Podcast: Play in new window | Download (Duration: 41:34 — 95.1MB) | Embed

Subscribe: Android | Google Podcasts | RSS | More

Most of us like to think that we use data to inform our decision-making process and path forward, but there’s one challenge. It’s possible and quite common that we seek out data to validate what we already believe. That’s called confirmation bias.

In speaking with Alex Edmans, a TED and Davos speaker, rigorous academic researcher and Professor of Finance at the London Business School, he argues that confirmation bias can lead us down the wrong path in business and in life, and provides ways to counteract this automatic human tendency. Alex’s research has been covered by the Wall Street Journal, New York Times, and The Economist, among others and he was interviewed by some of the most respected television channels like Bloomberg, BBC, CNBC, and CNN just to name a few.

In addition, as the author of Grow The Pie: How Great Companies Deliver Both Purpose and Profit, Alex outlines actionable and evidenced-based ways for organizations to upgrade their leadership and drive the company into an empowering growth paradigm where everyone wins.

Tune in to learn about:

• • • What is confirmation bias
    • How you can effectively deal with confirmation bias as to elevate your leadership skills
    • What the next era of business will look like (hint: all stakeholders win)
    • The importance of learning soft skills in school and in business
    • About the book Grow The Pie: How Great Companies Deliver Both Purpose and Profit

 

Connect with Alex Edmans:

• Linkedin
• Twitter
• Website
• TED Talk

Alex Edmans’ biography:

Alex Edmans is Professor of Finance at London Business School and Academic Director of the Centre for Corporate Governance. Alex graduated from Oxford University and then worked for Morgan Stanley in investment banking (London) and fixed income sales and trading (New York). After a PhD in Finance from MIT Sloan as a Fulbright Scholar, he joined Wharton in 2007 and was tenured in 2013 shortly before moving to LBS.

Alex’s research interests are in corporate finance (corporate governance, executive compensation, investment/growth/innovation, and M&A), behavioural finance, corporate social responsibility, and practical investment strategies. He has published in the American Economic Review, Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Journal of Economic Literature. He is Managing Editor of the Review of Finance, Associate Editor of the Journal of Financial Economics, a Research Fellow of the Centre for Economic Policy Research, and a Fellow of the European Corporate Governance Institute. He was previously Associate Editor of the Review of Financial Studies and a Faculty Research Fellow of the National Bureau of Economic Research. He won the Moskowitz Prize for Socially Responsible Investing, the FIR-PRI prize for Finance and Sustainability, the Investor Responsibility Research Centre prize, and the WRDS Award for Best Empirical Finance Paper at the WFA; was a finalist for the Smith-Breeden Prize for best paper in the Journal of Finance; and was named a Rising Star of Corporate Governance by Yale University and a Rising Star of Finance by NYU/Fordham/RPI.

Alex’s research has been covered by the Wall Street Journal, Financial Times, New York Times, The Economist, and The Times; and interviewed by Bloomberg, BBC, CNBC, CNN, ESPN, Fox, ITV, NPR, Reuters, Sky News, and Sky Sports. Alex has spoken at the World Economic Forum in Davos, testified in the UK Parliament, presented to the World Bank Board of Directors as part of the Distinguished Speaker Series, and given the TED talk What to Trust in a Post-Truth World and the TEDx talk The Social Responsibility of Business. He has written op-eds for the Wall Street Journal and Financial Times, writes regularly for Harvard Business Review, Huffington Post, World Economic Forum, and CityAM, and runs a blog, Access to Finance, that aims to make complex finance topics accessible to a general audience.

Alex serves on the Steering Group of The Purposeful Company, which proposes policy reforms to encourage companies to pursue long-run purpose over short-run profit, on Royal London Asset Management’s Responsible Investment Advisory Committee, and as an Advisor to Research Affiliates. The UK government appointed him (jointly with PwC) to conduct a study on the effect of share buybacks on executive pay and investment. Alex also serves as Mercers’ School Memorial Professor of Business at Gresham College, giving free lectures to the public. His 2019/20 lecture series is on Business Skills for the 21st Century and his 2018/19 series was on How Business Can Better Serve Society. His book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, will be published in early 2020.

At Wharton, Alex won 14 teaching awards in six years. At LBS, he won Best Teacher awards for both the MBA and Masters in Financial Analysis programmes and the Excellence in Teaching award for best professor across all programmes. He has served as Orientation Speaker and Graduation Speaker to the MBA, MFA, and Masters in Management classes.

* * *

Full Transcription:

Alex Edmans: One of my passions is to use rigorous academic research to influence the practice of business, and at the moment, on both sides of the Atlantic, there are calls to radically revolutionize business because there’s concerns that business is only focused on making the rich richer rather than serving society more broadly. I was brought into some of these debates to bring evidence to bear, and if I presented evidence that the people agreed with, they would say you’re the world’s top academic on this. You have such rigorous evidence. This is really compelling. If I brought something that people disagreed with, they would say you’re just an academic with no practical experience, or this study really is not relevant for the real world. I’m the same person, but depending on whether what I said was something they liked or they wouldn’t, they would just have completely different reactions to it.

Tanya: That’s Alex Edmans, TED speaker, Davos speaker, rigorous academic researcher, and Professor of Finance at the London Business School. Alex’s research has been covered by the Wall Street Journal, New York Times, and The Economist, among others, and he was interviewed by some of the most well-respected television channels like Bloomberg, BBC, CNBC, and CNN, just to name a few. In an eye-opening TED talk he gave titled “What to Trust in a Post-Truth World,” Alex argues that confirmation bias can lead us down the wrong path in business and in life. Additionally, he provides ways to counteract this automatic human tendency. As the author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit, Alex outlines actionable and evidence-based ways for organizations to upgrade their leadership and drive the company into an empowering growth paradigm where everyone wins. Recognized for his outstanding impact, Alex won 14 teaching awards while at Wharton and several at the London Business School where he currently teaches. Alex, what attracted you towards finance teaching and doing rigorous research?

Alex Edmans: Let me first start by talking about why I chose finance as a career. What I like about it is it’s a combination of both arts and sciences. On the one hand, you have evidence, but on the other hand, unlike the hard sciences, you can still have different opinions. People can still see the same data on the economy, but some people might argue that you can increase interest rates. Others might argue that you should reduce them. I like the fact that you could have a debate around that, but the debate could be grounded in evidence rather than purely based on something subjective.

You might think, well, if I’m interested in finance, well, why don’t I go to become a finance practitioner? Indeed, that’s what I did. Straight out of college I went to work for Morgan Stanley in investment banking in London, and there I used a number of the skills that really attracted me to finance as a career. You could have different opinions on a company’s problems and how best to address them. Should this company merge with another company, or raise equity, or raise debt? However, what I found less satisfying about it is that you would work on just one company’s problems at one time. I spent seven months planning my life into one particular deal for my client. The next day it hit The Financial Times, and that was really exciting. Then I looked back, and I realized I had spent seven months just looking at one company’s problems at that one time.

What’s nice about teaching and research is that, if you find a research discovery, that can be timeless. That could apply to multiple companies in different industries across different countries, and so the bandwidth of the contribution that you can make is much greater than in investment banking where you’re focusing on a small number of clients.

Tanya: That makes a lot of sense, so really, what attracted you is the – teaching anyways, is the level of impact that you can really have.

Alex Edmans: Yes, I think if you think about the purpose. What is the purpose of a professor? It’s the creation and dissemination of knowledge. That knowledge can be disseminated very widely, and that’s why I love doing things like this podcast. That can reach some people that I never end up meeting, whereas, as an investment banker, you really work with a couple of trusted clients. You do great stuff for that client, but it’s only a small number of companies rather than outreaching a broad audience.

Tanya: When you were young, were you always inclined to math and science and numbers, or is this something that you discovered later on?

Alex Edmans: No, when I was young, I was a bit of a jack-of-all-trades. I liked both maths, but also English literature. In England, you actually have to specialize quite early. When you do your A levels, which is the exams when you graduate high school, you only choose three or four subjects, and some people will choose math, physics, chemistry. Others might choose English, history, and German. I unusually did both maths and English, which shows the fact that I like both arts and sciences. That’s what attracted me to a social science such as economics, whereas, as I mentioned earlier, you have both the evidence and the theories, but they’re not set in stone. You can’t be dogmatic about them. Reasonable people can disagree, even if they agree on the evidence, and that debate is what really attracts me to this field.

Tanya: That’s great, and so now you’ve been teaching for quite a long time. You taught at Wharton for six years and now are teaching at the London Business School for almost seven years now, 6.5 years. I’m curious. Out of all the students that you’ve had, is there one particular student or thing that happened that stands out in your mind as being extraordinary?

Alex Edmans: It’s been a real privilege to teach at both places, and indeed, I also drew my PhD at MIT. I served as a teaching assistant and taught in the MBA program there. Out of all of those years, I think it’d be really unfair for me to single out one student, but I’ll single out a common theme that I’ve seen among the hundreds of students who particularly blow me away, which is courage. What I mean by that is there’s – my class is known for being pretty difficult. I involve things such as a public speaking component where I ask some students to present trade ideas, and students will just volunteer to do that. Public speaking is something which is challenging. Out of people’s greatest fears, most people will rank public speaking at the top of it. Even though it’s something that I don’t grade so there’s no instrumental motivation to do it, they’ll choose to get up in front of others and present a trade idea, including students who have no knowledge at all of finance before but are willing to give it a go to improve their skills.

Interestingly, I see this also outside the classroom, so what’s been a privilege for me is not just to interact with students within the classroom but also outside. When I was a professor at Wharton, I captained one of the student ice hockey teams for three years. Just to see somebody who’d never played ice hockey before be willing to play a pretty brutal and damaging sport and give it his or her all was fantastic, and that’s something I think translates into many other skills within the business world, which is to be innovative and to try something new. This is why many of my students now go into startup companies, even though they could get a very lucrative job at a conventional management consultancy or an investment bank.

Tanya: That’s interesting. You say that you really almost groom or teach your students what – is what you’re referring to is soft skills. You and I actually had a discussion before recording this about this, which I thought was very interesting. Why do you think it is important to teach your students soft skills? You include that as part of your offering when it’s really not something that’s required but you see as important.

Alex Edmans: Indeed, soft skills is something I got particularly passionate about teaching my students, and to give you the background, what I teach at London Business School and what I used to teach at Wharton and MIT was the core finance class. My job description is to just teach how to plug numbers into a spreadsheet, how to calculate the cost of capital and so on. While these are useful skills, I don’t think these are going to transform my students into future leaders, whereas I do think soft skills will do that, and this is based on a lot of vigorous research around them, for example, The Growth Mindset, by Carol Dweck, and Grit, by Angela Duckworth. I myself knew, realized about ten years ago that I was deficient in the soft skills. I decided to start learning them myself by studying what the research has to say about them and then starting to incorporate them in my lectures.

Now, when I first did this at Wharton, I was really nervous. I thought, well, is this something that students would react negatively to because it’s not as, I guess, hard as the Excel spreadsheet, probably not as [10:56], but they really found this interesting and quite transformational in some ways. Now I give this as part of a public lecture series. In addition to my position at LBS, I’m also a Professor of Business at Gresham College in London. Now, Gresham College is an interesting institution because it doesn’t offer degrees. It only offers a free public lecture series similar to how Michael Faraday used to give free lectures to the public on science.

My last year’s series was called How Business Can Better Serve Society, a standard finance topic based on my research. My current emphasis is called Business Skills for the 21st Century on these soft skills which I think to be really, really important, and indeed, they cover topics such as critical thinking, time management, mental and physical wellness, and the growth mindset. If it’s of interest to some of the listeners, you can see the talks and the transcripts surrounding them on the Gresham College website under the title Business Skills for the 21st Century.

Tanya: That’s amazing, and I think that you’re right on. These things, certainly, I did not quite acquire in school, and yet, they’re so important in life and in business. Do you have any thoughts on why this is not really mainstream and rigorously taught in school?

Alex Edmans: I think it could be a couple of reasons. If I think about, say, the finance or economic field, an analogy is behavioral economics and behavioral finance, the fact that people are not rational, psychological factors matter. Now, that was a field which took quite a long time to get into mainstream economics and finance because people thought it’s fluffy. It’s not something that you can model mathematically as easily, so people who were in the traditional economics and finance mold would not embrace them so much. Similarly, there might be view among standard academics in business that these skills – soft is often used as a [13:06] term. They’ll say, well, you’re teaching fluffy stuff rather than how to plug numbers into a spreadsheet. That’s why I’m pretty unusual in trying to teach this.

Also, I think there might be the view that this is not backed up. There’s not much research around this. It’s often people who go where they got – and there indeed are some popular best-selling books which you can buy at the airports by people who are trying to get into soft skills where it’s based on hunches, not so much on research. That might put off some people from thinking, well, we don’t want to teach this because anything goes. People can just say what sounds good, even if it’s not backed up by research. As I say, there’s some really great scholars out there who have done some really rigorous research on this topic, and that’s why, when I try to speak about this, I try to speak based on research and be very upfront that it’s not my own research. I’m standing on the shoulders of giants and learning from others who are dedicated to those fields.

Tanya: That’s actually a great segue into talking about your really compelling TED talk that you gave, which is titled “What to Trust in Post-Truth World,” where you talk about a flaw that we have as humans called confirmation bias. I thought it was fascinating so, for anybody listening, highly recommend watching it. Two questions, can you tell us what, for those that don’t know what it is, confirmation bias is, and I’m very interested in knowing at what point did you realize how much confirmation bias distorts our view of reality?

Alex Edmans: Thanks. Yes, a confirmation bias is the tendency to accept a story if it confirms what we would like to be true, even if the story might not be true or even if it’s a fact not backed up by evidence. Conversely, we will reject something if it contradicts our prior of view point, so we’re willing to accept new news that confirms what we think to be true. For example, it might be that you’re somebody who’s a climate change denier, and if some new evidence is put out suggesting that climate change is real, you might immediately think, oh, well, this must be just funded by some unscrupulous body, not actually looking at the research and seeing whether it’s rigorous. If you see some evidence suggesting, well, climate change is a hoax, then you immediately accept it without actually scrutinizing whether those claims are true. What led me to deciding to give a TED talk on this is seeing how serious this is in politics and in business in many fields. We’ve had the Brexit referendum within the UK, and we’ve had the Action Campaign between Trump and Clinton in the US. What was really surprising was just how people would only listen to points of views which they agreed with, which leads to the echo chambers, and this is true for both the Brexit campaign but also the Remain campaign. You’d only like to look at posts which you thought you’d agreed with, and you’d reject even sensible evidence which is against that.

Then I have some first-hand of confirmation bias in my own work. One of my passions is to use rigorous academic research to influence the practice of business, and at the moment, on both sides of the Atlantic, there are calls to radically revolutionize business because there’s concerns that business is only focused on making the rich richer rather than serving society more broadly. I was brought in to some of these debates to bring evidence to bear, and if I presented evidence that people agreed with, they would say, oh, you’re the world’s top academic on this. You have such rigorous evidence. This is really compelling. If I brought something that people disagreed with, they would say you’re just an academic with no practical experience. This study really is not relevant for the real world. I’m the same person, but depending on whether what I said was something they liked or they wouldn’t, they would just have completely different reactions to it.

One particularly extreme example of this was I was testifying in the House of Commons in a parliamentary inquiry on executive pay and corporate governance, and the witness before me presented a paper which argued that the higher the pay ratio between the CEO and workers the worse the performance of the company. Now, actually, what they had done is they had handpicked a half finished version of the paper when, actually, the finished version was published. It was published a few years later, and after going through peer review and correcting its mistakes, it found completely the opposite results. This shows how you can just always find any study that you want to to support your point of view, even if the finished version of the story shows the opposite. What was even more of a concern is, even though I brought this to the attention of the House of Commons and they said, oh, this is really bad; yeah, you must – you should submit something to highlight this mistake. Their final report referred to the tainted evidence. Why? Political climate at that time was one in which people believe that high executive pay was unfair and damaging to morale.

Tanya: My God, that should be unacceptable.

Alex Edmans: I think so. If you think about – let’s go to the title of my TED talk, “What to Trust in a Post-Truth World.” You might think there are certain websites and blogs are not trustworthy. You think a government report. That should be trustworthy, but unfortunate, we can’t even trust that.

Tanya: Wow! It seems like human beings have a tendency towards confirmation bias. In some cases and not all human beings but we tend to want to be right over doing what’s right.

Alex Edmans: That’s right, and there is a neurological basis for confirmation bias, which is why it is indeed so strong and led to some of the outcomes that I just discussed. There was a great study by some scientists at the University of Southern California where they did MRI scans of the brains of people and they saw what happened if you were presented with some arguments which disagreed with your political viewpoint. The part of the brain that lit up when you heard a contradictory opinion was the amygdala. That is the same part of the brain that lights up if a tiger attacks you and induces a fight or flight response, and so literally, hearing something that contradicts your viewpoint on, say, gun control, or legalization of cannabis, or climate change, you feel like you’re being slapped in the face, or you’re being attacked, which is why there are these quite extreme reactions that you see.

Tanya: My God, so this is very interesting. It’s not just an ego thing. There’s actually neurological wiring that makes us the way that we are.

Alex Edmans: Yes, and it’s particularly on the views on these thorny political issues. What they also did is they gave some other statements such as Thomas Edison invented the lightbulb, and then they provided some contradictory evidence to that. The amygdala didn’t light up because those were statements where there’s no real personal or political viewpoint. It’s the one where there is strong political debate where contradiction is one that really leads to this extreme reaction.

Tanya: In other words, no politics, religion, and talks about money or personal finances at a dinner party stands to be true. Especially knowing what we know now from a neurological standpoint, it is like you’re being attacked if whatever’s being presented defers from what you personally believe. That’s so interesting. Let me ask you this. If we’re not technically trained as you are to really dismantle these confirmation biases by going through tremendously rigorous research, how can a normal person like me really address this problem?

Alex Edmans: I think there are two things that we can look at. The first is to try to actively seek other viewpoints and find viewpoints that you disagree with. In many issues, there are two sides to both of the – to the issue, and it’s important to try and consider the other side. For example, in the Brexit referendum, I was a very strong supporter of Remain, and I would’ve loved to believe that all of the Brexit supporters were ignorant and racist. I thought, well, let me try to look at, well, what is the case with Brexit? I tried to look at what I found to be the strongest and most informed arguments for Brexit. I actually wrote in my blog, “The Case for Brexit.” I had a post called “The Case for Brexit,” as well as one called “The Case for Remain,” and I thought that that was consistent with my mission as a professor. As I mentioned earlier, the creation and dissemination of knowledge that involved disseminating knowledge on both sides of an argument, even if I personally own what was more aligned to one side.

I think, secondly, the second thing that I would recommend is to try to put your trust particularly in papers published in the top peer-reviewed journals. Now, there’s a lot of research out there, some by companies, and I really respect companies. I spend a lot of my time engaging with practitioners, but if you’re a company doing a study, there’s a couple of concerns. Number one, it might be that there’s a potential bias towards something which would be supportive of your clients, but number two is that, with companies, you might only have a year to complete a survey, whereas with an academic study you have maybe five years to finish it. You can really nail down a result, separate correlation from causation, and importantly, academic papers need to go through rigorous peer review to check that’s it right.

Now, peer review is not just a rubber stamp. In fact, some of the very best journals, they reject 95% of papers such as their standard for stringency, but it’s important to note that there’s a huge range of journals and the stringency of peer review. Just to say, oh, there was a published paper showing that X doesn’t convince anybody, but there are lists. For example, The Financial Times has a list of the top 50 journals, and that’s publically available. You don’t need to be an academic insider to look at that list. You can just check where was this paper published, and potentially, who are the – or who were the authors? Instead, what happens is that we latch onto a study because we like the findings or dislike the findings without considering who wrote it and whether it was published.

Tanya: Yeah, so just to sum up what you said, for non-research academic people, the best thing to do to really tackle your own confirmation biases is first ask what is the other side of the argument and really explore that as a possibility to and having it be valid. Not necessarily that you agree with it but just as a possibility, and then somehow you could figure out which way you want to fall on the issue. Then the other thing is to go to peer-reviewed journals, which the New York Times has a really nice list of them. The one thing that comes up for me is nowadays people read titles, mostly, like on Twitter and on social media, and really don’t have that habit on most issues to go and really rigorously view whatever the findings are behind what’s being claimed. How can we deal with that?

Alex Edmans: I wish I had the silver bullet for this, Tanya, but I don’t have any better answer than just to try to develop that habit. This is why one of the lectures I’m giving in the Business Skills for the 21st Century series is called Critical Thinking. It is so much of a temptation to believe a short tweet, and indeed, this is another psychological bias which is known as black or white thinking or splitting, which is that something is either always good or always bad. Exercise is always good for you. Red one is always bad or something like that when they’re actually nuances. Some things could be good in moderation and so on. Just the habit to recognize that there are two sides to most issues and to be questioning and to not automatically believe something which even if the headline is very strong but to try to investigate what’s behind it. Even a headline itself could be misleading.

Let me give you another government example. There was a more recent government study which said the evidence is that CEOs have hardly any effect on firm value. They were trying to make the point that CEOs don’t deserve their pay, and they referenced some evidence in the study. Who do they reference? They referenced a submission by Professor Alex Edmans, which is me. Now, if you actually look at the evidence that I submitted, it said completely the opposite of what they quoted, but it would be tempting for somebody just to read the report and say, well, there’s a reference here. Yes, they’re quoting that report quite faithfully when in fact they weren’t. Unfortunately, we do need to go that extra level and check out the references. Does that reference actually say what the person quoting it is claiming that it says?

Tanya: Wow! That’s really disconcerting that they completely misquoted you on your research. What did you do about that?

Alex Edmans: I’m writing a transcript which goes with my Critical Thinking lecture to highlight an issue. That lecture won’t be given until spring 2020, but you can certainly find both the Critical Thinking lecture and also the transcript behind it, which is to highlight the issue. Again, why I’m talking about this, it’s not to call out the government or to shame anybody, but this is just a manifestation of a general issue of a bias which is pervasive. This was just one situation where I thought it was particularly important because it could be driving policy.

Tanya: Yes, no, absolutely. I want to shift gears a little bit and talk about the incredible book that you’re publishing that is radical and thought provoking called Grow the Pie: How Great Companies Deliver Both Purpose and Profits. What inspired you to write the book?

Alex Edmans: There were two things which were – which are quite interrelated. The first is the huge polarization that we see about business. There are some people out there who believe that businesses are completely evil. What they try to do is they try to price gouge customers, treat workers as badly as possible, and they don’t care about polluting the environment. There’s others who might be on the business side who say, well, that’s absolutely not true at all. Businesses should only focus on generating profits. Indeed, there was a famous article published in 1970 by Milton Friedman who argued the social responsibility of business is to increase profit. Businesses should just focus as much as possible on making money and leave the environment to the government. Why do we have that same extremism? It’s based on this idea of confirmation bias that I refer to earlier is that, if you’re somebody who believes that business is evil, you’re going to latch onto certain studies just like the same way that you hear government was portraying research in the government inquiries.

This polarization leads to what I call the pie-splitting mentality. This is the idea that what a company produces is a fixed pie. Now, that pie can either go to investors as profits, or it can go to society as, for example, workers, customers, and the environment. With this polarization and the view that there’s a fixed pie, you fight against each other. If you’re a CEO, you think the best way to increase your profits is to take slices of the pie from workers by reducing their wages. Similarly, if you are trade union, you might think the best way to increase worker slice of the pie is to heavily regulate business in order to try to reduce their profits. Indeed, you see this battle being played out, and it’s not just played out ow in the 21st century, but you’ve seen this from, say, the robber barons of the 19th century and then the trade unions and so on. I was thinking, well, there must be a different way to run business from this adversarial approach. That’s why I called the book Grow the Pie, the idea that actually business and society can work together to provide outcomes of mutual benefit.

That’s linked to the second motivation to writing the book, which is a look at the careful evidence. A non-evidence-based view is one that only considers one side. If you’re a business person, you’re only going to consider the evidence for profit being great. Similarly, if you’re on the other side, you might only consider the evidence for companies being exploitative. If you look at the highest quality evidence, it actually is not an us or them mentality. It does show that companies that treat their stakeholders well are not sacrificing profit but actually delivering more profit in the long term. This idea that you can grow the pie and lead to outcomes that are mutually beneficial, that’s not just wishful thinking. It’s not just a too good to be true pipe dream. It’s backed up by evidence.

Tanya: That’s interesting. What do you think has been getting in the way for us to realize what you call pie-growing mentality?

Alex Edmans: Two things, so first is the pie-splitting mentality seems to be just pervasive. I think while there may be a psychological bias for it, but there might certainly be a historical bias for it. Historically, most of the wealth was in the form of lands where, if I have some land, then you have less land because there’s only a finite amount of land to go around. Nowadays, things are different because much wealth is in the form of human capital. If I’m smarter or because I’m getting a – my employee was developing and training me, that doesn’t hurt you. Things are different now because wealth can be created, but because many people have this idea that things – or there are some, that mentality has persisted.

The second reason is that, while it is indeed true that the pie can be grown in the long term, it does take a long time, and many of the structures that we have in business nowadays are focused on the short term. For example, companies in the US, they need to report their profit every three months. Now, if you are to train your workers, just to continue the last example, that costs you money. Now, in the long term it’s true that a better trained workforce is more productive and increases your profits, but if you’re a CEO and you’re trying to hit the next quarters earnings target, you might not bother training your workers because the immediate cost is something which is going to be negative to profits.

Tanya: How should leaders really take these two, short term versus long term, and deal with this? I mean, the short-term pressures are real. There’s expectations, and they’re benchmarked against, like you were mentioning, the earnings. How should people deal with this? What are some of the mental shifts that leaders, business leaders today need to do in order to really realize this long-term value and embody this pie-growing opportunity, business opportunity?

Alex Edmans: I think the first is to look at the evidence and to find that this pie-growing idea is not a pipe dream, and it’s a not a too good to be true idea. Historically, people have thought about this idea of corporate social responsibility being some optional extra, being something which is fluffy. They thought that it’s at the expense of profits, so let’s just do the minimum possible in order for us to preserve our public reputation. When, actually, what the evidence suggests is that it’s not an optional extra. It should be fundamental to how a company does business for them to see purpose and value creation to society as being central.

The second is, once you have that mindset, how do you actually put it into practice? I’d say that there’s a couple of things. The book talks about many, but let me just talk about two for the sake of time. The one is the incentive structures that you give throughout the organization. Now, when people think about reforming CEO pay, they will focus on the level of pay. The idea is the pie-splitting mentality. The CEO is being paid so much. If she wasn’t so greedy, you could redistribute her pie to everybody else, but that actually isn’t right.

Let’s say a top CEO in the US gets paid $10 million. Now, that sounds a lot, but compared to the average firm size in the Fortune 500, that’s $20 billion. Ten million is only 0.05%, so how much of the pie you can redistribute is actually really, really small. When, in fact, evidence shows that if you was to change the horizon of the CEO, for example, pay him according to the stock price in seven years’ time rather in three years’ time, that encourages her to do things such as invest in workers, which have effects of, say, two to three percent per year on her value. How much value you can create by growing the pie is much higher than how much you can create by splitting the pie differently. That’s the first point is incentive structures.

The second point is on reporting. Why is it that some investors may only focus on short-term profits? There’s the pressures that you were referring to, Tanya. It’s because traditional reporting is on the profit and loss statement, but there are many measures that companies can do to report their contribution to society, for example, their environmental records, what they’re doing with their workers, and so on. The extent to which we have this other model of reporting which is often called integrated reporting where you’re supplementing short-term quantitative measures with longer term qualitative measures, then investors will get a much bigger picture of what the company is doing.

Tanya: Oh, you know what? That makes a lot of sense. Realigning the incentives will certainly get people moving towards the long term. I like that. For the people that would like to get access to your book, how can they get a hold of a copy?

Alex Edmans: It’s available on Amazon and most other retail outlets, and also, if you’d like to just see what the book might be about and what other people are saying about it before buying it, it has a website growthepie.net, which has a chapter outline and some of the related work that is built off it and some reviews by people who have read it.

Tanya: I read the reviews. By the way, you have some incredible people that have weighed in really supporting your book and your findings so congratulations. That’s pretty incredible.

Alex Edmans: Thanks very much. What I was really grateful for was that the reviews were from a broad diversity of people, so there’s some vectors there, some investors, some academics, and some on more the societal side of the spectrum. What I hope my book to be is unifying. As I said at the start, what motivated me was this polarization between us and them, but what the book hopes to show is it’s not us and them. We’re in this together. We’re trying to make capitalism deliver profits because that’s important to investors but also serve society, and so I was really humbled by the fact that people from different companies were willing to get behind and endorse the book.

Tanya: Yes, I especially love that the book comes from someone in the finance background where this idea of us or them mentality is really an old paradigm. I believe and, actually, part of what we do in my day job at our consulting firm is really a we mentality. The idea of teams and really having everybody’s interest makes for the outcome so much more powerful than if you’re really fighting each other along the way.

Alex Edmans: It’s funny you say that. Often, when I speak about the importance of business to companies, I’m introduced as a professor of finance, and the audience thinks they’ve misheard. [39:04] is the enemy of a lot of these, perhaps, initiatives because they think, well, this is going to hit the bottom line. What I have to show and the [39:14] with my research more generally is that any finance professional with that mindset is actually failing at his or her job.

Tanya: That’s so powerful. I love that. Your students are very lucky to have you. I’ll say that. Just before we finish here, I would like to know is there anything that we haven’t talked about that you think we should?

Alex Edmans: I’d just like to reiterate the discussion we had earlier about Business Skills for the 21st Century. I think what I wanted to do with this lecture series is to make accessible the important business skills which are not traditionally taught at business school. To the extent to which any of the listeners find this of interest, they can view the series of the Gresham College website. It’s called Business Skills for the 21st Century, and the talks are livestream. Even if you can’t attend them in person, you can see them wherever you are in the world, and you can also see them on playback later, even if you are not free in that particular point in time. Also, as I mentioned, there are transcripts of lectures. The transcripts are not word for word, but instead, they’re meant to be a succinct summary of the main points. For somebody who’s constrained and can’t watch the entire talk, hopefully, the transcripts are of interest to you. This is consistent with my passion about trying to disseminate knowledge to a wide audience, so hopefully, that will be of interest to some people.

Tanya: Awesome. Alex, thank you so much for taking the time today and, also, for putting out a brilliant piece of work, your book, Grow the Pie. That really stands on what I believe to be the next business paradigm, which is really an awesome mentality. I love the message, and I fully support it. I just love that you took the time to provide rigorous evidence and a case for why it actually is possible, so thank you.

Alex Edmans: Thanks very much, Tanya, for having me on.

Tanya: Unmessable is recorded in the heart of New York City and a special thanks to all the team involved in producing the show. Visit tanyaprive.com/unmessable to find a transcript of this episode and be sure to subscribe to our newsletter.