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To err is truly human and mistakes are truly inevitable. Paul Nutt, an Ohio State University business school researcher, provides data showing that half of all decisions made in business organizations fail. In his book, Why Decisions Fail, he shows that decisions mostly fail because the deciders ignore feedback. The lesson is clear, decision making in business is a random walk—no one is any better at decision making than anyone else. The major difference between good and bad decision making concerns the degree to which people are open to feedback regarding the consequences of their decisions.In the moral development literature, there is a very interesting line of research on guilt. In the typical study, a hypothetical person makes a mistake, and the research participant is asked how he or she would respond if he or she had made that mistake. This is, of course, directly relevant to the topic of reactions to bad business decisions. The data show that people’s “guilt responses” fall into four relatively clear categories with specific behavioral consequences.The first category of responses is called “intropunitive”. Intropunitive people quickly, even reflexively, blame themselves. Such people are prone to more or less persistent feelings of guilt, seem somewhat neurotic, and were probably the kinds of clients studied originally by Sigmund Freud, the founder of psychoanalysis. They were the source of Freud’s ideas about the superego and the problem of guilt.The second category of responses is called “extrapunitive”. Extrapunitive people, when faced with the news that they have made an error, quickly, even reflexively, blame other people and external circumstances. They seem incapable of internalizing blame and seem somewhat hostile and suspicious of other people.The third category of responses is called “impunitive”. When it appears than impunitive people have made a mistake, they simply refuse to acknowledge that anything significant has happened. They deny the reality of the situation and typically wonder why anyone would bring up the subject. These people seem somewhat psychopathic, and the defining feature of psychopathy is no capacity for guilt.The fourth category of responses is relatively small in terms of frequency of occurrence. These responses are called “mature self-critical guilt”. Here the people own their mistakes and vow to learn from the experience.We are discussing an assessment literature here—the assessment of individual differences in how people respond to the news that they have made mistakes. Meaningful assessment should predict behavior, so it is important to ask what these four categories of guilt responses predict. In the moral development literature, the major outcome of interest is moral conduct—usually the delinquency/non-delinquency criterion. Intropunitive responses are primarily associated with feelings of guilt. Extrapunitive responses are primarily associated with hostility. Impunitive responses are primarily associated with denial. Of the four categories, only mature self-critical guilt predicts compliance and integrity; delinquents lack the capacity for mature self-criticism.

Kaizen refers to continuous, steady improvement. It means never being satisfied. It means continuous improvement in processes as well as products. If a company pursues kaizen, it will be able to produce higher quality products for less money.How does assessment fit with all of this? Hiring better people is part of continuous improvement. Assessment is the key to hiring better people. Using valid assessments will yield better results than using the DISC or OPQ. Hiring better people means hiring better workers, better managers, and better leaders. Good workers regularly come to work, follow sensible procedures, treat customers well, work well as part of a team, and accept (or don’t resist) change. Good managers provide their staff with structure and direction but treat them with respect. Good leaders are more concerned with the performance of the organization than with the advancement of their own careers. Good leaders are not charismatic, self-centered, self-promoters. Good leaders treat their staff with respect but hold them accountable for their performance, promote an appropriate philosophy and vision, and have the capacity for change. Valid assessment is the key to continuous improvement of personnel.

We now know that personality predicts leadership style, and that leadership style predicts ratings of leader effectiveness. There are also some data showing that leadership style predicts business unit performance. So there is a kind of causal arrow going from personality through leadership style to the performance of the business unit of which a manager is in charge. Thus, we can use personality to predict business unit performance.That is an important finding in itself, but it also raises a question about the links. That is, how do leaders affect organizational outcomes? Our Leadership Value Chain suggests an answer.

(Note: This is an abstract of a chapter by Robert Hogan and Michael Benson in The Perils of Accentuating the Positive (Hogan Press), edited by Robert B. Kaiser)George Gallup and Donald Clifton pioneered Positive Psychology under the banner of “science and the study of strengths”. Their survey research methodology is exemplary, and reveals important empirical links between employee attitudes and business results. I especially admire their focus on real business outcomes—e.g., profitability, productivity, turnover, and customer satisfaction. I also appreciate the humanism implied by their concern with employee well-being. In addition, Gallup researchers have firmly established that management practices are the key drivers of employee engagement, and employee engagement predicts a host of positive and negative business results.Although I admire Positive Psychology’s focus on effectiveness and high level performance, it is important to note three things about this emphasis. First, it is not new. The Institute of Personality Assessment and Research (IPAR) at U.C. Berkeley was established in 1949, based on a Rockefeller Foundation Grant, explicitly to study the determinants of competence, effectiveness, and high level performance. Over the years, IPAR researchers assessed over 2,000 highly effective and creative professionals, and published many papers describing their findings. Perhaps the best known of these are papers on the nature of creativity (Barron, 1969; MacKinnon, 1962).Second, high level effectiveness is not the same thing as “flourishing”, a key term for Positive Psychology. IPAR data, for example, clearly show that many if not most talented and accomplished people are driven by private demons. And finally, it is not at all clear what “flourishing” means. If it means being able to live with oneself, then it is clearly only one aspect of psychological health, and it is an aspect that is closely related to narcissism. As such, it is likely to increase the ability to live with oneself at the expense of the ability to live with others, which in turn, will decrease the probability of occupational success (Judge, LePine, & Rich, 2006). If flourishing means self-actualization in a Maslowian sense, then it is simply wrong-headed.Leadership requires balancing a number of competing tensions—for example, focusing on short-term versus long-term results, or focusing on people versus task requirements (cf. Kaiser & Kaplan, this volume). This chapter concerns a different tension—that between living with oneself and living with others. Using personality psychology as a roadmap, we argue that leadership effectiveness depends more on being able to live with others than with being able to live with oneself. Moreover, being able to live with others depends on a capacity that we call strategic self-awareness—understanding one’s strengths, abilities, and limitations in relation to other people. Consider the following example.Jean-Marie Messier was the CEO of the Paris-based Compagnie Generale des Eaux (CGE) from 1996 to 2001. Those who knew Messier described him as self-absorbed, utterly self-confident, and fond of the spotlight. His company, CGE, was a highly profitable, global leader in water, electrical, and waste utilities, and faced the prospects of steady long-term growth worldwide. Nothing about its environment, staff, or core competencies indicated any need for change. With no experience whatsoever in the world of media and entertainment, Messier transformed CGE to a movies and music enterprise that he named Vivendi, a transformation that turned into a total financial disaster.Traditional personality psychology began with French and German psychiatry in the late 19th century; it extends through Carl Rogers and Abraham Maslow in the 1950s and 1960s, and is represented today by cognitive behavioral therapy and positive psychology (Seligman & Czikszentmihalyi, 2000). We call this tradition intrapsychic theory because it focuses on processes inside people; it emphasizes self-discovery and maintains that the big problem in life is learning to live with oneself. The underlying assumption of this tradition is that everyone has hidden secrets—these could be strengths or limitations; these secrets need to be revealed and explored so that people can “become whole”.There is a second and much less influential tradition in personality psychology called interpersonal theory; it began in 1908 with the great Scottish psychiatrist William McDougall (whose thinking was not influenced by Freud) and extends through G.H. Mead in the 1930s and Irving Goffman and Theodore Sarbin in the 1960s; it is represented today by socioanalytic theory (cf. Hogan & Smither, 2001). This tradition focuses on social interaction and assumes that learning to live with others is more important than learning to live with oneself.As noted earlier, the mainstream (and dominant) intrapsychic tradition of personality psychology defines self-knowledge in terms of becoming aware of thoughts and emotions (and strengths) that were formerly unconscious. This is sometimes popularly expressed as getting in touch with one’s emotions, strengths (or even one’s “inner child”). This definition of self-awareness is the cornerstone of traditional psychotherapy, and it would be difficult to overstate how influential it has been. In our view, it is also incorrect, and it takes the process of guided individual development in the wrong direction.Socrates’ maxim was “know thyself”; he also famously maintained that the unexamined life is not worth living. However, Socrates and the ancient Greeks meant something very specific by self-knowledge. They were a practical people and they defined self-knowledge in terms of understanding the limits of one’s performance capabilities—i.e., knowing one’s strengths and shortcomings vis-?-vis one’s competitors in various activities. This is a sensible way to think about self-awareness; we refer to it as strategic self-awareness because it is information that can be used to shape and direct one’s career. There are two components of strategic self awareness: (1) understanding one’s limitations and strengths; and (2) and understanding how they compare with those of others. The second part is what distinguishes self-awareness from strategic self-awareness. We would like to note three points about this model of self-awareness.First, strategic self-awareness cannot be gained in vacuo or through introspection. Strategic self-awareness depends on performance-based feedback using a systematic and objective assessment process. If people want to improve their golf games, they will consult a golf pro who asks them to hit some balls, perhaps video-tape their performance, then offers feedback. If they want to improve their tennis game, they will do the same thing. But what should they do if they want to improve their life (or career) games? They will need feedback on their habitual ways of dealing with other people—i.e., the interpersonal moves they typically employ in their efforts to both get along and get ahead.

Personality psychology began with German and Swiss psychiatry; Sigmund Freud and Carl Jung exerted an immense historical influence on all theorizing about human nature. In particular, they argued that everyone has problems and that their problems are caused by being out of touch with their emotions, by lacking appropriate self-knowledge. The solution to their problems is enhanced self-awareness, fostered and guided by feedback from a therapist. This line of thought encourages self-absorption, but more importantly, it ignores the impact of a person on other people; other people are not significant in these theories. Freud and Jung founded the intrapsychic tradition of personality psychology—they focused attention almost exclusively on the process of inner exploration. There is an alternative view of personality that begins with William McDougall and extends through Timothy Leary, George Kelly, and Jerry Wiggins. These (Scottish/Irish/English) writers argued that peoples’ problems are caused by the way they perceive and treat other people. They started the interpersonal tradition of personality psychology—they focus almost exclusively on interpersonal relationships. I identify with the interpersonal tradition for two reasons. First, Freud and Jung thought introspection was the key to psychological health, but introspective tendencies are uncorrelated with career success; many happy and successful people (Voltaire, U.S. Grant, Ronald Reagan) were incapable of introspection. Second, humans evolved as group living animals, and success in life entirely depends on social acceptance and approval—i.e., on building and maintaining effective relationships. The study of relationships is an entire field of psychology; I can summarize the news from this field in terms of four broad points. First and most importantly, every relationship is an exchange process; successful relationships depend on both parties receiving some benefit. Thus, popular people are rewarding to deal with; unpopular people are punishing to deal with. There is only one way to be rewarding—by being consistent and accepting of others. There are many ways to be punishing—by being moody, hostile, inconsistent, untrustworthy, self-centered, or even weird. That which is exchanged during social interaction is respect and affection; after every interaction a person gains or loses a small bit of respect and affection depending on his/her performance. A person’s reputation is the summary of this accounting process, and smart people pay attention to it. Second, relationships evolve in systematic ways over the human life cycle. The earliest kind of relationship is that between an infant and its caretakers; this process has been brilliantly analyzed by John Bowlby in his Attachment and Loss trilogy. Forming secure attachment bonds with caretakers is the source of self-esteem and the foundation of all subsequent psychological development; attachment is eroded by “separation”—physical or emotional. Bowlby compares separation to exposure to radiation; it is bad in any amount and it accumulates. The next kind of relationship concerns dealing with adult authority; to survive, children must learn to accept the rules of authority (for example, to learn language children must accept what they are told about names), and this is facilitated by secure attachment relations. Then, around age five, all children enter a peer group; they must then learn to negotiate relationships with peers—as opposed to demanding and accepting resources from adults. At some later point in adolescence the mating dance begins. This seems mostly to be hormone-driven chaos, but one firm generalization is that relationships founded on similar values tend to endure, and those based on dissimilar values do not. Finally, young people enter the world of work where they must negotiate a wide variety of relationships and this is a function of social skill. Third, successful leadership involves managing three kinds of relationship problems. The first are relationships with subordinates; this is the primary focus of most discussions of leadership, and by far the easiest problem to deal with. The second are relationships with peers. Here the solution is to assure one’s peers that, if you become their boss, you will treat them fairly. The third problem is relations with superiors, and this one is crucial. The careers of Stanley O’Neal and John Thain, the recently failed CEOs of Merrill Lynch, are instructive because both men are similar in many ways. They are both talented and good with numbers and cost control; they are both arrogant, cold, and remote. But most importantly, both of them were superb at managing relations with their superiors (especially the board), while ignoring relations with subordinates. Such people, when they are talented, rise rapidly in organizations. They have great individual careers, but their damaged relationships with their subordinates inevitably undermine their leadership.People are hard wired by evolution to seek social acceptance and status during social interaction. Life is about getting along and getting ahead, and both outcomes depend on relationships and on the social skill needed to maintain them. Social skill is like any other skill—it can be coached. But successful coaching depends on a good assessment of the person’s current level of performance. Personality assessment is the key to enhancing social skills and relationship management.

I have known many smart guys in my life, but John Holland, who died last month, was the man who most influenced my career. John was part of a small group of famous psychologists (John Flannagan, J. P. Guilford, Robert Thorndike, Harrison Gough, Hans Eysenck, Alphonse Chapanis, and B.F. Skinner) whose interest in applied psychology and assessment was sparked by their experiences in World War II. If you have ever seen Warren Buffett interviewed on TV, you will have a good sense of John, who was also from Omaha. He was mild mannered, unpretentious, overtly modest, wickedly funny, ferociously competitive, and very hard working—he was one of the five most published scientists of the 20th century. He was a keen football fan (the Kansas City Chiefs), a fine pianist, and catnip for women—his wife Elsie (also from Omaha) could have had a career in the movies. And he created intense admiration and loyalty in everyone who worked with him because he was so smart, so perceptive, so principled, and so very funny. The same seems to be true for Warren Buffett.I learned five lessons from John that are worth repeating. The first concerns the importance of assessment for guiding peoples’ lives. As Freud said, the two biggest problems in life concern choosing a mate and choosing an occupation and people never do either for rational reasons—and he was right. The process of choosing a mate—male/female relations—is bound up in biology and hormones and is utterly irrational. The process of choosing an occupation is bound up with one’s relationship with one’s parents; nonetheless, it is in principle possible to make rational career choices and the key to doing that is valid assessment and competent feedback. The second lesson that I learned is utter disdain for the rules of the psychometric (or academic testing) establishment—e.g., what we learned in graduate school. One of John’s best lines was, “Forget everything you learned in graduate school”; he meant it and he was right. Mainstream psychometrics concerns measuring entities (i.e., determining “true scores”). But applied assessment has a job to do, and that is to predict outcomes. The psychometric establishment is only concerned in principle with how their methods apply to real world; in reality, they don’t care. Real test development is an intellectual and scientific activity that requires careful thought and some creativity; there are no formulae for good test development, there are no cook book recipes for developing meaningful assessment, and the best tests have been developed by mavericks.The third lesson I learned was that it is essential to have a sound, well thought out, conceptual basis for your measurement model. John was an avid student of philosophy of science. He was greatly concerned about, and immensely pleased with, the way in which his measurement model was theory-based and his research was consistent with the best precepts of real science: have an idea, test the idea, refine the idea based on the test, then start over. This lesson is quite unique and none of our competitors understand it. The fourth lesson I learned is that if you develop your assessments correctly, they will sell. John made a lot of money from his Vocational Preference Inventory and his Self-Directed Search. The same is true for Raymond Cattell and Harrison Gough. At some point, the market can distinguish between valid assessment and psychometric garbage. Finally, I learned from all of these guys (Holland, Cattell, Gough, etc.) that you have to retain control of your intellectual property. They all found it difficult to manage the test sales by themselves (John’s garage was stacked full of paper products), they sold their rights to “real” business people, and spent the rest of their lives bitterly regretting their decision. In 1982, Joyce and I sold the rights of the HPI to National Computer Systems. They were as incompetent as all big public companies seem to be; it was a terrible decision, and when we got the rights to the HPI back in 1992, we began making money immediately, and we vowed never to make that mistake again. It is important to remember John’s approach to assessment because, after the wind blows away all the psychometric schlock, his work will still be standing. There is a strong tendency in our discipline to forget the past, to assume that the research that is going on today is qualitatively better and has somehow superseded the earlier research. That, of course, has to do with the vanity and arrogance of youth. Virtually all of us could profitably reread the early work of Binet, Spearman, Strong, Allport, Murray, and of course, John Holland. And when we do, we will be surprised to discover how little progress has been made in the fundamentals of assessment over the past 100 years.

George Bernard Shaw (1856-1950), the Irish-born playwright and novelist, was the only writer to win both the Nobel Prize for Literature and a movie Oscar. Shaw was an ardent socialist who, nonetheless, founded the London School of Economics (LSE)—a hotbed of British capitalist thinking. But most importantly, as an Irishman, Shaw was a gifted and intuitive psychologist, and his most famous play, Pygmalion, contains an important practical lesson for the critics of personality assessment.The standard criticism of personality assessment is that people can and do “fake” their responses to the items on personality inventories. The concept of faking is deeply problematical in social life. It rests on the assumption that there is a “real” you and that faking involves pretending to be someone other than the real you. In contrast, for social constructionists, there is no “real” you, there is just the you that you have chosen to be; you then use social interaction to tell other people who you are and how you would like to be treated. More specifically, there is the real you, which is the you that you were as a child—an unsocialized horror, then there is the you that, as an adult, you (more or less self-consciously) pretend to be in public—the socialized you. The maturation process involves learning to fake, to hide the real you. In this way, the answers that you provide on a personality questionnaire would reflect the socialized you, not the real you, the unsocialized horror—unless you avoided the maturation process.In Shaw’s play, the linguist Henry Higgins bets a friend that he can train a cockney flower girl to speak “proper” English and pass her off as English gentility. Higgins selects Eliza Doolittle, and with some effort, trains her to drop her normal way of speaking and, instead, speak “proper” English. Higgins is successful, Eliza Doolittle is transformed, Higgins falls in love with her, and the play ends with her rejecting Higgins and marrying an impoverished English gentleman.Shaw’s play contains at least three lessons for personality psychology. First, there is no real you, there is just the you that you pretend to be in public. Every social performance is an act. Only people who are na?ve, unsophisticated, or psychologically obtuse insist on being authentically themselves. But as the existentialist philosopher Jean Paul Sartre remarked, “Authenticity is the mark of a person who has been taken in by his own act.”Second, with some concentration and practice, most people can change their social performances; like Eliza Doolittle, they can learn to fake, except that they are not faking, they are just playing a different role from the one they usually play.And third, some roles lead to greater social acceptance, popularity, and success than others. People who insist on being rude, opinionated, and abrasive aren’t simply being themselves, they are behaving in a self-defeating manner.Returning finally to personality assessment, people present themselves differently using the items on personality questionnaires—this is the essence of individual differences—and some of these presentations will lead to better outcomes than others. But no one is faking when they respond; how they present themselves is a choice, whether it is conscious or not.

People in the world of finance tend not to be very thoughtful about personality—and there are overwhelming data to support this generalization. But personality affects the decisions of financial managers just like everyone else. In addition, the success or failure of every organization is the sum of the decisions that the leaders make on a daily basis. Ultimately, then, the success of an organization depends to a significant degree on the personality of the leaders. Consider the case of Lehman Brothers, a 150 year old Wall Street investment bank with 25,000 employees world wide. It was the fourth largest investment bank in the world, and it declared bankruptcy on September 15th, 2008. The CEO of Lehman Brothers is Richard Fuld. Starting in the summer of 2007, Fuld made a series of decisions that ultimately doomed his company. As the subprime mortgage business slumped, Fuld decided that money could be made by investing as others retreated, so he “doubled down” on mortgage backed derivatives. As they continued to decline in value, so did Lehman’s holdings. But Fuld seemed not to notice. As Joe Nocera remarks in the New York Times (9/15/08), “And yet, even as they lowered the value of their mortgage-backed securities, firms like Lehman had still priced them too high.” David Einhorn, a hedge fund manager, described Lehman’s mark-to-market pricing as “dishonest”; Nocera called it wishful thinking.For at least a year, Lehman Brothers needed to sell parts of itself to remain solvent. Over the past several months, a series of interested buyers approached Lehman, but in each case, Fuld thought Lehman was worth more than the price offered. He maintained this position right into bankruptcy. Why did Richard Fuld make these decisions? What sort of person is he? The question is hard to answer because the only information we have is in the financial press, which is not insightful about psychology. Fuld received a BS from the University of Colorado in 1969 and an MBA from NYU in 1973. He joined Lehman Brothers in 1969 as a commercial paper trader, and Lehman is the only place he has ever worked. He rose rapidly, and has been the CEO since 1993. The Institutional Investor magazine named Fuld the #1 CEO in the industry in 2006. Fuld’s salary in 2007 was $51.7 million dollars and in March, 2008 he received a $22 million dollar bonus for 2007. Over the past five years, Lehman paid him $311.9 million dollars in compensation.Here are some other facts about Richard Fuld: