Evaluating Placement Information (Part 3 of 3)

Skillfully evaluating information to place ability at best-fit will tend to have three parts: analysis, psychology, and constraints. Accommodating any one of these in a placement process isn’t easy. Being good at all three is rare. Let’s look at the constraints part below and tie up this series of posts.

The Constraints 

The third part of a skillful evaluation addresses constraints. The most important job for principals (i.e. the talent seekers and candidates) here is to manage recruitment risks, or the risks that arise because agent-actors (i.e. placement facilitators) may have interests that differ from those of principals. For example, placement facilitators who are fully paid or credited as of a candidate’s hire date may unwittingly employ conservative strategies associated with top-down recruiting initiatives versus understanding the true growth opportunities represented by the relevant edges of recruiting. More to the point, they might, aggressively market candidates who behave similar to a stereotyped benchmark.

I make this point by distinguishing between the profession and business of agency. The profession is about recruiting talent so as to maximize long-term returns, while the business of recruiting or agency is about earning rewards in the short-term. Naturally, current viability is essential to support the profession. But when a placement facilitator emphasizes the business at the expense of the profession, principals are not best served. Rather, facilitators should concentrate on helping principals find matches that provide sensible balance, relevant diversity, and are under priced. This requires going against the consensus and being willing to appear very different from the pack.

John Maynard Keynes, the renowned economist and investor, wrote about this in The General Theory of Employment, Interest, and Money, published in 1936. He discusses the conduct of a long-term investor: “For it is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of the average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

As Keynes suggests, the risk of losing credibility as a placement facilitator for straying too far from convention is important. As a result, facilitators will often strive to be different enough to succeed but not so different as to be considered unconventional. The reason is that they are often inappropriately judged by short-term performance. Likewise, a principal who makes a conventional decision that turns out to be wrong can fall back on the argument that the decision process was usual, even if uninspired, and hence the outcome was based on something unavoidable. A principal who makes a correct but unconventional decision that ends badly is exposed to criticism and the risk of losing credibility.

In hiring, the trend toward conformity is clear. It seems to me that workforces today look more like their stereotyped benchmarks than they did thirty years ago. Just as we see in investment portfolios the measure of how different a mutual fund portfolio is compared to its benchmark, has fallen from 75 percent in 1980 to about 60 percent in 2010 in the United States. Too many leaders in ability placement markets as well as in business fear straying too far from convention, even in cases where the convention isn’t all that great.

Because all three parts to skillfully evaluate placement information are difficult, they stand in the way of great long-term performance. Some can succeed in one or two of those areas, but very few can master all three. This fits with the conclusion of an analysis of skill and luck in hiring: only a handful can surmount the analytical, psychological, and constraint obstacles. The same is true in financial investing which provides an excellent analog to learn from.

Evaluating Placement Information (Part 2 of 3)

Skillfully evaluating information relating to the best-fit placement of ability will tend to have three parts: analysis, psychology, and constraints exerted by principals (i.e. talent seekers and candidates). Accommodating any one of these in a placement process isn’t easy. Being good at all three is rare. Let’s look at the psychology part below.

The Psychology

The second part of a skillful evaluation is psychological. This part deals with talent seeker and candidate biases. These include over confidence, anchoring, confirmation, and relying on what is most recent. These biases arise automatically and are therefore very difficult to overcome by primary placement participants or secondary participants known as influential others. For example, when making a prediction, people tend to give disproportionate weight to whatever they have experienced most recently. In hiring, there is a strong tendency to choose talent seekers or candidates which have done well recently, those that seem to have a hot hand.

Also, how people make decisions when they are uncertain about gains and losses is at odds with classical economic theory. Because good placement process decisions can have bad outcomes, not everyone has a temperament that is well suited to making decisions about activities that involve luck. This emphasizes the importance of being willing to go against the crowd. Most agent-actors (i.e. placement facilitators) know that it is more comfortable to be part of the crowd than to be alone. But it’s also hard to distinguish yourself if you’re doing the same thing as everyone else. Skillful investors, for example, heed Benjamin Graham’s advice: “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it—even though others may hesitate or differ.” However, it is insufficient to be a contrarian because sometimes the consensus is right. The goal is to be a contrarian when it allows you to gain an edge, and the calculator helps you ensure a margin of safety.

We’ll get into the constraints (Part 3 of 3) in the next post.

Do you think there are similarities between evaluating a person’s ability and evaluating a stock?

Evaluating Placement Information (Part 1 of 3)

Skillfully evaluating information relating to the best-fit placement of ability will tend to have three parts: analysis, psychology, and constraints exerted by principals (i.e. talent seekers and candidates). Accommodating any one of these in a placement process isn’t easy. Being good at all three is rare. Let’s look at each part below.

Before we begin however, let’s review the placement process in total which is as follows:

  1. Aggregation of intents
  2. Filtration of preferences
  3. Introduction of principals
  4. Prediction via evaluation
  5. Commitment execution

Although we view process sequentially, in reality our experience is palindromic in that a principal or agent-actor (i.e. placement facilitator) can enter the process at any point and proceed any way. This post deals with #4 of the placement process.

Let’s get to it!

The Analysis

To begin the analysis, the real causes of best-fit need to be identified. Success factors include supply and demand and outcomes. For this purpose, data can provide insight to how markets and their participants actually look. So if there’s a discrepancy between what a person’s ability ought to be valued at and what they are currently valued at, placement facilitators need to develop a theory about why value and pay have diverged. What’s going on that’s causing the gap? The analytical edge is embodied in the theory of what determines the fundamentals and why the ability is misvalued or misplaced.

The edge should also include what Benjamin Graham, the father of security analysis, called a margin of safety. You have a margin of safety when you buy a stock at a price that is substantially less than its value. As Graham noted, the margin of safety “is available for absorbing the effect of miscalculations or worse than average luck.” The size of the gap between value and pay tells you how big your margin of safety is. As Graham says, the margin of safety goes down as the price goes up. In other words, make your margin of safety as large as possible without losing attractiveness.

We’ll get into the Psychology (Part 2 of 3) in the next post.

Do you think it’s possible to value ability similar to how a stock is valued?