Monday, December 29, 2008

Pick-a-Pay Loans

Justin here. One of the worst financial inventions to come out of the housing boom has been the "Pick A Pay" loan.

Basically, the homeowner picks a payment they feel comfortable with, then they just pay it; it's as easy as that. You get a low payment, increasing house value, and big biceps (see picture) . . . well, not really.

What happens most of the time is that the homeowner is actually paying less than the interest! So the principal, instead of going down with every payment, actually GOES UP! You are essentially borrowing more money monthly. This was all well and good (though still not smart) while home values were rising. You can guess what happens when the house starts falling.

In May 2008, a San Francisco news station did a segment spotlighting the training videos that the company used (video here). It shows a scene where the homeowner asks the loan officer to clarify that he won't actually be paying down principal with this loan and the recommended response is "it's optional".

(Note: The company shown in the video was bought by another bank, which was bought by another bank, which then suspended the pick-a-pay program and then got bought by yet another bank.)

Friday, December 12, 2008

Recipe for Disaster: Keeping Up With The Joneses

Justin here. The single best (and by far most fascinating) explanation I've found of the current financial crisis is This American Life’s The Giant Pool of Money episode that aired on NPR. (You can listen to the 30 second promo here, the full story here, or read the transcript here.)

Mostly because excerpts like this:

“I wouldn't have loaned me the money. And nobody that I know would have loaned me the money. I know guys who are criminals who wouldn't loan me that and they break your knee-caps. I don’t know why the bank did it. I’m serious ... $540,000 to a person with bad credit.”

It made me realized that the sole cause of the crisis (literally ... the ... sole ... cause) is this: the need to keep up with the Joneses.

At every level of the chain: from countries needing to boost their investment returns so they sell out of treasuries and go to higher yielding alternatives, to homeowners taking out mortgages and second mortgages because their neighbors and friends are, to mortgage brokers creating riskier and riskier loans because their competition are, to banks buying those mortgages because the other banks are buying them.

The desire to “keep up” overtook the need to act rationally. I urge you to read or listen to it. Below are some more excerpts (emphasis mine) and my key takeaway:

"An interesting fact, here. Mike Garner's bank did not care how risky these mortgages were. This was the new era: banks didn't have to hold on to these mortgages for 30 years. They didn’t have to wait and see if they’d be paid back. Bank's like Garner's just owned them for a month or two and then sold them on to Wall Street. Wall Street would sell them on to the global pool of money."

And this:

"No income no asset loans. That's a liar's loan. We are telling you to lie to us. We're hoping you don't lie. Tell us what you make, tell us what you have in the bank, but we won't verify? We’re setting you up to lie. Something about that feels very wrong. It felt wrong way back when and I wish we had never done it. Unfortunately, what happened ... we did it because everyone else was doing it."

And lastly, this about the current and future landscape:

"The global pool of money is avoiding anything with even the slightest hint of risk and that affects everybody, no matter who you are. It's harder to borrow money to buy a house, or build a factory, or bring your country boldly into the 21st century."
My key takeaway is this: things are generally not as good or as bad as they seem.

Translation: if Mr. Market underpriced risk on the outset of this mess (ie - he bought risky securities he shouldn’t have), is it so crazy to think that Mr. Market could overprice risk today (ie – Mr. Market might not be buying some low risk securities that he should be buying?)

Tuesday, November 18, 2008

The House is Falling

Justin here. When my wife and I moved to Greensboro, we looked at 10 or 15 houses before making an offer on the cheapest one of the lot. After finding out there were two other offers, we paid the asking price ($129,900) for the 110 year old bungalow that had an abundance of charm and lead paint but skimped on the closet space and bathrooms.

Almost four years, one baby, 6 restored windows and a new paint job later, I'm still scurrying across the house at 6:00am to get to my closet, one that was made for a man with much narrower shoulders than me.

Anyway, when the stock market is moving like it is now, we've found it helpful to think about stock prices in terms of home prices. We've often asked clients, "What if you had a ticker running across your screen telling you what your home was worth? What if Jim Cramer screamed about your home price on TV? What if Barron's did a story about how overvalued your house was?" You'd start to believe everything they say.

Enter Zillow, a website that is supposed to track the daily price of your house. Zillow has been out a while, but I only got around to looking up my house in the last few months (below is the 5 year chart, that circle withe the $ is where I bought the house.)

And when I looked at it, do you want to know what I felt? Regret. Seriously. I regretted buying it for more than zillow said it was 'worth' ($115,000) and regretted not selling it in May 2008 when it was 'worth' $164,000.

But, you want to know what else I felt? Relief. Seriously. I was relieved to not have gotten the email, seen the quote, or heard the news that my house was 'worth' only $120,000 in February of 2007. Relieved that I didn't panic and sell out after it "when down" 15% from my purchase price. Relieved that I knew what my house was really worth and didn't sell for less.

And then I realized that looking at Zillow is no different than reading a stock analyst report, listening to a talking head, or checking your stock portfolio daily. The analysts and talking heads might sound slick and have a clean looking chart, but chances are they don't know the real value. And your stock portfolio today is only a snapshot of what someone will pay you right now, not a true measure of what is is worth. We think the prices we'll see in 6, 12, 18, 24, heck even if it takes 36 months (which is still long before the bulk of us will need to use our investments) will tell a much different story that the 'quotes' we're getting today.

Try telling the seller of my house that it was only worth $115,000 the day before he sold it - that's what Zillow said it was worth. I think he'd argue that my bank's check to him for $129,900 is a lot more accurate than Zillow's "quote." For him, his house ended up being worth about 13% more than Zillow quoted. Would it surprise you if we had the same thing going on in the stock market today, but on a much larger scale?

Ben Graham, the father of value investing, Mr. Market, and Warren Buffett's investing career, once said:

"The investor who permits himself to be stampeded or unduly worried by unjustified market declines . . . would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment."
Words worth remembering, especially now.

Question: What Are You Doing?

Justin here. American Public Media's Marketplace has been asking different people that question ("what are you doing?") since the start of this financial crisis. Today, they asked one of our favorite people: Dan Ariely

In this three minute 'interview' (listen below) Dan says that he has decided to not look at his investment statements. His motivation is more for peace of mind than anything else. Dan found that when he looked at his dwindling account it put him in a bad mood. In other words, worrying about it didn't add a single day to his life (those are my words, not his . . . well, not really even mine.)

We'd agree with Dan's advice . . . but with a caveat. We think two of the keys to successful investing are 1) finding a person (or process) that you trust and 2) sticking to them (or it.)

The "leg-work" is done in step 1 and "stomach-work" is done in step 2.

So, if you've done your leg-work in step 1 (picking a sound, rational, time-tested person or process), then the stomach-work in step 2 should be easier (not easy, just easier).

However, if you've been willy nilly in step 1 (following the talking heads, the cocktail party stock picks, or the advisor without a process), then step 2, well . . . you better keep that motion sickness bag next to your letter opener.

Thursday, November 13, 2008

Class is in Session

I stumbled upon some some great explanations of recent events from martketplace.org (as in "Hi, I'm Kai Ryssdal and you're listening to Marketplace on NPR.)

They have a number of videos by Senior Editor Paddy Hirsch. The stick-figure-on-white-board lessons are great primers on what is going on. In the short (5 minute) videos he touches all sorts of terms acronyms you hear on a daily basis but might be a little (or a lot) fuzzy on such as: CDOs, naked shorting, CDSs, The TARP, margin calls. You can find them all here.

I think the most enlightening one is on CDOs (below):


Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.

Tuesday, November 11, 2008

No good news?

I was listening to Squawk Box while shaving this morning. I know better than to listen to CNBC while shaving, or anything, for that matter. Driving, shaving, or operating machinery while listening to CNBC is, in my opinion, about as dangerous as gets, dangerous as texting, reading email or blabbing away on your PDA while driving. I have been stupid enough to shave and listen to Squawk Box before; I've got a styptic pencil, too.
This morning was sort of different.  After Ned Riley, of Riley Asset Management, said a few wise words (he’s as baffled as anybody is over why investors, who couldn’t get enough of Stock A at 21 times earnings yielding 2.5%% a year ago wouldn’t want to buy shares of Stock A by the truckloads, now that it’s down 50%, at 11 times earnings and yielding 6%).  After Ned wrapped up his talk, Joe, Becky, and Carl (above) said they had scoured everywhere this morning, (everywhere to them was the Wall Street Journal, New York Times, USA Today, and Investors’ Business Daily) and couldn’t find anything good, anywhere. 

Done with shaving and all the Squawk Box I could stand, I finished dressing, took the dogs out, and headed to my 7:00 am meeting.  Justin and I were first on the agenda at a meeting of the board of directors of Gate City Rotary Club, to which I belong.  To build up an endowment to provide capital to reinvest in the people, projects, and values we hold dear, we formed our own 501(c)(3) corporation.   Although we've been buying investments for a little less than a year (a non-meaningful span, performance-wise), the board wanted a progress update.  And so with the help of the Investment Committee, we did our best to explain why what we owned was in alignment with our value philosophy, and to say that our relative outperformance, in this period way to brief to be meaningful, was not due to any brilliance on our part, but to our slow to act style, plus a healthy dose of good luck.  And while many investors, I am sure, watched and worried through the remainder of Squawk Box, wondering when this unrelenting, ravenous bear market would find a bottom, 11 Rotarians committed to service above self reflected on what 80 years of wealth creation looked like through all the wars, invasions, recessions, crises, and panics. One steps back, takes a deep breath, and feels a sense of gratitude upon realizing a value approach is inherently sound and that a long-term investment policy for maintaining and growing wealth will remain long after we're all gone. And despite Joe, Becky and Carl saying they couldn't find anything good this morning, we knew this was good.

When I got in to work, I overheard Anne saying she too had heard Joe, Becky and Carl on Squawk Box this morning report how they couldn’t find anything good anywhere. 

And there it was, the first thing I saw, and in honor of Veteran’s Day, too, Service Dogs Give Hope, and Help to Wounded Veterans.  Be sure to check out the slideshow.

Gratitude, the healthiest of human emotions, seems to have a way of finding whatever is good.   Maybe that’s why good news is so scarce.  If you know a Veteran, why don't you call or write them this week and tell them how grateful you are for them, and that you live in a free nation. And the next time someone says they can't find anything good anywhere, don't believe them.

Friday, November 07, 2008

. . . so, what are we doing?

Justin here. This is from our most recent market commentary, (here):

One of our clients called, saying he had a question: “I’m just curious as to what you are doing to insure that I won’t lose a lifetime of savings?” . . . I’m going to take a cue from my old high school algebra teacher and assume that if someone in the class asks a question, chances are that other folks in the room are wondering the same thing.
In the commentary, we include an excerpt from Warren Buffett's 1987 letter to shareholders, which features his explanation of the way he thinks about the stock market - what he calls Mr. Market.

Buffet's words are so clear and helpful that is should be required reading before anyone opens a brokerage account (maybe I'll include that on my "suggestions box" form for President Elect Obama.)


As a side note, you can find all of our past commentaries here. If you'd like to be added to our quarterly mailing list, send me your mailing address and we'll be happy to send it to you the old fashioned way.

Friday, October 31, 2008

Inflation Hits the $1. 0 Cleaners

Justin here. I have breakfast every Thursday with some guys over at Biscuitville. Across the street there is this Dry Cleaners shop that obviously didn't think through all the implications of inflation (pardon the poor picture; I snapped it with my phone.)

Not only is the new name on the sign $1.75 Cleaners, (note much bigger "7") but you can see on the window that they call themselves $1. 0 Cleaners, twice!

There is some equation in economics with a cute chart that dictates when you decide to raise prices (I think it's when Marginal Return equals Marginal Cost or MR=MC) . . . I think it should really read MR = MC + new signage.

Friday, October 17, 2008

Warren Buffett Op-Ed: Buy American. I Am.

Justin here.

Warren Buffett wrote a great Op-Ed piece for the New York Times this morning. Well worth your next five minutes.

Buy American. I Am.

Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Tuesday, October 14, 2008

The Decabox

Justin here.

We don't call market bottoms. It really isn't in our skill set and we wouldn't know where to start. We try to stick to buying cheap companies that we think will get less cheap.

But . . . if I was required by law to call the bottom, it would be when CNBC unveiled the decabox (left).

10 talking heads + 2 anchors + 3 scrolling tickers + 1 "is your money safe" logo = possible market bottom.

It looks like they unveiled it October 10th, see if you can find that day on this chart. But remember, we don't call market bottoms . . . unless required by law.

Monday, October 13, 2008

FIX IT!

Justin here. We still have a long way to go, but Mr. Market was ecstatic today for some reason. Maybe someone took SNL's advice and decided to "fix it!" . . . or then again, it was probably just supply and demand. Speaking of Mr. Market, you can find our Market Commentaries here; the "poor fellow" plays a lead role in our newest one.

Thursday, October 09, 2008

2:30 pm on April 28, 2004, did you know where your SEC Commissioners were?

Stephen Labaton, in an article he published October 3 in the New York Times, provides a close up look into one of the most arcane moments of 2008, so far.  Labaton explains how an obscure Securities and Exchange Commission decision led to an out of control financial crisis.  Read it, and you'll see why Senator John S. McCain, on the day he was quoted as saying, "If I were President of the United States, I would fire Christopher Cox today.  (That's Mr. Cox, on the left, chairman of the Securities and Exchange Commission, and Roel C. Campos, on the right, at a House hearing in 2007. Mr. Campos was on the commission in 2004 when a decision was made to change the net capital rule for big investment banks.  Mr. Cox appears to be listening out of both ears.)  As recently as March 11, 2008, Chairman Cox has said, "We have a good deal of comfort about the capital cushions at these firms at the moment.”  How do you like that?  I've read Labaton's article, silently.  I've read it, out loud.  I've read it to anyone who will listen.   And I ask the same question every time: how could Mr. Cox have been so wrong?  Give it a read

The editors of the Times, with whom I disagree often, published a 4 minute slideshow of the April 28, 2004 meeting (pay close attention to Item #2) between SEC Commissioners and the heads of JP Morgan, Lehman Brothers, Merrill Lynch, Bear Stearns, and Goldman Sachs, in a basement conference room at the office of the SEC.   Reading the article and viewing the audio slideshow won't lower your blood pressure, but it will provide valuable insights that the talking heads haven't. 

I'm interested in what you think about this.  I invite you to use the "comments section" found beneath this post.

Tuesday, October 07, 2008

Days till we reach zero

On more down days than I'd like to admit, my team mates have heard me say, "At this rate, we'll be down to zero in no time."  Now they've started saying it before I can get the very words out of my mouth.  It's "tap code" at JSCO for a bit of gallows humor that our team uses to puts things back in perspective, to put the train back on the track, to put the cart behind the horse.  You get the point.  As any fool who can push a stick in the dirt can tell you, it's not going to go to zero, even though we sometimes think it will.
Stock markets are behaving as if all the indexes will go to zero in less than a month, maybe sooner. No one knows the future, but I for one have a hard time believing that this very real, very serious financial crisis will play out by going to zero. The Dow Jones Industrial Average, a proxy for the market, has in fact experienced record of volatility and panic selling this high only three times since December 31, 1946, the end of World War II:
  • October 16, 2002, when the Dow Jones was 8,036.03
  • November 9, 1987, when the Dow Jones was 1,900.20
  • November 5, 1974, when the Dow Jones was 674.75

The summers of 1962, when the Dow Jones was 572, and 1970, when the Dow Jones was 874, experienced high but slightly lesser volatility and panic selling.   The chart below shows the Dow Jones Industrials and our fear and volatility indexes from December 31, 1946 to the present.  Click the chart to full size. 
No one knows where and when all this panic will land.  Some wonder if it ever will.  It will.  History records that extreme volatility and panic selling do not last indefinately.  At some point, the invisible hand of Adam Smith kicks in and eliminates whatever shortage exists.  Some would say his invisible hand has already been working off the shortage of buyers.  Extreme volatility and panic selling provide wonderful opportunities to buy shares of excellent businesses at bargain prices.  Today's headlines are rarely the same as what history's judgement is going to be. 

If you haven't already seen it, study the wonderfully perceptive presentation by Weston Wellington of Dimensional Fund Advisors that Justin described in his post of October 2, part of which is below:
  • "Earlier this week, I came across a presentation by Weston Wellington with Dimensional Fund Advisors, called "Is It Different This Time?" Wellington reviews our nation's past and, in particular, the media's reaction during those time. He does a great job of bringing some perspective to a volatile time.  (Justin said viewing it was guaranteed to lower blood pressure 20 points for every viewing.  If current levels of volatility and panic don't ease up soon, I'll need to view it several times a day.  I guess there could be lot worse things than reinforcing one's long-term perspective. 
This is not a recommendation to buy or sell any security, market, or an endorsement of any investment philosophy, firm, or process.  This is just a call to sit down, take a breath, and study history.

Friday, October 03, 2008

If we did more of the latter, I think we could get out of this

Friday morning's broadcast about the Wachovia Takeover included two pearls of wisdom; I heard them as the interview ended and think it's safe to assume Marketplace listeners (and Renita Jablonski) might not have heard them.  The interview is only 3 minutes long and well worth hearing/reading.  Click the player's "play" button to play; hit "pause" button at 3:03 marker to stop. 



Bonus: Chris Whalen notices tremendous people at Wachovia.

TEXT OF INTERVIEW

Renita Jablonski: Wells Fargo is buying Wachovia for just over $15 billion. That takes Citigroup and the Federal Deposit Insurance Corporation out of the picture. Citi was only looking to grab Wachovia's banking operations. The FDIC said it would step in to pick up any loan losses. Wells Fargo says this morning it will acquire all of Wachovia and that it doesn't need the government's help.

We're joined now by Chris Whalen, managing director of Institutional Risk Analytics. Chris, you've been watching these developments for awhile. What do you think of Wachovia now getting together with Wells?

Chris Whalen: I think they're a much better fit for one another. I also was really a little concerned about Citi, because you know, they have the most subprime consumer focus in their business model -- Citi's loss rate on loans, for example, tends to be twice the other large bank peers'. So I am not keen on seeing Citi buy anything right now.

Jablonski: And we should mention that Wells Fargo did play a little game of hard to get here because it had initially wooed Wachovia with a $20 billion figure, kind of pulled out of that -- that's when the Citigroup / FDIC thing started and then came back. What brought Wells back to this?

Whalen: Well I think the Wells Fargo folks ran the numbers and they decided that they needed to make a bid. If you look at Wells Fargo's perspective, they have a way of getting into the northeast, into the southeast, and that's a beautiful thing for them, cause they're now a national franchise. And once they deal with the asset quality problems, they have tremendous people at Wachovia that they can integrate into the Wells Fargo. And I think they couldn't say no -- they had to get in the game. And that's great news for all of us.

Jablonski: How important is the timing of this deal, coming down on this day of the House bailout vote? I guess this raises the question, is government intervention truly necessary right now?

Whalen: Well, not this intervention. I've been opposed to the House plan since day one, and the reason is we're fighting a battle that we should have fought six months ago in terms of liquidity, the accounting rules that started this mess. And really, the big picture here is we're going through a deflation. We're having asset values fall, a lack of a bid for many assets. We have to fix that and make leverage our friend again.

Jablonski: But I have to ask you this, I mean it seems the perception at least is that Wall Street is so much counting on this bailout at this point.

Whalen: Well, don't worry about Wall Street. Believe me, Wall Street will be there tomorrow. But we've got to stop looking at short-term market indicators as an indication of reality. I think we spend far too much time looking at the television set and far too little time talking to one another. And if we did more of the latter, I think we could get out of this.

Jablonski: Well, it was good talking to you. [read: Me give up watching TV network news and opinion shows?  No way.]

Whalen: Thank you.

Jablonski: Chris Whalen of Institutional Risk Analytics.

Thursday, October 02, 2008

Is It Different This Time?

Justin here. The late Sir John Templeton (pictured here, right, 30 years ago with Jonathan) is known for saying that the four most expensive words in the investing language are "this time it's different."

[Jonathan was fortunate enough to work for Sir John. You can read more about their relationship in our last commentary, here]

Earlier this week, I came across a presentation by Weston Wellington with Dimensional Fund Advisors, called "Is It Different This Time?" He reviews our nation's past and, in particular, the media's reaction during those time. He does a great job of bringing some perspective to a volatile time.

So what's in it for you? It is guaranteed to lower your blood pressure 20 points for every viewing.

It's well worth your next 15 minutes (or if you're really pressed, skip ahead to the "TIME 1970" slide and watch from there.)

The long and short is this:  Life is rarely as bad (or as good) as it seems. Try your best to be patient, calm and rational.

Wednesday, October 01, 2008

"Well, I'm just a bill . . .

. . . just a lonely old bill, and I'm sittin' here on capital hill. But now I'm off to the Senate where they sit and debate: adding a surtax to millionaires, an extension to unemployment pay, tax breaks for businesses and renewable energy, increasing FDIC insurance and adding a $1,000 tax credit for less affluent homeowners."

Justin here. I know that doesn't quite carry the same tune as the original Schoolhouse Rocks song, but this is a lot more complex than just "school buses must stop at railroad crossings" (no offense Bill).

Saturday, September 27, 2008

The Doctor is In

Ron Lieber knows value when he sees it.  Not intrinsic value, but examination value.  In his feature article in today's New York Times, he says good financial advisors have the examination skills of an ace psychologist.  I've heard financial advisors called lots of things, but I haven't often heard them called keen observers of minds and money.  Lieber rounded up a bunch of planners and advisors who got their starts as psychologists or studied the field as graduate students. 
Lest you think I fall into either of those categories let me assure you neither I nor anyone else in my firm started as a psychologist nor studied psychology in graduate school.  We have, however, spent hundreds of hours with psychologists, some spent on their couches trying to understand our own quirks and biases, but hundreds more spent with clients, psychologists, and psychiastrists on our couches, though fortunately not all at the same time.  Meir Statman taught us how to "make science our ally".  From Dan Ariely, we've discovered how hidden forces direct our minds in the making of decisions that are predictably irrationalCFA Institute provides us with a digital library filled with presentations on economics, finance, and behavioral psychology, explained by world-class experts in their fields.
We take our calling seriously and have asked more than one client to encounter professional therapy, and our reading room has served as a makeshift emergency room for more than one financial intervention, the most memorable of which included: the client couple, her therapist, his therapist, their accountant, our management team, and their small group.  (I'm just glad the fire department didn't pop in that day, checking expiration dates on fire extinguishers and rounding up frayed extension cords, if they had, they would have had to join up with our recovery group (hey what's a few more people?), never mind leaving a fire truck parked on the curb with its flashers on.  We look back on that day with fondness and gratitude; each participant shone, contributed magnificently, and on that day, the hero (the husband) and the heroine (the wife) put a stake in the ground, changed the river course for good, and re-wrote the history books of their lives.    

Lieber's feature is worth the read.  He shows real advisors in a light neither the newspapers nor the talking heads know anything about, maybe because it doesn't sell advertisements.  Growing money is a process that doesn't happen overnight, it takes years and decades, not days.  Check the article out here.

Most of you reading this post can take comfort in the reality that time on your side is the best insurance policy against volatility and permanent loss of capital. Some of you can't, maybe time isn't on you side.  No psychology sheepskins here, just authentic, wise, and caring people, alumni of the bear markets, the emergency room, and the trenches of real life.

If anybody knows of any other articles about financial advisors serving as financial therapists, please leave leave a comment or drop us a line. 

Friday, September 26, 2008

Economics Haikus

Justin here. One of the blogs I have set up in my Google Reader is Freakonomics at the New York Times. They follow all the cardinal rules of blogging: short, funny, plenty of pictures, frequent but not too frequent posts.

A few weeks ago they asked readers to submit entries into an economic haiku contest (9th grade english refresher: poem with 3 lines each containing 5, 7, and 5 syllables in each respective line.) They had over 300 entries, but see the final six here.

I submitted the following haiku in honor of Jon's (his name at work) aka my Dad's (name on the weekend) 58th birthday today:

My Dad's Lesson to Me:
Speed, Price, Quality
You can get one, maybe two
But never all three.
— Posted by Justin

If my poem doesn't make sense, don't feel too bad; it's only because "Speed Price or Quality" wasn't said to you at least once per day as a kid. Like sitting at a slow gas pump because they are selling it for $0.05 and all the pumps are being used. Or when a fast (yet expensive) car would zoom by us on the road. Or when our pizza (fast and inexpensive) was delivered only partially cooked.

I carried on the tradition. Millie has always shopped at Wal-Mart, and when she comes home after waiting in the checkout line for 45 minutes, she says "Speed, Price or Quality" through her teeth. That was, of course, until the quality started to go south, and she decided it wasn't worth it to just get "Price". So she started shopping at Harris Teeter where she gained speed and quality, yet gave up price. And then she started clipping coupons, thus giving up speed and gaining back some price . . . and on and on the endless pursuit of all three.

Fascinating how that works.

The closest product I've found that has all three is Pastabilities, a restaurant in Greensboro with the best bread and pasta in town, fast service, wonderful ambiance, and a dinner for two with tip is under $20. Of course, usually when you find all three, prices go up, so get it while you can!

Thursday, September 25, 2008

Presidential Address

Justin here. I tuned in last night to watch the President address the nation about our financial crisis. I was impressed with the way he laid out the problem and its causes, clarified the difference between a "bailout" and an "investment", and explored the consequences of not doing anything.

He didn't say anything funny as in the past (like "Americans are working hard to put food on their families") but it was a great address none the less.

For anyone wanting a recap, it's well worth your next 12 minutes. Take caution though: The "If We Don't Do This" Scenario isn't for the faint of heart!

--Update #1--
It looks like we've done it after all. The video is still worth it

--Update #2--
. . . or maybe we haven't done it. (And note that the link under "Update #1" used to take you to an article that said "negotiations resolved; deal is on the way" or something like that.)

Thursday, September 18, 2008

Enemies in the financial markets are fierce warriors

Jonathan here. Having just talked with his friend in Manhattan, Dick Barron, business reporter at the Greensboro-News Record, writes, in his BizBytes newsletter (click here, follow instructions to subscribe to BizBytes)

  • "As one of my friends in Manhattan wrote today on [his] Twitter [page]: "Just walked to Wall Street for a meeting and back. The mood on the street is weird. Everyone looks weak, frightened and angry, like on 9/11" [emphasis mine].
Sun Tzu wrote The Art of War in the 6th century BC. His military strategies are still being taught.
  • “Draw them in with the prospect of gain. Take them by confusion. Use anger to throw them into disarray."
Understanding Sun Tzu's brilliant strategies puts the unprecedented economic events and (investors' unprecedented reactions) into perspective.
  • Investors have been drawn in with the prospect of gain.
  • Investors have been taken by confusion.
  • Investors have been thrown into disarray.

You need allies in your war. When the News-Record called us during Monday's 504 point drop in the Dow, we said investors needed to "take a deep breath," and we explained why we didn't need to "stay glued to the TV for the latest headline." Click here to read the article.

Monday, September 15, 2008

Predictably Irrational Group on LinkedIn

I've been fascinated with LinkedIn since April, when an Internet search  for my friend Mark Tosczak directed my web browser to his public profile on LinkedIn.  (LinkedIn's reference to Mark appeared first in Google's search results page
In July, after learning Linkedin had a dozen or so members (out of more than 20 million members) with keywords "Dan Ariely" or "Predictable Irrational", I launched the Predictably Irrational group on LinkedIn.  LinkedIn recently enhanced Group functionality by providing our own page for group discussions, etc. Still in its infancy, I anticipate our discussions will generate unusual and stimulating insights.  If you're interested in knowing more, click here.
Our group is diverse; vocationally, we represent, among other things:
Consultant in the U.K.
Quantitative analyst with Bank of America
Consultant with United Airlines
Director of Product Development with LinkedIn
Retired CMDR U.S. Navy
Another quant with Bank of America
Sales effectiveness coach in Paris
Resident at the Center for Future Banking
Professor with Duke University, the author
Scientist at LinkedIn
Health and Disability Speaker
Director of Security and Special Ops
Software Architect with Bluestreak
Principal Product Manager with eBay
Senior Training Specialist for USDA
Lead Business Analyst with Ocwen

Tuesday, August 26, 2008

The New Wonder Drug

Justin here. What if I told you there was a drug that was written up in the New England Journal of Medicine in 2006 that saved 1,500 lives and $175 million in just 18 months in the ICU's of five hospitals in Detroit (that's 200 lives and $23 million per hospital per year)?

. . . and that the drug didn't have to be developed by big pharma or tested by the FDA or even have its ads run during sporting events (you know, the ads where a bunch of women are sitting around at a restaurant explaining, as happily as they can, that "headache, diarrhea, nausea, and back pain are all common side effects" of the new drug they're on)?

. . . and that the total (one time) cost to provide this drug for all ICU units in the United States was only $2 million but that it was only being used in Michigan, New Jersey, and Rhode Island?

. . . and that this wasn't even a "drug" at all . . . that it was a checklist.

There was a great article published in The New Yorker last December that I have summarized and highlighted below. You can find the complete version here.

This article is fascinating on so many fronts: it makes you think about your job and how it could be improved by the use of lists, it makes you think about the set-up of American medicine's dependence on drugs and sales, and it makes you consider the role of 'self' and your ability to be humble enough to realize that you don't know everything and/or can't store every bit of useful information in your head.

Enjoy . . . and sorry for the long article, but I think it's worth it.

The Checklist

If something so simple can transform intensive care, what else can it do?

by Atul Gawande December 10, 2007

If a new drug were as effective at saving lives as Peter Pronovost’s checklist, there would be a nationwide marketing campaign urging doctors to use it.

[ . . . ]

On any given day in the United States, some ninety thousand people are in intensive care. Over a year, an estimated five million Americans will be, and over a normal lifetime nearly all of us will come to know the glassed bay of an I.C.U. from the inside. Wide swaths of medicine now depend on the lifesupport systems that I.C.U.s provide: care for premature infants; victims of trauma, strokes, and heart attacks; patients who have had surgery on their brain, heart, lungs, or major blood vessels. Critical care has become an increasingly large portion of what hospitals do. Fifty years ago, I.C.U.s barely existed. Today, in my hospital, a hundred and fifty-five of our almost seven hundred patients are, as I write this, in intensive care. The average stay of an I.C.U. patient is four days, and the survival rate is eighty-six per cent. Going into an I.C.U., being put on a mechanical ventilator, having tubes and wires run into and out of you, is not a sentence of death. But the days will be the most precarious of your life.

A decade ago, Israeli scientists published a study in which engineers observed patient care in I.C.U.s for twenty-four-hour stretches. They found that the average patient required a hundred and seventy-eight individual actions per day, ranging from administering a drug to suctioning the lungs, and every one of them posed risks. Remarkably, the nurses and doctors were observed to make an error in just one per cent of these actions—but that still amounted to an average of two errors a day with every patient. Intensive care succeeds only when we hold the odds of doing harm low enough for the odds of doing good to prevail. This is hard. There are dangers simply in lying unconscious in bed for a few days. Muscles atrophy. Bones lose mass. Pressure ulcers form. Veins begin to clot off. You have to stretch and exercise patients’ flaccid limbs daily to avoid contractures, give subcutaneous injections of blood thinners at least twice a day, turn patients in bed every few hours, bathe them and change their sheets without knocking out a tube or a line, brush their teeth twice a day to avoid pneumonia from bacterial buildup in their mouths. Add a ventilator, dialysis, and open wounds to care for, and the difficulties only accumulate.

[ . . . ]

This is the reality of intensive care: at any point, we are as apt to harm as we are to heal. Line infections are so common that they are considered a routine complication. I.C.U.s put five million lines into patients each year, and national statistics show that, after ten days, four per cent of those lines become infected. Line infections occur in eighty thousand people a year in the United States, and are fatal between five and twenty-eight per cent of the time, depending on how sick one is at the start. Those who survive line infections spend on average a week longer in intensive care. And this is just one of many risks. After ten days with a urinary catheter, four per cent of American I.C.U. patients develop a bladder infection. After ten days on a ventilator, six per cent develop bacterial pneumonia, resulting in death forty to fifty-five per cent of the time. All in all, about half of I.C.U. patients end up experiencing a serious complication, and, once a complication occurs, the chances of survival drop sharply.

[ . . . ]

Here, then, is the puzzle of I.C.U. care: you have a desperately sick patient, and in order to have a chance of saving him you have to make sure that a hundred and seventy-eight daily tasks are done right—despite some monitor’s alarm going off for God knows what reason, despite the patient in the next bed crashing, despite a nurse poking his head around the curtain to ask whether someone could help “get this lady’s chest open.” So how do you actually manage all this complexity? The solution that the medical profession has favored is specialization.

[ … ]

We now live in the era of the super-specialist—of clinicians who have taken the time to practice at one narrow thing until they can do it better than anyone who hasn’t. Super-specialists have two advantages over ordinary specialists: greater knowledge of the details that matter and an ability to handle the complexities of the job. There are degrees of complexity, though, and intensive-care medicine has grown so far beyond ordinary complexity that avoiding daily mistakes is proving impossible even for our super-specialists. The I.C.U., with its spectacular successes and frequent failures, therefore poses a distinctive challenge: what do you do when expertise is not enough?

On October 30, 1935, at Wright Air Field in Dayton, Ohio, the U.S. Army Air Corps held a flight competition for airplane manufacturers vying to build its next-generation long-range bomber. It wasn’t supposed to be much of a competition. In early evaluations, the Boeing Corporation’s gleaming aluminum-alloy Model 299 had trounced the designs of Martin and Douglas. Boeing’s plane could carry five times as many bombs as the Army had requested; it could fly faster than previous bombers, and almost twice as far. A Seattle newspaperman who had glimpsed the plane called it the “flying fortress,” and the name stuck. The flight “competition,” according to the military historian Phillip Meilinger, was regarded as a mere formality. The Army planned to order at least sixty-five of the aircraft.

A small crowd of Army brass and manufacturing executives watched as the Model 299 test plane taxied onto the runway. It was sleek and impressive, with a hundred-and-three-foot wingspan and four engines jutting out from the wings, rather than the usual two. The plane roared down the tarmac, lifted off smoothly, and climbed sharply to three hundred feet. Then it stalled, turned on one wing, and crashed in a fiery explosion. Two of the five crew members died, including the pilot, Major Ployer P. Hill.

An investigation revealed that nothing mechanical had gone wrong. The crash had been due to “pilot error,” the report said. Substantially more complex than previous aircraft, the new plane required the pilot to attend to the four engines, a retractable landing gear, new wing flaps, electric trim tabs that needed adjustment to maintain control at different airspeeds, and constant-speed propellers whose pitch had to be regulated with hydraulic controls, among other features. While doing all this, Hill had forgotten to release a new locking mechanism on the elevator and rudder controls. The Boeing model was deemed, as a newspaper put it, “too much airplane for one man to fly.” The Army Air Corps declared Douglas’s smaller design the winner. Boeing nearly went bankrupt.

Still, the Army purchased a few aircraft from Boeing as test planes, and some insiders remained convinced that the aircraft was flyable. So a group of test pilots got together and considered what to do.

They could have required Model 299 pilots to undergo more training. But it was hard to imagine having more experience and expertise than Major Hill, who had been the U.S. Army Air Corps’ chief of flight testing. Instead, they came up with an ingeniously simple approach: they created a pilot’s checklist, with step-by-step checks for takeoff, flight, landing, and taxiing. Its mere existence indicated how far aeronautics had advanced. In the early years of flight, getting an aircraft into the air might have been nerve-racking, but it was hardly complex. Using a checklist for takeoff would no more have occurred to a pilot than to a driver backing a car out of the garage. But this new plane was too complicated to be left to the memory of any pilot, however expert.

With the checklist in hand, the pilots went on to fly the Model 299 a total of 1.8 million miles without one accident. The Army ultimately ordered almost thirteen thousand of the aircraft, which it dubbed the B-17. And, because flying the behemoth was now possible, the Army gained a decisive air advantage in the Second World War which enabled its devastating bombing campaign across Nazi Germany.

Medicine today has entered its B-17 phase. Substantial parts of what hospitals do—most notably, intensive care—are now too complex for clinicians to carry them out reliably from memory alone. I.C.U. life support has become too much medicine for one person to fly.

Yet it’s far from obvious that something as simple as a checklist could be of much help in medical care. Sick people are phenomenally more various than airplanes. A study of forty-one thousand trauma patients—just trauma patients—found that they had 1,224 different injury-related diagnoses in 32,261 unique combinations for teams to attend to. That’s like having 32,261 kinds of airplane to land. Mapping out the proper steps for each is not possible, and physicians have been skeptical that a piece of paper with a bunch of little boxes would improve matters much.

In 2001, though, a critical-care specialist at Johns Hopkins Hospital named Peter Pronovost decided to give it a try. He didn’t attempt to make the checklist cover everything; he designed it to tackle just one problem, the one that nearly killed Anthony DeFilippo: line infections. On a sheet of plain paper, he plotted out the steps to take in order to avoid infections when putting a line in. Doctors are supposed to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. Check, check, check, check, check. These steps are no-brainers; they have been known and taught for years. So it seemed silly to make a checklist just for them. Still, Pronovost asked the nurses in his I.C.U. to observe the doctors for a month as they put lines into patients, and record how often they completed each step. In more than a third of patients, they skipped at least one.

The next month, he and his team persuaded the hospital administration to authorize nurses to stop doctors if they saw them skipping a step on the checklist; nurses were also to ask them each day whether any lines ought to be removed, so as not to leave them in longer than necessary. This was revolutionary. Nurses have always had their ways of nudging a doctor into doing the right thing, ranging from the gentle reminder (“Um, did you forget to put on your mask, doctor?”) to more forceful methods (I’ve had a nurse bodycheck me when she thought I hadn’t put enough drapes on a patient). But many nurses aren’t sure whether this is their place, or whether a given step is worth a confrontation. (Does it really matter whether a patient’s legs are draped for a line going into the chest?) The new rule made it clear: if doctors didn’t follow every step on the checklist, the nurses would have backup from the administration to intervene.

Pronovost and his colleagues monitored what happened for a year afterward. The results were so dramatic that they weren’t sure whether to believe them: the ten-day line-infection rate went from eleven per cent to zero. So they followed patients for fifteen more months. Only two line infections occurred during the entire period. They calculated that, in this one hospital, the checklist had prevented forty-three infections and eight deaths, and saved two million dollars in costs.

Pronovost recruited some more colleagues, and they made some more checklists. One aimed to insure that nurses observe patients for pain at least once every four hours and provide timely pain medication. This reduced the likelihood of a patient’s experiencing untreated pain from forty-one per cent to three per cent. They tested a checklist for patients on mechanical ventilation, making sure that, for instance, the head of each patient’s bed was propped up at least thirty degrees so that oral secretions couldn’t go into the windpipe, and antacid medication was given to prevent stomach ulcers. The proportion of patients who didn’t receive the recommended care dropped from seventy per cent to four per cent; the occurrence of pneumonias fell by a quarter; and twenty-one fewer patients died than in the previous year. The researchers found that simply having the doctors and nurses in the I.C.U. make their own checklists for what they thought should be done each day improved the consistency of care to the point that, within a few weeks, the average length of patient stay in intensive care dropped by half.

The checklists provided two main benefits, Pronovost observed. First, they helped with memory recall, especially with mundane matters that are easily overlooked in patients undergoing more drastic events. (When you’re worrying about what treatment to give a woman who won’t stop seizing, it’s hard to remember to make sure that the head of her bed is in the right position.) A second effect was to make explicit the minimum, expected steps in complex processes. Pronovost was surprised to discover how often even experienced personnel failed to grasp the importance of certain precautions. In a survey of I.C.U. staff taken before introducing the ventilator checklists, he found that half hadn’t realized that there was evidence strongly supporting giving ventilated patients antacid medication. Checklists established a higher standard of baseline performance.

These are, of course, ridiculously primitive insights. Pronovost is routinely described by colleagues as “brilliant,” “inspiring,” a “genius.” He has an M.D. and a Ph.D. in public health from Johns Hopkins, and is trained in emergency medicine, anesthesiology, and critical-care medicine. But, really, does it take all that to figure out what house movers, wedding planners, and tax accountants figured out ages ago?

[ . . . ]

After the checklist results, the idea Pronovost truly believed in was that checklists could save enormous numbers of lives. He took his findings on the road, showing his checklists to doctors, nurses, insurers, employers—anyone who would listen. He spoke in an average of seven cities a month while continuing to work full time in Johns Hopkins’s I.C.U.s. But this time he found few takers.

There were various reasons. Some physicians were offended by the suggestion that they needed checklists. Others had legitimate doubts about Pronovost’s evidence. So far, he’d shown only that checklists worked in one hospital, Johns Hopkins, where the I.C.U.s have money, plenty of staff, and Peter Pronovost walking the hallways to make sure that the checklists are being used properly. How about in the real world—where I.C.U. nurses and doctors are in short supply, pressed for time, overwhelmed with patients, and hardly receptive to the idea of filling out yet another piece of paper?

In 2003, however, the Michigan Health and Hospital Association asked Pronovost to try out three of his checklists in Michigan’s I.C.U.s. It would be a huge undertaking. Not only would he have to get the state’s hospitals to use the checklists; he would also have to measure whether doing so made a genuine difference. But at last Pronovost had a chance to establish whether his checklist idea really worked.

This past summer, I visited Sinai-Grace Hospital, in inner-city Detroit, and saw what Pronovost was up against. Occupying a campus of red brick buildings amid abandoned houses, check-cashing stores, and wig shops on the city’s West Side, just south of 8 Mile Road, Sinai-Grace is a classic urban hospital. It has eight hundred physicians, seven hundred nurses, and two thousand other medical personnel to care for a population with the lowest median income of any city in the country. More than a quarter of a million residents are uninsured; three hundred thousand are on state assistance. That has meant chronic financial problems. Sinai-Grace is not the most cash-strapped hospital in the city—that would be Detroit Receiving Hospital, where a fifth of the patients have no means of payment. But between 2000 and 2003 Sinai-Grace and eight other Detroit hospitals were forced to cut a third of their staff, and the state had to come forward with a fifty-million-dollar bailout to avert their bankruptcy.

Sinai-Grace has five I.C.U.s for adult patients and one for infants. Hassan Makki, the director of intensive care, told me what it was like there in 2004, when Pronovost and the hospital association started a series of mailings and conference calls with hospitals to introduce checklists for central lines and ventilator patients. “Morale was low,” he said. “We had lost lots of staff, and the nurses who remained weren’t sure if they were staying.” Many doctors were thinking about leaving, too. Meanwhile, the teams faced an even heavier workload because of new rules limiting how long the residents could work at a stretch. Now Pronovost was telling them to find the time to fill out some daily checklists?

Tom Piskorowski, one of the I.C.U. physicians, told me his reaction: “Forget the paperwork. Take care of the patient.”

I accompanied a team on 7 A.M. rounds through one of the surgical I.C.U.s. It had eleven patients. Four had gunshot wounds (one had been shot in the chest; one had been shot through the bowel, kidney, and liver; two had been shot through the neck, and left quadriplegic). Five patients had cerebral hemorrhaging (three were seventy-nine years and older and had been injured falling down stairs; one was a middle-aged man whose skull and left temporal lobe had been damaged by an assault with a blunt weapon; and one was a worker who had become paralyzed from the neck down after falling twenty-five feet off a ladder onto his head). There was a cancer patient recovering from surgery to remove part of his lung, and a patient who had had surgery to repair a cerebral aneurysm.

The doctors and nurses on rounds tried to proceed methodically from one room to the next but were constantly interrupted: a patient they thought they’d stabilized began hemorrhaging again; another who had been taken off the ventilator developed trouble breathing and had to be put back on the machine. It was hard to imagine that they could get their heads far enough above the daily tide of disasters to worry about the minutiae on some checklist.

Yet there they were, I discovered, filling out those pages. Mostly, it was the nurses who kept things in order. Each morning, a senior nurse walked through the unit, clipboard in hand, making sure that every patient on a ventilator had the bed propped at the right angle, and had been given the right medicines and the right tests. Whenever doctors put in a central line, a nurse made sure that the central-line checklist had been filled out and placed in the patient’s chart. Looking back through their files, I found that they had been doing this faithfully for more than three years.

Pronovost had been canny when he started. In his first conversations with hospital administrators, he didn’t order them to use the checklists. Instead, he asked them simply to gather data on their own infection rates. In early 2004, they found, the infection rates for I.C.U. patients in Michigan hospitals were higher than the national average, and in some hospitals dramatically so. Sinai-Grace experienced more line infections than seventy-five per cent of American hospitals. Meanwhile, Blue Cross Blue Shield of Michigan agreed to give hospitals small bonus payments for participating in Pronovost’s program. A checklist suddenly seemed an easy and logical thing to try.

In what became known as the Keystone Initiative, each hospital assigned a project manager to roll out the checklists and participate in a twice-monthly conference call with Pronovost for trouble-shooting. Pronovost also insisted that each participating hospital assign to each unit a senior hospital executive, who would visit the unit at least once a month, hear people’s complaints, and help them solve problems.

The executives were reluctant. They normally lived in meetings worrying about strategy and budgets. They weren’t used to venturing into patient territory and didn’t feel that they belonged there. In some places, they encountered hostility. But their involvement proved crucial. In the first month, according to Christine Goeschel, at the time the Keystone Initiative’s director, the executives discovered that the chlorhexidine soap, shown to reduce line infections, was available in fewer than a third of the I.C.U.s. This was a problem only an executive could solve. Within weeks, every I.C.U. in Michigan had a supply of the soap. Teams also complained to the hospital officials that the checklist required that patients be fully covered with a sterile drape when lines were being put in, but full-size barrier drapes were often unavailable. So the officials made sure that the drapes were stocked. Then they persuaded Arrow International, one of the largest manufacturers of central lines, to produce a new central-line kit that had both the drape and chlorhexidine in it.

In December, 2006, the Keystone Initiative published its findings in a landmark article in The New England Journal of Medicine. Within the first three months of the project, the infection rate in Michigan’s I.C.U.s decreased by sixty-six per cent. The typical I.C.U.—including the ones at Sinai-Grace Hospital—cut its quarterly infection rate to zero. Michigan’s infection rates fell so low that its average I.C.U. outperformed ninety per cent of I.C.U.s nationwide. In the Keystone Initiative’s first eighteen months, the hospitals saved an estimated hundred and seventy-five million dollars in costs and more than fifteen hundred lives. The successes have been sustained for almost four years—all because of a stupid little checklist.

Pronovost’s results have not been ignored. He has since had requests to help Rhode Island, New Jersey, and the country of Spain do what Michigan did. Back in the Wolverine State, he and the Keystone Initiative have begun testing half a dozen additional checklists to improve care for I.C.U. patients. He has also been asked to develop a program for surgery patients. It has all become more than he and his small group of researchers can keep up with.

But consider: there are hundreds, perhaps thousands, of things doctors do that are at least as dangerous and prone to human failure as putting central lines into I.C.U. patients. It’s true of cardiac care, stroke treatment, H.I.V. treatment, and surgery of all kinds. It’s also true of diagnosis, whether one is trying to identify cancer or infection or a heart attack. All have steps that are worth putting on a checklist and testing in routine care. The question—still unanswered—is whether medical culture will embrace the opportunity.

Tom Wolfe’s “The Right Stuff” tells the story of our first astronauts, and charts the demise of the maverick, Chuck Yeager test-pilot culture of the nineteen-fifties. It was a culture defined by how unbelievably dangerous the job was. Test pilots strapped themselves into machines of barely controlled power and complexity, and a quarter of them were killed on the job. The pilots had to have focus, daring, wits, and an ability to improvise—the right stuff. But as knowledge of how to control the risks of flying accumulated—as checklists and flight simulators became more prevalent and sophisticated—the danger diminished, values of safety and conscientiousness prevailed, and the rock-star status of the test pilots was gone.

Something like this is going on in medicine. We have the means to make some of the most complex and dangerous work we do—in surgery, emergency care, and I.C.U. medicine—more effective than we ever thought possible. But the prospect pushes against the traditional culture of medicine, with its central belief that in situations of high risk and complexity what you want is a kind of expert audacity—the right stuff, again. Checklists and standard operating procedures feel like exactly the opposite, and that’s what rankles many people.

It’s ludicrous, though, to suppose that checklists are going to do away with the need for courage, wits, and improvisation. The body is too intricate and individual for that: good medicine will not be able to dispense with expert audacity. Yet it should also be ready to accept the virtues of regimentation.

The still limited response to Pronovost’s work may be easy to explain, but it is hard to justify. If someone found a new drug that could wipe out infections with anything remotely like the effectiveness of Pronovost’s lists, there would be television ads with Robert Jarvik extolling its virtues, detail men offering free lunches to get doctors to make it part of their practice, government programs to research it, and competitors jumping in to make a newer, better version. That’s what happened when manufacturers marketed central-line catheters coated with silver or other antimicrobials; they cost a third more, and reduced infections only slightly—and hospitals have spent tens of millions of dollars on them. But, with the checklist, what we have is Peter Pronovost trying to see if maybe, in the next year or two, hospitals in Rhode Island and New Jersey will give his idea a try.

Pronovost remains, in a way, an odd bird in medical research. He does not have the multimillion-dollar grants that his colleagues in bench science have. He has no swarm of doctoral students and lab animals. He’s focussed on work that is not normally considered a significant contribution in academic medicine. As a result, few other researchers are venturing to extend his achievements. Yet his work has already saved more lives than that of any laboratory scientist in the past decade.

I called Pronovost recently at Johns Hopkins, where he was on duty in an I.C.U. I asked him how long it would be before the average doctor or nurse is as apt to have a checklist in hand as a stethoscope (which, unlike checklists, has never been proved to make a difference to patient care).

At the current rate, it will never happen,” he said, as monitors beeped in the background. “The fundamental problem with the quality of American medicine is that we’ve failed to view delivery of health care as a science. The tasks of medical science fall into three buckets. One is understanding disease biology. One is finding effective therapies. And one is insuring those therapies are delivered effectively. That third bucket has been almost totally ignored by research funders, government, and academia. It’s viewed as the art of medicine. That’s a mistake, a huge mistake. And from a taxpayer’s perspective it’s outrageous.” We have a thirty-billion-dollar-a-year National Institutes of Health, he pointed out, which has been a remarkable powerhouse of discovery. But we have no billion-dollar National Institute of Health Care Delivery studying how best to incorporate those discoveries into daily practice.

I asked him how much it would cost for him to do for the whole country what he did for Michigan. About two million dollars, he said, maybe three, mostly for the technical work of signing up hospitals to participate state by state and co√∂rdinating a database to track the results. He’s already devised a plan to do it in all of Spain for less.

We could get I.C.U. checklists in use throughout the United States within two years, if the country wanted it,” he said.

So far, it seems, we don’t. The United States could have been the first to adopt medical checklists nationwide, but, instead, Spain will beat us. “I at least hope we’re not the last,” Pronovost said.

[ . . . ]