I’m currently reading a well written book entitled How Markets Fail: The Logic Of Economic Calamities by John Cassidy, a journalist at the New Yorker magazine which I would highly recommend to my clients and others who like to assimilate new ideas. In the book Cassidy describes the major influence of what he describes as Utopian Economics, thinking that is blind to how real people act, how this leads to market bubbles such as real estate crashes and credit crunches, and explores behavioral economics which focuses on individual behavior biases – overconfidence, envy, herd behavior, and myopia – and how they lead to some troubling macroeconomic behavior that affects all of us.

I’m at a part of the book where Cassidy a paper done in 1990 by David Scharfstein of MIT and Jeremy Stein of Harvard entitled “Herd Behavior and Investment”. The core of their model basically says that if an investment manager goes with the crowd (i.e., invests in the same stocks as other investors) and things turn out badly, he gets to share the blame with everybody else; if he follows a contrarian strategy, he bears the sole responsibility for his mistakes. After the Sharfstein-Stein paper was published, other researchers provided empirical evidence that supported it by analyzing the hiring and firing of fund managers at Fidelity, Franklin-Templeton, and T. Rowe Price. A similar pattern was found in the hiring and firing of Wall Street security analysts – the ostensibly objective professionals who produce quarterly earnings forecasts that investors rely on.

I’ve introduced this phenomenon because I believe it has direct consequences for a senior executive joining a new company. On the one hand, he or she is often hired to bring fresh thinking and strategies to a new role to help change the business trajectory along any one of a number of key dimensions (revenues, costs, customer service, stakeholder relations, etc.).

On the other hand, institutions (companies, not-for-profits) and cultures are often tied to the status quo. They resist change and are quick to point to and exploit problems with a new approach (i.e., the “contrarian strategy”) if introduced by the recently hired executive. So what should a new senior executive do to counteract this predictable behavior?

A few practical suggestions we would make to our clients and readers:

First, it’s absolutely essential that the senior leadership of the hiring company be in complete accord with the rationale for the new hire, the need for change, the necessity for supporting him or her in the role, and the commitment and willingness to provide that support, even if the early going is rough and difficult.

Second, the new executive hire, to the greatest extent possible, needs to ensure that he or she has the resources and tools to succeed. This means, among other things having the budget to do the job, having topnotch people (or agreement to hire them if changes need to be made), and having the technology platform needed to compete.

Third, the goals the new senior executive needs to deliver against need to be specific, measurable, and achievable. It’s pretty clear to me over many years in business that making 90% of an unrealistically difficult goal isn’t valued nearly as much as delivering 110% of a reasonable goal with some stretch to it. New hires need to avoid being put in a position of needing to achieve the impossible and being blamed for not doing so.

Clearly, we are not going to be able to eliminate herd behavior, it happens in so many areas of life,  but it’s critical to success in a new position to try to correct for it.