Master Life Faster: Newsletter

How Do You Build a Great Team?

Posted in Newsletter by Paul Lem, M.D. on June 2, 2009

Volume 2, Issue 6
SOCIAL: How do you build a great team?
SMART: Why your friends matter
WEALTHY: How to diversify your investments

“The wave of the future is not the conquest of the world by a single dogmatic creed but the liberation of the diverse energies of free nations and free men.
-John F. Kennedy

How Do You Build a Great Team?

FlagsIn April, I was invited by the Canadian Foundation for Innovation (CFI) to evaluate proposals for the $520 million Leading Edge and New Initiatives Funds Competition. There were 9 committees in total, and my committee had about 15 members. The organizers said they selected each committee to represent a diverse cross-section of the scientific community.

Different Disciplines
They definitely succeeded with my committee. There was a mix of disciplines, including chemistry, biology, industrial engineering, materials science, medicine, social science, optical engineering, political science, and computer science. There was also a mix of men and women, young and old, industry and academia, and different ethnic backgrounds. We didn’t always agree, but our different viewpoints led to a more balanced assessment of each proposal.

During one of our breaks, I chatted with fellow committee member Hadi Mahabadi about the diversity of our group. Hadi is Director of the Xerox Research Centre of Canada (XRCC). He told me that XRCC generates about 1.5 patents/scientist/year, and they launch about 4–6 new products every year.

I asked Hadi for the secret to this extraordinary creativity. His answer was diversity. Xerox deliberately assembles teams that have a mix of business skills (e.g., R&D, sales and marketing, operations, finance), and a mix of demographics (e.g., age, sex, race, culture, people with disabilities). Over years of experience, they’ve found that diverse teams come up with better solutions and more successful products.

All Together Now
Scientific evidence backs up Hadi’s methods. At the University of Illinois, Patrick Laughlin asked volunteers to crack a letter-to-number code by working alone or in teams of 4. He found that teams were better at coming up with solutions than the group’s best problem-solver working alone. Ok, so 4 heads are better than one. But what’s the best composition for a team?

Something Old, Something New
The answer comes from Luis Amaral at Northwestern University in Evanston, Illinois. He and his colleagues analyzed all collaborations that led to publications in 7 social psychology journals, 9 economics journals, 10 ecology journals, and 6 astronomy journals. They also analyzed the teams which produced 2,258 Broadway musicals from 1877 to 1990.

Results showed that the most successful teams tended to share 3 characteristics in common:

  1. 50–60 percent of team members were veterans in the field.
  2. 20–30 percent of team members had never worked together before.
  3. About 50 percent of team members were well-connected with others in the field.

Amaral said, “We found that teams that achieved success—by producing musicals on Broadway or publishing academic papers in good journals—were fundamentally assembled in the same way, by bringing in some experienced people who had not worked together before. The unsuccessful teams repeated the same collaborations over and over again.”

Laughlin PR, Bonner B, Minor A. (2002). Groups perform better than the best individuals on letters-to-numbers problems. Organizational Behavior and Human Decision Processes. 88: 605–20. Full Article.

Guimera R et al. (2005). Team assembly mechanisms determine collaboration network structure and team performance. Science. 309: 697–702. Full Article.

“Be careful the environment you choose for it will shape you; be careful the friends you choose for you will become like them.”
-W. Clement Stone

Why Your Friends Matter

NudgeRichard Thaler is an American economist, and one of the founding fathers of behavioral finance. This field investigates how psychology and human nature affect economic activities such as saving, spending, and investing.

In Thaler’s new book Nudge: Improving Decisions About Health, Wealth, and Happiness, he shows how small changes to your daily life can have big consequences. One of the biggest influences is your choice of friends.

Consider these facts:

  • Harvard researchers found that a person’s chances of becoming obese increased by 57 percent if he or she had a friend who became obese.
  • In a study of how teenagers start smoking, researchers in New Zealand found that 49 percent of 13-year-olds received their cigarette from a friend.
  • Researchers at the University of Illinois found that teenagers were more likely to do well in school if they had high-achieving friends.

EaglesBirds of a Feather
Take a close look at your friends. Would you be happy if you became exactly like them in 5 years? If not, maybe it’s time to find new friends. As the saying goes, it’s hard to soar with the eagles if you’re surrounded by turkeys.

Christakis NA, Fowler JH. (2007). The spread of obesity in a large social network over 32 years. N Engl J Med. 357(4): 370–379. Full Article.

Stanton WR, Silva PA. (1992). A longitudinal study of the influence of parents and friends on children’s initiation of smoking. Journal of Applied Developmental Psychology. 13: 423–434. Abstract.

Mounts NS, Steinberg L. (1995). An ecological analysis of peer influence on adolescent Grade Point Average and drug use. Developmental Psychology. 31(6): 915–922. Abstract.

“Make money on Wall Street, bury it on Main Street. Take it out of harm’s way.
-Paul Scharfer

How to Diversify Your Investments

EggIn the 1950s, Harry Markowitz of City University in New York showed that a diversified portfolio increases returns while reducing risk. His work on “Modern Portfolio Theory” (MPT) is the reason why most investors diversify their investments into asset classes such as stocks and bonds.

It seems pretty simple: don’t put all of your eggs in one basket. But there are two important details which investors often forget:

  1. The asset classes should not be correlated.
  2. Your portfolio consists of more than just your financial investments.

When picking asset classes, it’s no use if they rise and fall together. It’s like putting your eggs into two baskets that are tied together with a rope. Pull the rope and both baskets tip over. To make things more complicated, correlations can change with time.

Wake-up Call
This is the harsh lesson that’s been learned by many Baby Boomers. They thought they were smart by diversifying their portfolios into real estate and the stock market. Historically, real estate has had a relatively low correlation with the stock market. But the sub-prime meltdown has shown that real estate and stocks can fall dramatically at the same time.

Bogle’s Rule
Perhaps these investors should have paid attention to “Bogle’s Rule.” Jack Bogle is the founder of The Vanguard Group, an investment company famous for pioneering low-cost index funds. He says, “At a certain stage in life, probably fairly early, your bond position should equal your age.”

For example, if you are 50 years old, then 50 percent of your portfolio should be in ultra-safe bond investments such as Treasuries and Treasury Inflation Protected Securities (TIPS). Bonds are relatively uncorrelated with asset classes such as real estate and stocks because they have locked-in interest rates. This means they can’t go down a lot, which makes them a solid foundation for your portfolio.

What Color is Your Parachute?
The second detail that’s often overlooked is an assessment of your job security and earning power. People with jobs that are highly correlated with the stock market should invest their money in less risky assets. For example, business owners who sell luxury goods should invest more in bonds because their businesses are heavily dependent on the state of the economy.

In contrast, people with secure jobs should invest more in riskier asset classes such as stocks. For example, a tenured university professor should invest more in stocks compared to an entrepreneur. Similarly, young people should invest more in stocks than old people because their portfolios have more time to recover in value if there is a big drop.

Diversification generates higher returns with less risk…but only if you’re truly diversified.

Markowitz HM. (1952). Portfolio selection. Journal of Finance. 7(1):77–91. Full Article.

Investopedia. Diversification beyond equities. Accessed on June 2, 2009. Full Article.

Brokamp R. (2008). Jack Bogle on Warren Buffett and beating the market. Motley Fool. December 22. Full Article.

Chen P et al. (2006). Human capital, asset allocation, and life insurance. Financial Analysts Journal. 62(1): 97-109. Full Article.

Copyright 2009 by Paul Lem, M.D. All Rights Reserved.
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