Daily Archives: November 12, 2019

Too Much Democracy Is Bad for Democracy

The major American parties have ceded unprecedented power to primary voters. It’s a radical experiment—and it’s failing.
By Jonathan Rauch and Ray La Raja – Americans who tuned in to the first Democratic presidential debates this summer beheld a spectacle that would have struck earlier generations as ludicrous. A self-help guru and a tech executive, both of them unqualified and implausible as national candidates, shared the platform with governors, senators, and a former vice president. Excluded from the proceedings, meanwhile, were the popular Democratic governor of a reliably Republican state and a congressman who is also a decorated former marine.

If the range of participants seemed odd, it was because the party had decided to let small donors and opinion polls determine who deserved the precious national exposure of the debate stage. Those were peculiar metrics by which to make such an important decision, especially given recent history.

Had the Democrats seen something they liked in the 2016 Republican primary? The GOP’s nominating process was a 17-candidate circus in which the party stood by helplessly as it was hijacked by an unstable reality-TV star who was not, by any meaningful standard, a Republican.

Americans rarely pause to consider just how bizarre the presidential nominating process has become. No other major democracy routinely uses primaries to choose its political candidates, nor did the Founders of this country intend for primaries to play a role in the republican system they devised.

Abraham Lincoln did not win his party’s nomination because he ran a good ground game in New Hampshire; rather, Republican elders saw in him a candidate who could unite rival factions within the party and defeat the Democratic nominee in the general election.

Today’s system amounts to a radical experiment in direct democracy, one without precedent even in America’s own political history.

The two major parties made primaries decisive as recently as the early 1970s. Until then, primaries had been more like political beauty contests, which the parties’ grandees could choose to ignore. But after Hubert Humphrey became the Democrats’ 1968 nominee without entering a single primary, outrage in the ranks led the party to put primary voters in charge. Republicans soon followed suit. more>

Updates from Chicago Booth

Why do analysts low-ball earnings forecasts?
By Martin Daks – The market-research company FactSet reports that for each quarter over the past five years, an average of 72 percent of companies in the S&P 500 beat earnings estimates. Past research, including by University of Pennsylvania’s Scott Richardson, University of California at Irvine’s Siew Hong Teoh, and Boston University’s Peter D. Wysocki has found that analysts’ forecasts become more pessimistic and thus beatable as the quarter end approaches, but an unaddressed question is how this walk-down affects clients. If analysts revise their forecasts downward each quarter to placate managers, wouldn’t this confuse the investors who ultimately pay for their services?

According to Chicago Booth’s Philip G. Berger and Washington University’s Charles G. Ham and Zachary R. Kaplan, analysts walk down forecasts by suppressing positive news from quarterly forecasts, not by issuing misleading negative revisions. When analysts have positive news, they will often revise the share price target upward or state explicitly that they expect companies to beat earnings estimates, while leaving the quarterly forecast unrevised. Suppressing positive news leads to beatable forecasts—behavior that benefits corporate executives but carries important implications for both the individual investors who rely on these predictions and researchers studying investor expectations.

When securities analysts receive updated information after issuing a quarterly forecast, they have three options: revise the current-quarter earnings forecast; issue an alternative forecast signal, such as a revision to the share price target or future-quarter earnings; or issue no additional forecast.

By not disseminating all information through the current-quarter earnings forecast, which is widely available through commercial databases, analysts provide an advantage to investment clients who have paid for access to the full breadth of their research product.

“Analysts convey information in ways that enable them to be of service to clients, who they care about, and, at the same time, to avoid displeasing corporate managers, who they also care about,” Berger says. “Non-clients, who rely on earnings forecasts because they do not have access to the whole of an analysts’ work product, end up with skewed information, but this is not a primary concern for the analysts’ business.”

The researchers demonstrate that a simple strategy based on buying companies expected to beat earnings, using share price target revisions and the text of reports, yields significant abnormal returns, suggesting the market does not see through the analysts’ strategy for conveying information selectively. more>

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Updates from McKinsey

Bias busters: Avoiding snap judgments
Despite their best intentions, executives fall prey to cognitive and organizational biases that get in the way of good decision making.
By Tim Koller, Dan Lovallo, and Phil Rosenzweig – The board of a mining company thinks it’s time for a new CEO, one who understands the increased role of technology in the industry and can inspire the next generation of mining leaders. The hiring committee has a few internal candidates in mind—namely, the heads of the copper, nickel, and coal divisions.

All three have similar years and types of industry experience and comparable P&L responsibilities. But the front-runner in the minds of many on the committee is the head of the copper division. After all, copper has contributed the most to the bottom line over the past few years, while the other divisions have been lagging. It must be because the unit head is a tech-savvy people person, with a good understanding of industry trends, they reason. “Seems like a no-brainer,” the head of the hiring committee notes.

But how can the board be sure that it is picking the best candidate for the top job?

These distortions don’t apply only to company performance; the halo effect can also alter how we view individual performance. That’s what happened in the case of the mining company. The front-running CEO candidate’s division had performed well in large part because of a significant spike in the price of copper, something over which he had no control. Yet the halo of high profits shined on the business-unit leader, the hiring committee’s initial impressions of him stuck, and he was appointed CEO.

Much to the board’s dismay, the new CEO did not demonstrate either skillful use of technology or strong leadership, two capabilities that were critical for this role. Early in his tenure, the company incurred billions of dollars in losses. more>

Updates from Adobe

The Simple Life
By Jenny Carless –By day a graphic designer, by night a nature photographer, Anders Bundgaard focuses on simplicity, no matter the medium.

Bundgaard’s interest in graphic design was first piqued during an internship at an advertising agency. After finishing school, he sought out a series of courses—including year-long programs in print and reproduction, drawing, advertising, and multimedia—to develop the skills he needed.

At 21, Bundgaard moved from Denmark to London in search of new and interesting work. “My first job here was for a company that designed film posters,” he says. “I really liked the work and continued in that direction.”

Today, Bundgaard’s graphic design work is mainly aimed at the film industry. His portfolio includes film posters, motion graphics for trailers, and title sequences.

Whether working in print or motion, his preferred style is simple and clean.

“I try to get to the core of a project and then distill it down to the bare minimum to communicate the idea,” he says. more>

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