Category: Book reviews

No One Would Listen

You can’t really criticize Harry Markopolos. He was right. He had spotted something wrong with Bernie Madoff years before the biggest Ponzi scheme collapsed. Unlike many others, Markopolos contacted the Securities and Exchange Commission about his suspicions. They ignored him. Markopolos went to the press, but no meaningful article came of it.

When Madoff’s scheme collapsed and he  turned himself in, Markopolos became lauded by the press, testified in Congress about the failings of the SEC, and was even offered the job of Chairman of the SEC by an ill-informed Congressman. No One Would Listen is another step in the Markopolos victory lap.

He celebrates his brilliance in discovering the fraud and the incompetence of the SEC for not stopping it. He fills his attacks with similes:

“His returns were as reliable as the swallow returning to Capistrano.”

“As I continued examining the numbers, the problems with them began popping out as clearly as a red wagon in a field of snow.”

Markopolos lays out how he first ran into Madoff and the years he spent trying to figure out how Madoff was generating his returns. Eventually, he came to the conclusion that he couldn’t do it. Since Madoff ran a big trading organization, he could have been front-running orders to generate illicit profits. Effectively, he would be stealing from his brokerage customers and giving it to his money management operations.

The other likely possibility was that Madoff was making up his returns and using new funds coming in to redeem those leaving. Markopolos could not find any footprints of Madoff’s split-strike trading strategy. There didn’t seem to be enough options traded on the markets to support the amount Madoff had under management.

I think it’s important to see why Markopolos was focused on Madoff. The principals at his firm wanted him to reverse engineer Madoff strategy so they could offer a similar product to their clients. Markopolos could not figure out how Madoff was generating his steady returns. He first contacted the SEC as a way to get his boss off his back. If he could prove Madoff was a fraud, his boss would quit demanding that Markopolos duplicate the Madoff strategy.

Markopolos starts off  No One Would Listen by stating that he made five separate submissions to the Securities and Exchange Commission over a nine-year period. So far, I’ve only seen one, his December 22, 2005 letter. Frankly, I found the letter to be a rambling, half-coherent diatribe. It was penned by a competitor who couldn’t figure out the trading strategy of the legendary Bernie Madoff, the founder of NASDAQ.

As Chris MacDonald notes “Markopolos is a bit of a strange cat. He’s a likeable guy, and apparently a man of integrity, but also a bit paranoid-sounding.” (He had seen the new movie, Chasing Madoff, based on the book.)

Clearly the SEC was unable to stop Madoff. Was it their fault?  Yes. They relied on the well-established credentials of Madoff and dismissed the paranoid ramblings of an eccentric analyst. Markopolos’s barbs against the SEC are over-the-top and eventually got distracting. On top of that, I was often distracted by his misuse of “principle” instead of “principal” in the book. You would think that a financial analyst would know the difference.

Compliance and Liar’s Poker

Michael Lewis has written some great stuff on our most recent financial crisis: The Big Short, Iceland’s Meltdown, Greece and Corruption, and Popping the Irish Bubble. This was not his first rodeo. Lewis had a brief career in finance working as a London-based bond salesman for Solomon Brothers during the mid eighties. His finance career came to crashing halt in 1988 just after the big stock market crash of 1987. He tells his tales of finance and the excesses of Wall Street in Liar’s Poker.

Lewis covers the birth of the mortgage securitization market and trading of mortgages at Solomon Brothers. The firm dominated the market for a few years. They helped shepherd through the regulatory changes and convinced the bankers at S&Ls to buy and sell their mortgages. They essentially created greater liquidity in the American housing market. This would grow tremendously over the next twenty years, leading to the events Lewis later documents in The Big Short.

As a young, inexperienced, and mostly incompetent bond salesman, Lewis mostly screws his customers selling them bad products. But it was good for Solomon Brothers. It was good for his wallet. Wall Street greed is on full display.

It’s eerie reading this book, realizing that it was not 2008, but 1986. The book is not as good as The Big Short, but is still a very good book. I think it’s important to look back to make sure we don’t keep making the same mistakes.

Lords of Finance

The financial crisis of 2008 was not the first. In reading Lords of Finance you see some of the obvious parallels from the 1920s.

Liaquat Ahamed focuses his story on Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve, Hjalmar Schact of the Reichsbank and Emile Moreau of the Banque de France.

One focus of the 1920 s financial crisis was the stock market crash. Rampant speculation caused a bubble, even though it was initially rooted in economic reality. This was the “new economy” era of automobiles and radios. The old railroad based economy was being surpassed by trucking. Stock prices were rising, but so were the profits of the companies listed on the stock exchange. But then stock prices began rising out of proportion to the rise in corporate earnings.

There was clearly a speculative bubble. Investors were clamoring to find the next Google General Motors. Amateur investors were pouring in and borrowing to make their investments. The Federal Reserve did nothing and then when it decided to act it found it was unable to find a way to curb the speculation. When the Fed pulled back on the ability of banks to lend for stock speculation, non-banks stepped in to provide capital.

There was a thought that “the Fed could pierce the bubble with a surgical incision that would bring it back to earth without harming the economy. It was a completely absurd idea. Monetary policy does not work like a scalpel but more like a sledgehammer.”

As far back as the beginning of the Federal Reserve system there was the question of whether the Fed should intervene in an asset bubble.

The 1920s financial crisis was caused more than just stock speculation, just as the 2008 crisis was caused by more than just residential real estate speculation. It was fueled by debt. The world economy was trying to recover from the economic effects of World War I. Germany began the 1920 owing $12 billion ($2.4 trillion in 2011 values) in reparations to France in Britain, France owed the US and Britain $7 billion ($1.4 trillion in 2011 values)  in war time debts and Britain owed the US $4 billion ($800 billion in 2011 values).

The book goes further back  and focuses on the gold standard as one of the core underlying economic problems that helped cause the Great Depression. Up until this point there was an “almost theological belief in gold as the foundation for money.” Gold was the international currency. Each country’s currency was pegged to the value of gold. The ability to convert paper money into gold instilled confidence in the currency.

By coincidence, the discovery of gold through the late nineteenth century kept pace with economic growth. Then came World War I. The largest economic powers in the world met in the battlefield. Pound Sterling and Franc versus the Mark. The United States and the Dollar came in eventually. After spending the first few years sitting on the sidelines and supplying the Allies, the United States had accumulated an enormous trough of reserves.

One of the problems with the gold standard is that it gives people the option to cash in that paper money for actual gold. That obviously creates some faith in the currency. But it has opposite effect in times of crisis. people will lose faith in the paper money and redeem it for gold. That drains the system of gold, causing a tightening of credit. To counter, the banking system will need to raise interest rates to encourage people to keep money in the bank instead of gold in their mattress. Raising interest rates during a financial crisis will make things worse. You want to be able to reduce interest rates to encourage the flow of capital.

The other contributing factor was the failure of banks. This was before the days of the FDIC and insured deposits. So if you thought your bank was going under, you pulled your money out. This lead to bank runs and banks hoarding cash instead of investing the cash in loans that would grow the economy.

In the end, each economy began its recovery after it suspended the gold standard.  Is some ways the gold standard is just about digging up gold and re-burying it. The huge treasure of US gold was sitting underground, literally underneath Wall Street. France’s gold reserves were underwater; its vaults sat beneath a subterranean aquifer.

As George Santayana wrote: “Those who cannot remember the past are condemned to repeat it.” Ben Bernanke was a scholar of the Great Depression. He saw what the four Lords of Finance did, leading them to the subtitle of the book: The Bankers who Broke the World. It’s worth your time to read the book.

What Caused the 2008 Crisis?: All the Devils are Here

Was it Fannie Mae? Was it the lack of regulatory oversight? Was it the rating agencies? Was it pure greed?

Yes, yes, yes and yes. Plus, there were lots of other factors.

Bethany McLean and Joe Nocera put together an insightful look at the many factors that created the housing bubble and amplified the destruction when it popped in All the Devils are Here: The Hidden History of the Financial Crisis. Pundits and purists have tried to pin the blame on a single element. It seems clear that many “devils” were at work. It’s not just institutions that failed in the crisis. The authors paint the pictures of key individuals who helped inadvertently build up the housing bubble or allowed for it cause mass destruction.

Certainly, Fannie Mae and Freddie Mac were part of the problem. It was their stranglehold on the securitization of conforming mortgages that lead Wall Street to look at non-conforming mortgages as a source of profits. Subprime mortgages, by definition, were outside the definition of “conforming” by Fannie Mae and Freddie Mac standards.

Wall Street’s thirst for product was an ample funding source for subprime lenders. They didn’t need the deposits of conventional banks for funding. They could just sell their loans to Wall Street for packaging into mortgage-backed securities. Wall Street would also provide the warehouse funding to help subprime lenders with capital to originate mortgage loans.

The federal government was pushing for increased home ownership. The Clinton administration announced its National Homeownership Strategy, with the goal of raising the number of homeowners by 8 million over the next 6 years. (Bush carried on a similar strategy.) The flaw is that to meet that goal, riskier borrowers would need be made homeowners.

JP Morgan developed Variance at Risk, an analytical method to analyze the risk in a bank’s portfolio. They understood that the mathematical models were merely an indicator risk. Although correct 95% of the time, they were also wrong 5% of the time. Other lenders adopted VaR, but failed to grasp its limitations.

AIG and its Financial Products division played a key role. They helped provide the back stop that helped the market accept the AAA rating of mortgage-backed securities. Eventually they also moved into credit default swaps. The authors paint a picture of AIG-FP as a collaborative workplace where employees could express their skepticism about deals. Then Hank Greenberg threw out the management and replaced them with Joe Cassano. He ran the shop in a more dictatorial manner and doled out information on a need-to-know basis.

Of course there were the rating agencies who gave the RMBS and CDOs undeserved AAA ratings. That was supposed to mean that the securities are just a little riskier than US Treasuries. It was Fitch that changed things. Moody’s and Standard & Poor’s had a business model based on subscribers. Fitch changed things by charging the issuers instead of the subscribers. That would eventually lead to the ratings shoppings that became part of the subprime bubble. Of the AAA rated subprime residential mortgage-backed securities from 2007, 91% were downgraded to junk status and 93% of those from 2006 were downgraded to junk status. That is a horrible track record.

I suppose that was a bit of a spoiler, but we all know that the financial markets came to a grinding halt in 2008, crushing big banks, speculative investors, small banks, and those just hoping for a small part of the American Dream.

There are a dozen other “devils” discussed in the book, but you should just read it yourself instead of reading my ramblings.

The worst part of the subprime crisis is that the bigger goal of increasing ownership was a failure. Between 1998 and 2006 only about 1.4 million first-time home buyers purchased their homes using subprime loans. That was only about 9% of all subprime lending. The remaining 91% of subprime lending was refinancings or second home purchases (or third or fourth …). “By the second quarter of 2010 the homeownership rate had fallen to 66.9% percent, right where it had been before the housing bubble.”

I found this book to be a great companion to The Big Short and In Fed We Trust. The Big Short does a great job of focusing on how the CMBS and CDO markets worked. In Fed We Trust focused on the events of 2008. All the Devils are Here focuses on the macro events that swarmed together into an apocalyptic mix of bad bad loans, bad underwriting, bad risk assessment, bad investing and bad goals.

Attacking Wall Street in 1920

I don’t often include fiction books in my book reviews on this site. But I was drawn to The Death Instinct because its historic fiction is centered around an event on Wall Street. So I thought the book would be interesting for a compliance professional.

A horse-drawn wagon passed through Wall Street’s lunchtime crowds on September 16, 1920. Inside the wagon was 100 pounds of dynamite and 500 pounds of cast-iron slugs to act as shrapnel. The wagon exploded in front the Morgan Bank and the US Treasury building, killed 38 people and seriously injured hundreds.

It was the most destructive terrorist attack on US soil until the Oklahoma City bombing. Jed Rubenfeld draws some analogies between the 1920 attack and the 9-11 attacks. Unlike those attacks, the 1918 attack went unsolved. There were some vague accusations of plots by Italian anarchists, but nobody was ever charged.

Rubenfeld puts together a sweeping storyline to find his explanation for the bombing. He inserts many subplots branching out from the main story line. He also includes several real-life characters, fictionalized for the book. This includes Marie Curie, Sigmund Freud, Senator Albert Bacon Fall, and former Treasury Secretary William G. McAdoo. The main protagonists are Dr. Stratham Younger, Colette Rousseau – a radium scientist, and James Littlemore a detective with the NYPD.

There is a lot going on and I thought the story might go spinning out of control at a few points, but Rubenfeld manages to keep it together.

My biggest quibble is with the title.  When the publisher offered me  copy I almost passed on it. The “Death Instinct” is one of Freud’s theories. He came to the conclusion that humans have not one but two primary instincts: the life-favoring instinct and the death instinct. In other words, humans strive for both tenderness and thrills. Personally, I found the whole Freud sub-plot to be a distraction to the story and the title merely reinforces an aspect that I did not like.

Otherwise, I enjoyed the main characters and the twisting storyline as it jumps from plot-to-plot and character-to-character. There is romance, financial intrigue, and police procedural elements all mixed in.

The US Private Equity Fund Compliance Guide

One of the struggles with implementing a compliance program for a private equity fund is that the Investment Advisers Act is targeted at retail operations dealing with relatively liquid investments. Neither fits well with the private equity model of institutional investors and large, illiquid transactions. Most of the guidance and discussion about how to implement a compliance program focuses on the retail side. Given the changes coming from Dodd-Frank, most private fund managers will need to register with the SEC as investment advisers.

Private equity firms are going to need some good guides to help them out. PEI Media just published The US Private Equity Fund Compliance Guide. It is a useful resource to private equity firms putting together a compliance program.

Since it was just put together this year, the guide includes most of the new laws and regulations coming out of Dodd-Frank as they relate to private equity fund compliance. Of course, given the huge slate of rule-making in the pipeline, the guide will start getting out-of-date. You need to start sometime and the regulatory framework will continue to evolve.

Charles Lerner of Fiduciary Compliance Associates took the helm as editor of the guide and farmed out the individual chapters to a talented group of contributors. Most chapters do a great job of trying to translate the regulatory regime of the Investment Advisers Act to the realities of a private equity fund manager. A few chapters come up short. They merely tack on a paragraph at the end of the chapter pointing out that much of the preceding is irrelevant for most private equity firms or fail to provide a meaningful discussion for private equity.

Some chapters do a great job of addressing the problems that are more closely associated with private equity. The “Side Letters” chapter does a great job putting those agreement in the context of potential conflicts and the requirements of the Investment Advisers Act. I would give the same praise to the “Identifying Potential Conflicts of Interest” chapter.

Overall, I found the guide to be a great resource in helping me to craft my compliance program. My copy is already getting filled with notes and annotations. The downside it that it’s expensive: $795.

You can take a look at the table of contents for the guide and see how it fits into what you are doing and whether it would be worth the price.

The Corruption of Scott Rothstein

In Miles Away… Worlds Apart, Alan Sakowitz tells the story of the biggest financial fraud in South Florida history, from his unique perspective of a whistleblower. Throughout the book Sakowitz compares his close-knit neighborhood to the Scott Rothstein’s greed.

Sakowitz takes us through the narrative of the events leading to the arrest of Scott Rothstein. He was contacted through a broker to invest in structured settlements offered by Rothstein. The investment was to but a stream of payments from an employment dispute and deliver a lump sum payment to Rothstein’s client.

Conversion of structured settlements is completely legitimate, but usually subject to regulation and judicial oversight. A victim may prefer a big lump sum instead of installment payments made over time. Certainly, the capital source in the middle is going to want some reward for exchanging cash today for future payments.

Rothstein was offering a huge reward for investors willing to be the capital source. In one example he was offering a $900,000 settlement, payable over three months for an investment of $660,000. Why would any plaintiff be willing to take $660,000 today when they could have the entire $900,000 at the end of 90 days?

For an investor, that is an incredible return. Even more incredible given the assurances from Rothstein that payments are guaranteed. Sakowitz found the returns and Rothstein’s showmanship to be intoxicating, but was suspicious. The intoxication was enough for Sakowitz to have three meetings with Rothstein.

When asked about volume, Rothstein said he was settling 3,000 cases per year, all without actually filing a lawsuit. The smallest of his payouts was $500,000. When asked to speak to the attorneys handling the cases, Rothstein claimed he was personally handling all of the cases.

The biggest red flag for me was Rothstein acting as a seller of the settlements and the attorney for plaintiffs at the same time. There is a terrible conflict between trying to get the best financial deal for his clients at the same time he is trying to offer an enticing return for “investors.” A real attorney would have advised his clients to get a better deal in structuring a settlement.

With all the red flags, it’s easy to see why someone would think that the investment was a fraud and not get involved. It’s a bigger step to call the authorities and make the assertion. Even being 90% sure that it was fraud, that leaves a 10% chance that you’re wrongly accusing an innocent man, damaging both of your reputations.

Why did Sakowitz call the FBI? He tells interleaves stories from his close-knit community telling stories of charity and self-sacrifice for the benefit of others. He writes about his parents as role models and wanting to set a fine example for others.

Rothstein’s walls were plastered with hundreds of awards and plaques from charitable causes, plus photos of Scott with the governor of Florida, the Broward County Sheriff, the Fort Lauderdale chief of police, other politicians, famous athletes and entertainers. Given Rothstein’s connection to the political establishment, the predicament becomes who do you call to tell you found the fraud. The Fort Lauderdale Police Department would be a bad a choice. It turns out that when Rothstein fled the country, he had a police escort to his plane from a lieutenant in the FLPD. After eliminating all of the other government organizations appearing on Rothstein’s wall of shake-n-smile, he turned to the FBI. I found it interesting to hear how Sakowitz felt a sense a relief after making the call.

I was drawn to the story for a few reasons. Sakowitz runs Pointe Development Company, a real estate company. Like me, he is an attorney by training, working in the real estate industry. As a compliance professional, I am fascinated by the mechanics of fraud and Ponzi schemes. Sakowitz was kind enough to send me a copy of the book to review.

Although the book provided great information and perspective on the Rothstein fraud, I was hoping for more. Sakowitz provides plenty of information about his own background to show why he turned in Rothstein. He does not provide equivalent information to show how Rothstein went bad.

Most people do not wake up one morning and decide to perpetrate a fraud on his clients, friends, business partners and anyone who walks through his office door. Clearly greed was a factor. He must have seen an opportunity to sell a settlement for his own benefit. It’s not clear that Rothstein felt the pressure to be a mover and a shaker or what the pressure was that made him initially step over the line. Clearly his extravagant lifestyle created the pressure to keep the scheme going. We certainly could guess at the rationalization Rothstein used to justify his crimes. Perhaps he thought he was supporting the political system, endowing charities and creating jobs.

I would have liked to read more about Sakowitz’s thought process in deciding to report Rothstein to the authorities. Walking away is easy when you suspect a fraud. You merely risk passing on an investment. Reporting a fraud does put you at risk. If you’re wrong, you risk the personal and professional repercussions.  If you accuse a person like Rothstein, who showed off a gun strapped to his ankle, you risk physical harm.

In the end, Rothstein was an evil man, blatantly stealing money. Sakowitz was a good man, who saw through the greed, and took the extra step to try and stop the evil man. That alone is makes a compelling story.

Book Review: Rewired

I think a big part of compliance is education. It is great to get compliance imposed through internal systems, but you generally need to get the message out to your company about the policies, why they exist, and what they need to do.

There is lots of talk about the generation and age group starting to make their way into the workforce. They have group up with the internet, access to lots of information, and access to lots of communication tools. In Rewired, Dr. Larry Rosen tries to off insight into “understanding the igeneration and the way they learn.”

The publisher was nice enough to send me a free review copy. I was interested because the book was based on really studies and empirical data. I see too many rants about the changing learning habits of younger generations based on anecdotes and conjecture.

Dr. Rosen focuses on the what he calls the “igeneration” of children and teens in elementary school through high school. I also have young kids so I had a personal interest in the subject.

He emphasized that this generation is one that multitasks and has ample access to mobile communications. I grew up at the dawn of able television and video games. This generation is growing up with an amazing amount of connectivity and information access.

He has found that they are used to a “fast, shallow pace of information presentation” and get bored easily.

Some of points that Dr. Rosen makes seem off to me. He includes MySpace and Twitter as platforms that hold the attention of the igeneration. He talks about them gathering in Second Life.

Huh?!? I have not seen that to be true. Sure, they love to communicate. Just not these platforms. They text, and text, and text.

In looking at footnote 7 for the first chapter he discloses some of his methodology. In each study he used anonymous online surveys to interview their subjects. That the research was gathered online would seem to skew the data. You are automatically excluding those with no or limited access to the internet.

The igeneration hates school. Most kids hate school. We all hated school growing up. Students didn’t read the books. They read the Cliff Notes or online summaries. Again, that doesn’t sound like new behavior to me.

I think some of his conclusions are a bit off or obvious. Other hand, he does offer some insight and useful suggestions.

In dealing with multitasking, he attributes some of this as an attempt to make tedious work more fun. They are also trying to fill in the gaps and downtime.

I think he puts too much emphasis on 3D social networks. Personally, I think this may have more utility in distant learning than in school. One of the great things about school is that you have a large gathering of your peers in one place. Why communicate virtually when you are in close approximation.

He does have a few great examples of using virtual tours of other places like an art museum or Mayan cultural exhibit to create a more immersive learning environment. There are some great ideas in there. I’m not sure how that translates to other subjects.

It is clear that my kids are growing up in different learning environment with access to vast amounts of information. It is clear that new adults coming into the workforce have grown up in a very different information and communications environment. Dr. Rosen offers some insight and help in thinking about their learning needs. I think it’s just sometimes flawed.

The Ascent of Money: A Financial History of the World

Niall Ferguson had the unfortunate luck of writing The Ascent of Money just before the unveiling of the 2008’s Great Panic. At the time he finished writing the book in May 2008, only $318 billion of write-downs had been acknowledged.

I was interested in the book because of its focus on the development of our financial institutions. If we want to understand the present and hope to have some insight to the future, then we need to understand the past.

Ferguson starts with the origin of money, “the crystallized relationship between debtor and creditor.” Effectively turning counting into wealth. Once you had money, then you needed banks and clearing houses to aggregate borrowing and lending.

Then the government got involved and introduced government bonds (largely to wage war and pay for the extravagant spending of the monarchies.) This lead to the securitization of streams of payments and highlighted the need for the regulation of securities markets.

Then the sixteenth century brought the rise of the joint stock companies and the market for the trading of these equity interests.

The rise of insurance funds and pension funds in the eighteenth century used the economies of scale and the laws of averages to provide financial protection.

The nineteenth century saw the start of option and future contracts. These eventually morphed into the more sophisticated derivatives seen as a central player the Great Panic.

The last piece was the emphasis on real estate ownership that became a central policy for the twentieth century. This policy, combined with more sophisticated derivatives, became the maelstrom of the 2008’s Great Panic. At the time, the creators and sellers of these products boasted of allocating risk to those “best able to bear it,” when the reality was more that it was being allocated to “those least able to understand it.”

He ends the book with a lengthy afterward called “The Descent of Money.” Those with the pitchforks and torches chasing the bankers will not like where Ferguson ends up. “[F]inancial markets are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us. It is not the fault of the mirror if it reflects our blemishes as clearly as our beauty.”

We need to remember that the ascent is not a straight line. It is full of rapid drops, rising bubbles and death-defying falls. “If stock market movements followed the ‘normal distribution’ …, an annual drop of 10% would happen only once every 500 years, whereas on the Dow Jones it has happened about once every five years.”

He spends some time looking at Long Term Capital Management and their collapse in the late 1990s. These quant traders used sophisticated models to identify correlations and uneven pricing. Ferguson focuses on a flaw in their data for their downfall. Their models worked on just five years of data. If they had gone back 11 years, they would have captured the 1987 stock market crash and seen the volatility and unseen correlations.

This fatal flaw sounds much like the flaw in the Gaussian copula function that failed in assessing the risks for mortgage backed securities. They used ten years worth of data in that formula. Unfortunately, the last real estate crash predated that data.

A failure to understand history lead to yet another fatal flaw.

Ferguson does a great job of shedding light on the origins of finance. If you have an interest in finance, then you need to understand the history of finance. The Ascent of Money is worth the time spent reading it.

Sources:

Check out The Checklist Manifesto

As a former transactional attorney, I was trained to use checklists. The transactions were too complicated to keep track of everything in my head. I also needed to communicate with the rest of the transaction team. In The Checklist Manifesto, Atul Gawande approaches checklists from the perspective of a surgeon.

I had put off reading this book because I’m already a fan of checklists. I didn’t need to be sold on their effectiveness. But I was still floored by the effectiveness Gawande reported in his studies.

In using a checklist for placing a central line, the ten-day infection rate was reduced from 11% to zero. He cites many other examples and studies that show that checklists can improve the performance of highly-trained workers.

“In a complex environment, experts are up against two main difficulties. The first is the fallibility of human memory and attention, especially when it comes to mundane, routine matters that are easily overlooked under the strain of more pressing events…. A further difficulty, just as insidious, is that people can lull themselves into skipping steps even when they remember them. In complex processes, after all, certain steps don’t always matter.”

I was particularly happy to see Gawande cite the correct story about Van Halen’s use of M&M’s as a compliance checklist tool. (See my prior post: Compliance Van Halen and Brown M&M’s.)

If you haven’t already read The Checklist Manifesto you should add it to your reading list.

Other’s thoughts on The Checklist Manifesto: