Enron and Newspapers

Another thought on Enron, following on my New Yorker piece.

One of the big points made by Jonathan Macey and others is that the Enron scandal is an example of “receiver failure” as well as “transmitter failure”: that is, that it wasn’t just the case that the company sent misleading signals. It was also the case that those who were supposed to be listening to and interpreting those signals didn’t do their job.

The exception, of course, were newspapers. The Enron scandal was, in large part, broken by the Wall Street Journal.

This is strange, no?

We operate with the assumption, particularly in our understanding of what makes financial markets efficient, that those with the best incentives to ferret out the truth are those who are partial—that is, are directly involved in the process—and those who are economically motivated, who have money at stake. So you’d think that hedge funds, shorts, arbs, and analysts—all of whom were massively partial and economically motivated—would have been the first to see the “real” Enron.

But they weren’t. Reporters were, a group who—at least in theory—you’d think were in the least advantageous position. They aren’t partial to the proceedings. They have no money at stake. (Compared to their Wall Street counterparts, in fact, they barely make any money at all.) They aren’t (relatively speaking) as well-trained as financial intermediaries. They have to serve a general audience, which disposes them against highly technical examination. There are real limits on how much space and time they can devote to a particular story, and their rewards for doing well are almost entirely internal and professional: good reporters are rewarded, largely, by having their status elevated among other reporters. On Wall Street, seeing truth gets you a million dollar bonus. At a newspaper, it gets you a slap on the back.

We’ve spent a lot of time, post-Enron, criticizing the flaws in the investment community’s gatekeeping activities. But I think we should also recognize what the Enron case tells us about the value of newspaper journalism. Maybe, in other words, we have underestimated the value of impartial, professionally-motivated, under-paid and overworked generalists in tackling the kind of information-rich, analysis-dependent “mysteries” that the modern world throws at us.

All of which, of course, points out the irony of what’s happening in the newspaper business right now. We are dismantling the institution of newspaper journalism precisely at the moment when it seems to be of greatest social value.

Comments

[bob]

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[Christopher Horn]

Does anyone else, being a fan of the comparatively high level of discourse on this blog, feel a little neglected that the owner has not updated for such a while?

One has this idea of Malcolm working frantically to meet a deadline for some multimillion dollar book advance, while we anonymous lurkers wait patiently for another slab of meat to be thrown to the bloggy jackals :)

[J Pody]

Agreed

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[Michael Gauet]

Malcolm, I've read 'The Tipping Point' four or five times. The ideas you elucidate in this insightful work truly changed my mind from the inside out about how social phenomenon manifest. Thank you for the sticky concepts. They are always in the front of my mind.

Come see me at myspace.com/skyaak.

CU, Michael Gaudet
Artist/Inventor

[Michael Gaudet]

It's Gaudet, not Gauet.

[Andrew Miller]

"Maybe, in other words, we have underestimated the value of impartial, professionally-motivated, under-paid and overworked generalists in tackling the kind of information-rich, analysis-dependent “mysteries” that the modern world throws at us."

Sounds like a little bit of self-justification here. Nonetheless - any group with a little more independence should (emphasis on the word should) get a better answer, and that includes journalists that don't get swallowed up by fraternization with their subjects. Traditionally, corporations - if they really want to know bad news about themselves and their practices - set up internal consulting groups that operate independently of the corporation as a whole. Corporate Executive Board, a company that evaluates best and worst business practices, has its own consulting division that evaluates its own business programs and delivers bad news up the chain of command. Consider checking them out - the limits of a good internal opinion, special interest be damned.

[Rogers Place]

These company officers just need to put the facts on the table. If your company is only worth $2 million put that down on paper. When you try to make it look like your worth $25 million, someone will want to cash in their shares and you'll be unable to meet it. Just be honest in your bookeeping.

[Margaret]

Mr. Gladwell and Readers,

This seeming paradox reminds me of nothing so much as a wronged spouse who is the last to know that the husband or wife is having an affair. The friends and neighbors all seem to know, yet not the one person with the most to lose.

I would suggest that this is because once we have a lot at stake we involve our emotions in our perceptions and decisions. Once the emotions are involved, logic goes out the window.

This could also illuminate why some jealous, neurotic people irrationally hold on to the belief that their spouse is having an affair, when no evidence exists to support this claim.

For more astute examples of stress induced irrationality, see Malcolm Gladwell's New Yorker article on "Why Some People Panic and Others Choke."

best wishes,
Greta

[Yaacov Iland]

If you read Fool's Gold: the Makings of a Global Market Fraud, which is about Bre-X, you'll see that the fraudsters usually create an environment in which those organizations that might seem to have a financial stake in uncovering the fraud, actually have a stake in perpetuating it. So the journalists may actually be the ones with the most to gain from investigation, or at least perceive themselves as such.

[Elke]

Another thought... On a superficial level, I agree that the Enron mess (and I lost no money, for what it's worth) could be categorized as a "mystery."

But, again, intent is important. I thought it was interesting that the average documents associated with an SPE run about 20 pages, whereas the Enron papers averaged closer to 1,000 pages. A needle in a haystack may also be a mystery and not a puzzle. But if someone INTENTIONALLY hides one there, that context is pretty important. There is an assumption of truthfullness in SEC filings... And while the "truth" was included in the filings, it was hidden among a lot of other stuff, perhaps put there intentionally. Telling the technical truth doesn't cut it for me, they were telling everyone the truth in the sense that if I say I make a little less than a "Million a Year," I could be talking about pesos. If I expect others to determine what the denomination is, well, is that "receiver error"? Maybe. But my intent is that people would misinterpret my words.

Greetz
Elke

[Paul Maidment]

Malcolm, This article supports Paul's (different Paul) comment earlier and highlights academic research that suggests that reporting is market-driven, though its incentives are not monetary: How The Media Missed Enron
http://www.forbes.com/columnists/2006/01/30/enron-media-scandal-cx_pm_0130enronmedia.html

[Mark Hengel]

Mr. Gladwell.

It's April 20 and your last post hit the web January 4. I admire your attempt to rid the Internet of blogarrea. However, it depresses me that a man paid to think for a living cannot find a topic.

mark.

[Kisna]

Yup, I’ve seen those heat maps and they’re fun to look at. I’ve wondered how the data gets stored though; there’s a trade-off of granularity of the data vs. storage space..

http://www.pzno.com

[Kisna]

The Corporatization of Online Media...

I know we are dismantling the newspaper industry, but fret not, the effect is simply a lateral move to an "online newspaper" industry. It looks like a stop-change-start because the online newspaper landscape looks like the old newspaper industry of the 1850s (if I had to guess).

http://www.zonz.net

[Kisna]

I would say Press has always put forward cases which others have missed and for whatever reasons they work on these stories,-to be the first one to have new story or to get a pat on the back,they have exposed many companies & people.

http://www.kosarit.com

[Kisna]

As you properly note, the interests of a diverse set of shareholders will no doubt differ due to their varied individual interests.

http://www.kosarit.info

[emlak]

thank you very good nice topic thanks :)

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[Ken]

Dear Malcolm,
As an avid reader of your blog and a reader of your books and articles, I would like to point your attention to a recent article in the Harvard Business Review http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?ml_action=get-article&articleID=R0702A&ml_page=1&ml_subscriber=true The article cites the work of Duncan J. Watts titled: The accidental Influentials.

It attempts to assert that: Malcolm Gladwell argues that “social epidemics” are driven in large part by the actions of a tiny minority of special individuals. The idea seems intuitively right—we think we see it happening all the time. Nevertheless, this isn’t actually how ideas spread. It’s better to focus on getting enough plain, ordinary people to sign on.

What is your comment?

[evden eve nakliye]

thank you very very nıce thank you very very much...

[evden eve nakliye]

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[joe]

Thanks Malcolm. How about some newer posts?

Hope for a new book soon.

[gordon in philly]

These "underpaid, overworked generalists" seemed to totally miss and not question the most important "analysis rich mystery of our time", the war in Iraq. While i love your books, I think that being part of the journalistic profession makes you look at it through rose colored spectacles.

[Andrew]

interesting.

one time i asked a two experts whether asking the right question is better than giving the right answer...the specialist answered affirmatively and the generalist said 'let me think it over.'

[ThunkDifferent.com]

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