity of the firm.” (We added the italics.)

Uhh, do you think it would have been nice for the reg­u­la­tors to have requested con­fi­den­tial, pri­vate liq­uid­ity and solvency-​related stress tests to start with? (Maybe they did, and they’re not telling anyone.)

So, we ask, exactly what is the point of the SCAP exer­cise? (We’ve asked that before.)

The notion of cap­i­tal being any kind of buffer only makes sense in a trad­ing port­fo­lio with com­pletely liq­uid assets, i.e., take your upfront cash (cap­i­tal), buy Trea­suries, repo them, take the pro­ceeds, buy more Trea­suries, repo them, and con­tinue lever­ag­ing as long as you can… Even in that case, the cap­i­tal isn’t quite a buffer for cred­i­tors, espe­cially as the lever­age increases.

With typ­i­cal illiq­uid bank loans and other such unmar­ketable invest­ments, the notion that the level of book value of com­mon equity pro­vides a “buffer” or “cush­ion” is vacant, i.e., that it is some mea­sure of liq­ui­da­tion value if the firm’s sol­vency is ques­tioned. (Even with liq­uid assets, if other traders know that a port­fo­lio must be liq­ui­dated, then the amount of cap­i­tal invested is then the max­i­mum, limited-​liability loss dur­ing the feed­ing frenzy, and is not the net liq­ui­da­tion value.)

For new read­ers, it’s worth not­ing that we’ve writ­ten about the government’s stress test on a few occa­sions – most recently on April 7 in Where Will the Bank Stress Test­ing Exer­cise Lead? (If you read that post, you’ll under­stand why we rec­om­mend con­fi­den­tial, pri­vate (seem­ingly) ran­dom or ad hoc requests by reg­u­la­tors for liq­uid­ity and sol­vency stress tests – noth­ing for­mal, stan­dard­ized, or com­pre­hen­sive that would indi­cate such a pol­icy or inves­ti­ga­tion actu­ally existed. There’s no rea­son to raise need­lessly sus­pi­cions by announc­ing such a program.)

In addi­tion, we have writ­ten about the silli­ness of cap­i­tal ratios a few times, also – in both last week’s aptly-​named post, More Cap­i­tal Ratio Silli­ness, and March Mad­ness: New Bank Cap­i­tal Require­ments from Saint Patrick’s Day. Other than pos­si­bly, ten­u­ously con­stru­ing the excepted sen­tence above from the SCAP doc­u­ment as an admis­sion of irrel­e­vancy (given what should be the true and impor­tant issue of inter­est dur­ing a liq­uid­ity cri­sis), we saw noth­ing in the SCAP doc­u­ment that notices or dis­cusses the test’s defi­cien­cies, par­tic­u­larly the short-​coming of empha­siz­ing book cap­i­tal at the expense of some­thing real. That might be a good thing – if the reg­u­la­tors under­stand the weak­nesses and con­sciously elim­i­nated that dis­cus­sion. How­ever, it’s a bad thing if they don’t under­stand or couldn’t iden­tify those short-​comings.

Oh, well. Let’s pray for good luck for these firms and the economy.

P.S. We may con­tinue to edit this post tomor­row or in the near future.

While we often write about silly things, we gen­er­ally don’t stoop low enough to write about Walt Mossberg’s mis­in­formed opin­ions regard­ing com­put­ers and other devices in The Wall Street Jour­nal, but tonight is an exception.

In his most recent col­umn, Com­puter Buy­ers Have to Con­sider Sys­tem Upgrades, Mr. Moss­berg writes “… you may want to wait to buy, if you can, until the new oper­at­ing sys­tems emerge… This is espe­cially true if you are think­ing of buy­ing a Win­dows Vista machine. Vista is slow and filled with annoy­ing nag screens.”

We have two dif­fer­ent ver­sions of Vista installed on three machines and XP Pro­fes­sional installed on a few oth­ers. We pre­fer Vista. Other than blog­ging, our main appli­ca­tions range from math pro­grams to graphic and photo edit­ing, and Vista is not slower than XP. In fact, it tends to be more sta­ble, i.e. needs to be rebooted less often. If you have a mod­ern PC, we’d be very sur­prised if you pre­ferred XP to Vista, or if you found Vista to be lack­ing. (Our most recent pur­chases came with XP Pro­fes­sional with an option to upgrade to Vista Busi­ness. We exer­cised that option very quickly.)

By the way, the annoy­ing nag screens that Mr. Moss­berg men­tions can be eas­ily turned off. Per­haps he’s done so in the past or per­haps not, but he could have per­formed a pub­lic ser­vice by explain­ing how to dis­able those mes­sages in about the same amount of space that he used to com­plain about them. It’s not very dif­fi­cult; go to the Secu­rity Cen­ter (via Con­trol Panel if you want) and turn the User Account Con­trol off.

We know that Microsoft has its faults, and it’s very easy to take shots at the firm as it makes any num­ber of mis­takes; recall last year’s Jerry Sein­feld ads for exam­ple. How­ever, unless you’re using an ancient machine or a very, very, very cheap one, we’d be very sur­prised if typ­i­cal and rel­a­tively high-​powered users didn’t pre­fer Vista after using it. It’s better-​looking and works at least as well if not bet­ter. To be clear, you don’t need to buy hard­ware that costs in the four dig­its to be happy with Vista’s performance.

Maybe Mr. Moss­berg does know how to shut off the “annoy­ing nag screens” or maybe he doesn’t. If he doesn’t, do you really want to take hard­ware and oper­at­ing sys­tem pur­chas­ing advice from him? If he does, why didn’t he men­tion it or ignore them. We don’t trust him.

Our pre­vi­ous post, Help Wanted: Look­ing for Banking’s Har­ri­son Berg­eron, relates the dystopic forced-​equality of Kurt Vonnegut’s short-​story, Har­ri­son Berg­eron, with what seems to be Trea­sury Sec­re­tary Geithner’s plan to not allow healthy finan­cial firms to repay/​refund their gov­ern­ment investments.

Back on Octo­ber 7, 2008, in Even A Per­fect Bailout Will Fail, we wrote:

Finally, does the reader imag­ine that once the cri­sis recedes, the fed­eral gov­ern­ment will vol­un­tar­ily give up con­trol of the new por­tion of the econ­omy that it con­trols? Gen­er­ally, to induce the gov­ern­ment to shrink requires, if not a lit­eral rev­o­lu­tion, at least a fig­u­ra­tive one, e.g., the Rea­gan Rev­o­lu­tion. With­out such a rev­o­lu­tion, what hope does the econ­omy have with more government interference?

Now, we don’t think the over­all cri­sis has receded and we don’t think the the bailout has been any­thing close to per­fec­tion, but we don’t think it’s too early to crow. It does seem that cer­tain firms do not need – and prob­a­bly didn’t need – fed­eral gov­ern­ment funds. How­ever, it does seem that fed­eral gov­ern­ment offi­cial and bureau­crats lack the self-​control to release these firms from direct invest­ment con­trol. (Of course, would still be under their reg­u­la­tory over­sight – not that that fact pro­vides us with any comfort.)

Already, dur­ing the past sev­eral weeks there has been a plethora of sto­ries about gov­ern­ment med­dling in com­pen­sa­tion, lend­ing poli­cies, etc.

It seems ironic, but with all the bank­rupt firms and indi­vid­u­als who can­not repaid their debts, as it stands today, it doesn’t seem the Obama and Gei­th­ner want to be repaid by the cred­it­wor­thy ones.

We thought that we men­tioned Kurt Vonnegut’s excel­lent short story, Har­ri­son Berg­eron, in a pre­vi­ous post, but we can’t seem to find it in the archives. We have rec­om­mended it to any num­ber of friends and acquain­tances, and rec­om­mend it to you, dear reader, too. It is quite short and quite good and quite free at the above link.

We know that we’re not the first to analo­gize Geithner’s plan with the forced-​equality dystopia that Har­ri­son Berg­eron rebels against, but an arti­cle in today’s edi­tion of The Wall Street Jour­nal makes the sim­i­lar­i­ties crys­tal clear. In fact, the first sen­tence in Gei­th­ner Weighs Bank Repay­ments says it all: “ Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner indi­cated that the health of indi­vid­ual banks won’t be the sole cri­te­rion for whether finan­cial firms will be allowed to repay bailout funds, a posi­tion that might com­pli­cate their efforts to give back the cash.”

In sum, Geithner’s posi­tion seems to be: let’s crip­ple the best firms to make them all equal (or at least appear equal). Clearly, it’s unten­able and silly and, frankly, quite unAmer­i­can. (Our own late mother had the stated posi­tion that each of her chil­dren were equal in every way, and like all of our sib­lings, we rebelled against it to stress our unique­ness. For­tu­nately, no one did any­one too stu­pid or harm­ful or per­ma­nent, but that prob­a­bly had more to do with good for­tune than with any­thing else. We’re try­ing not to make that mis­take with our chil­dren, but we’re sure that we’ll make new ones.)

Given the tea par­ties and the public’s gen­eral dis­en­chant­ment with the bailouts and hand­outs and crony­ism and spend­ing and taxes, we won­der whether a hero will rise from the streets, or at least from the bank­ing indus­try, to chal­lenge Geithner’s and Obama’s poli­cies of forced equal­ity. His or her argu­ment should be quite sim­ple: in a fun­gi­ble, dynamic, global econ­omy how does ham­string­ing the bet­ter domes­tic firms ben­e­fit any­one other than for­eign firms?

Mr. Gei­th­ner, the weak do not get stronger by mak­ing the strong weaker. Crip­pling the strong only crip­ples the strong and noth­ing more.

With firms like Gold­man Sachs and J.P. Mor­gan express­ing their desire to refund the gov­ern­ment invest­ments, we hope that some­one within the firms or out­side of them rises up to defend them (and the coin­ci­dent Amer­i­can Way) and put an end to the nonsense.

Please remem­ber, Mr. Gei­th­ner, per our oft-​cited Hip­pocrates ref­er­ence, “first, do no harm.” In our opin­ion, you’re not off to a very promis­ing start.

Let’s hope banking’s Har­ri­son meets a bet­ter fate.

The Irrel­e­vance of Book Equity and Cap­i­tal Ratios

Last month we wrote March Mad­ness: New Bank Cap­i­tal Require­ments. In that, we stated: “We’ve always thought that such require­ments were stu­pid and pro­vided a false sense of secu­rity: kind of like duck­ing and cov­er­ing under one’s school desk as prac­tice and prepa­ra­tion for a nuclear explosion.”

We also pro­vided an exam­ple from an old merger of two rust belt firms. At the time of the merger, the firms had com­bined book val­ues of $2.0 bil­lion ($2,000 mil­lion) but com­bined mar­ket val­ues of about $300 mil­lion. At its the­o­ret­i­cal best, book value rep­re­sents net expected future ben­e­fits from past trans­ac­tions or events, whereas mar­ket value rep­re­sents net expected future ben­e­fits from all trans­ac­tions and events – both past and antic­i­pated. In the rust-​belt merger exam­ple, at the time, equity investors had con­cluded that the future would be bleak, and it turned out to be, but also at the time, no loan covenants were breached.

We think that’s worth restat­ing because on Mon­day, Bank of Amer­ica reported com­mon share­hold­ers’ equity of $166 bil­lion, yet finance​.google​.com reports that the mar­ket value of com­mon stock was about $50 bil­lion. Now, exactly how rel­e­vant is the book value of $166 bil­lion when investors value the firm at less than one-​third of it? We’d say, “not very.”

Think about it. Do you care if your house has a net book value of $166,000 if its net mar­ket value is $50,000. Or, ignor­ing tax-​planning impli­ca­tions, do you care if your lever­aged port­fo­lio has a book value of $166,000 if it can be liq­ui­dated for $50,000? Would you make deci­sions based upon the actual net equity of $50,000 or the reported net equity of $166,000? What do you think that, say, poten­tial cred­i­tors would con­sider when offer­ing financ­ing? More­over, what would you want them to con­sider if those cred­i­tors were act­ing as agents for you? There may be reg­u­la­tory impli­ca­tions to the book val­ues, but it seems that investors have con­cluded that those reg­u­la­tions (and all of the sub­si­dies) haven’t pro­vided enough sta­bil­ity or value to secure their resid­ual interests.

Also, real­ize that B of A’s net book value is greater because its lia­bil­i­ties are worth less than they were, which is not quite com­pletely worth­less. The prices for claims on the gross assets have declined. These are the silly, unre­al­ized account­ing gains are shown as result­ing from increases in credit spreads. In B of A’s case, they rec­og­nized at least $2.2 bil­lion of them in the first quar­ter although it was prob­a­bly more. (We wrote about this topic in Decem­ber in Mark­ing Debt to “Mar­ket” or Addi­tion Through Sub­trac­tion. 

By the way, and of course, B of A is not alone with its imbal­ance between its lower net mar­ket value and its much higher net account­ing value. In fact, Citi’s ratio of market-​to-​book equity ratio is sub­stan­tially smaller. And remem­ber, that’s despite the hun­dreds of bil­lions of dol­lars of guar­an­tees made by the U.S. gov­ern­ment on Citigroup’s behalf.

With Pri­vate Equity and other Illiq­uid Invest­ments, then most likely, Yes.

We’ve writ­ten about uni­ver­sity endow­ments on a few occa­sions, with Set an Exam­ple, Mr. Cohon! being the most recent. While we’re fond of just about every­thing we write, in this sub­set of posts, we par­tic­u­larly like our anal­ogy of invest­ing and bicy­cling in The Harvard-​Yale-​CALPERS Cycling Club. In fact, we’ll prob­a­bly extend it when we have the opportunity.

An arti­cle in this past Saturday’s Tribune-​Review, Carnegie Mel­lon loses $300 mil­lion in invest­ments, reminded us of an impor­tant fact that we haven’t men­tioned before, and that relates to the dif­fi­culty for investors of illiq­uid assets to esti­mate their losses in a timely fash­ion. Given the recent end of the first-​quarter, it seems like a worth­while time to men­tion this fact (although while the Carnegie Mel­lon arti­cle spurred us to write, we haven’t checked to see the size of CMU’s invest­ments in pri­vate equity.)

First, recall that many uni­ver­si­ties crowed that there endow­ments had lost less than the gen­eral “mar­kets” as of last June 30. Other than supe­rior invest­ing abil­ity or good for­tune, there is another pos­si­ble expla­na­tion for that phe­nom­e­non, which will likely now hurt them.

By now, just about every­one who would visit this page under­stands the issues related to mark-​to-​market account­ing – mainly that there are very few deep and liq­uid mar­kets with cur­rent, reli­able prices; so, the book value that is sup­posed to be a “mark-​to-​market price” is often an inter­nal mark-​to-​model cal­cu­la­tion or exter­nal quote from a friend. Those cal­cu­la­tions may or may not rep­re­sent any­thing other than the appli­ca­tion of a for­mula or algo­rithm, and a quote from a friend is just that – a friendly quote, but that’s not today’s topic.

Instead, con­sider one of the gross­est absur­di­ties of invest­ing life: a fre­quent account­ing treat­ment for pri­vate equity. By def­i­n­i­tion, if it’s pri­vate equity there is no mar­ket and no mar­ket price, yet often it must be “marked” to it.

While that’s prob­lem­atic – actu­ally it’s just plain stu­pid and con­tra­dic­tory – that’s not the larger prob­lem with which cer­tain endow­ments may now have face. The big­ger prob­lem is that the endow­ment may report the “val­ues” of cer­tain pri­vate equity funds on a three-​to-​six month lag – depend­ing upon when the reports are sent and when your invest­ment com­mit­tee meets to review and accept them.

So, imag­ine that you are an endow­ment invest­ment offi­cer and like many oth­ers, you’ve invested in a pri­vate equity fund or two or three, because, hey, at the time, there didn’t seem to be much risk and the his­tor­i­cal and pro­jected returns looked great. (Well, that’s what the sales­men and con­sul­tants said, and they’re alumni or their fathers are on the board of trustees or whatever.)

Some­time in May, as a fund investor, you’ll receive fund state­ments with val­ues as of Decem­ber 31 or even ear­lier, and you’ll have to re-​mark the endow­ment val­ues to those reported values.

Does the reader think that those pri­vate equity fund val­ues may show declines? Except in very rare cases, we’d think that val­ues would have had to decline – in some cases sub­stan­tial declines – espe­cially given those “as-​of” dates. Or, does the reader think that such deferred losses have been antic­i­pated and com­mu­ni­cated to fund investors? In our mind, that would be a very hope­ful out­look, espe­cially if the pri­vate equity fund man­ager had made cap­i­tal calls dur­ing in the interim, i.e., asked investors to fund their remain­ing con­trac­tual com­mit­ments. In that case, the fund man­agers would have had very lit­tle incen­tive to share addi­tional and pre­cise bad news with their investors.

So, given the lag, if such pro­jec­tions haven’t been pro­vided to endow­ments and accepted by them, then antic­i­pate endow­ments with pri­vate equity hold­ings to real­ize addi­tional losses in the very near future – most likely dur­ing the sec­ond quar­ter of 2009, which for many, is the last quar­ter of their fis­cal year. We doubt that other illiq­uid invest­ments fared much bet­ter or are marked more fre­quently; so, expect a rever­sal of last June’s (rel­a­tively) good fortune.

Update: if you’re look­ing for an aca­d­e­mic dis­tinc­tion, see: The Dif­fer­ence between Risk and Uncer­tainty. In the post below, we crit­i­cize firms for not chang­ing their prac­tices despite the recent fail­ures of their esti­ma­tions, method­olo­gies, and mod­els. Of course, we think that both are worth reading.

Every Mon­day morn­ing for the past sev­eral years, we’ve received an e-​mail from http://​jobs​.phds​.org that lists avail­able posi­tions accord­ing to our spec­i­fi­ca­tions, which are:

“Send Weekly emails con­tain­ing jobs…
…for PhDs in: Busi­ness /​Finance /​Eco­nom­ics
…of types: Con­tract /​Project /​Tem­po­rary, Employee, Non-​tenure-​track fac­ulty, Post­doc­toral researcher, Tenure-​track /​tenured fac­ulty
…in sec­tors: all
…located: in United States
…with key­words: none

Gen­er­ally, there’s 20 — 40 posi­tions listed each week, and most of those involve quan­ti­ta­tive finance, usu­ally in the NYC area. For the past year or so, we’ve been par­tic­u­larly inter­ested to see if the job descrip­tions would change given the fail­ure of many quan­ti­ta­tive trad­ing strate­gies, mod­el­ing tech­niques and risk mea­sures. (Yeah, we know they didn’t actu­ally “fail.” Recent results were just plain bad luck that no one could have pre­dicted. The mod­els worked per­fectly, except when they didn’t.)

Unfor­tu­nately, our par­en­thet­i­cal sar­casm seems to be the implicit posi­tion of many finan­cial firms – with­out the sar­casm, of course. We say because we haven’t observed any change in the posted job descrip­tions in the jobs​.phds​.org emails or any of the other ones that we receive from recruiters who reg­u­larly send sim­i­lar descriptions.

Now, we’ve been mean­ing to write about this obser­va­tion for a few months but were finally moti­vated to do so because of sev­eral other items we read this morn­ing, includ­ing two opin­ion columns and one article.

The arti­cle, Computer-​Trading Mod­els Meet Match in The Wall Street Jour­nal, describes how sev­eral algorithmic-​based hedge funds have lost money recently because of “the recent high volatil­ity.” So, we guess their mod­els aren’t flawless.

One of the op-​ed pieces is by L. Gor­don Crovitz, and it is also in the Journal: In Finance, Too, Learn­ing Entails Risk. In it, Mr. Crovitz attempts to relate “finan­cial engi­neer­ing” to other types of engi­neer­ing, e.g., mechan­i­cal engi­neer­ing, and he seems to imply that it’s still a young dis­ci­pline; so, give it time, but we think that his argu­ment ulti­mately fails and is unconvincing.

That’s because “finan­cial engi­neer­ing” isn’t really engi­neer­ing, which we’d define as the thought­ful appli­ca­tion of sci­ence or tech­nol­ogy to (or in) a well-​understood, phys­i­cal envi­ron­ment. Finance is a sub­set of a social “science.”

Mr. Crovitz writes in his last para­graph that: “The mea­sure of inno­va­tors is not in the mis­takes they make, but in the lessons they learn. We now know that our com­plex mar­kets need bet­ter mod­els, which should include more humil­ity, acknowl­edg­ing that some risks are still too uncer­tain to mea­sure and should be avoided.” We’d argue with the “still too” in the last sen­tence as we doubt that such social uncer­tainty can be resolved or pre­cisely mea­sured. (By the way, we also dis­agree with his con­clu­sion in that sen­tence that “some risks…should be avoided.” We have no prob­lem with folks tak­ing wild or uncer­tain gam­bles; how­ever, we see no rea­son that we should sub­si­dize their losses when those gam­bles go bad.)

To his main point, how­ever, we don’t see much learnin’ goin’ on. It seems to be busi­ness as usual at many firms and funds.

A much more crit­i­cal op-​ed piece is by Michael Barone, and it’s enti­tled ‘For­mu­las’ for cer­tain fail­ure, and his first sen­tence is “Beware of geeks bear­ing for­mu­las.” He dis­cusses (and crit­i­cizes) finan­cial mod­els, global warming/​climate change mod­els, and health-​care mod­els, and it reads much like our post from six months ago, Global Warm­ing and the Mort­gage Cri­sis. Remem­ber that this is Michael Barone, who is very well-​known for using sta­tis­ti­cal data in the analy­sis of pol­i­tics and demographics.

As usual, we point new read­ers to our essay, Uncer­tainty Man­age­ment, which details our per­spec­tive and phi­los­o­phy on these issues as well as any num­ber of related posts: see our blog archives. The main point is that not all uncer­tainty is mea­sur­able, i.e., that mea­sur­able uncer­tainty, or risk, is a proper sub­set of uncer­tainty and unknow­ing. (In other words, spe­cific math­e­mat­i­cal con­di­tions must be met for uncer­tainty to be risk. So, uncer­tainty is a more gen­eral term, i.e., all risk involves uncer­tainty, but not every­thing that is uncer­tain is risky because not all uncer­tainty is mea­sur­able, which a spe­cific math­e­mat­i­cal definition.)

As we read the evi­dence, many insti­tu­tions and their ‘quants’ will con­tinue to solve mis-​specified risk prob­lems, because they don’t know how to treat more dif­fuse and dif­fi­cult uncer­tainty prob­lems; so, they assume them away and treat them as risk prob­lems. We’re clearly not under­es­ti­mat­ing the dif­fi­cul­ties these folks face nor the neces­sity of mak­ing trade-​offs, but we’re not sure if they under­stand the nature of the prob­lem or trade-​off. As we’ve writ­ten many times before, if they don’t under­stand them, then they are igno­rant, and if they do, then they are cyn­i­cal., e.g., Our Eter­nal Ques­tion: Cyn­i­cal or Naïve? Nei­ther char­ac­tis­tic is appeal­ing or useful.

Ignor­ing the larger epis­te­mo­log­i­cal issues and the prob­lem of induc­tion, here’s a sim­ple exam­ple of the dif­fi­culty of mak­ing infer­ences and find­ing use­ful infor­ma­tion. Even when a dis­tri­b­u­tion can be per­fectly known, it’s moments – like the mean and vari­ance – need not exist. (Look a Cauchy dis­tri­b­u­tions and, more gen­er­ally, cer­tain sta­ble dis­tri­b­u­tions. While one can cal­cu­late his­tor­i­cal means and vari­ances from a time series, those “esti­mates” may be non­sen­si­cal. (They can’t esti­mate some­thing that doesn’t exist.) The arith­metic can be per­formed, but the notion is empty.

As we see it, too often if one has a (risk) ham­mer, then every­thing looks like a (risk) nail, and it’s easy to pound away, espe­cially when the alter­nate is to admit that a solu­tion doesn’t exist, which too often sounds like, “I don’t know.” So, while var­i­ous num­bers can be cal­cu­lated – even cal­cu­lated very pre­cisely, earnestly, and dili­gently – to do so is to apply tech­nol­ogy, but it’s not engi­neer­ing nor is it very smart and it can be very harmful.