Common Core and Liquidity Auctions

Is it too much of a stretch to claim that American Federation of Teachers President Randi Weingarten and New York Stock Exchange CEO Henry DeCoste share a common concern? Perhaps so, though it does appear that both are worried about the impact of performance metrics on their operating systems.

For instance, as the President of America’s foremost teacher’s union, Ms. Weingarten has protested long and hard against the student testing policies of the Common Core and No Child Left Behind programs. One concern appears to be focused on the harm that can be inflicted on the process of classroom instruction when the instructor “teaches to the test,” thereby diverting learning efforts from critical thinking activities to memorization tasks.

Meanwhile, last week, the NYSE applied for permission to launch a new initiative that addresses a similar premise. Although its adoption of a mid-day stock auction process might seem arcane to laypersons, the motivation behind the initiative is comparable to the concerns of Ms. Weingarten.

You see, investment management strategies have been shifting significantly from value trading to momentum trading activities. In other words, instead of assessing the long term value of firms and then purchasing undervalued equities, investors are increasingly assessing the movement of stock values during a trading day and then rushing through trades at the very end of that day (or at the very start of the following day).

But when large numbers of traders gravitate to such strategies, relatively few trades remain during the mid-day hours. As a result, large volumes of late day momentum trading transactions are based on relatively small volumes of mid-day trading activities, a situation that jeopardizes the stability of the entire financial system.

The NYSE’s solution is to stimulate mid-day trading by holding auctions, a strategy that may yield some incremental improvement. Nevertheless, such auctions do not address the fundamental problem that the widespread adoption of financial market performance metrics is significantly impacting the activity that it is purportedly measuring. And that very situation exists in regards to the Common Core and No Child Left Behind programs as well.

In other professional and academic fields, researchers have known for decades that the presence of investigators can influence the behavior of phenomena. In the 1920s, for instance, business engineers referred to this condition as the Hawthorne Effect. And in the 1960s, sociolinguists called it the Observer’s Paradox.

A similar effect now appears to be wielding an outsized influence today in fields from primary education to the investment industry. Thus, before we respond to metrics of sub-optimal performance by modifying our operating activities, perhaps we should pause to identify the disappointing outcomes that are attributable to the measurement process itself.

New York’s Education Rebellion

Have you ever heard of the Whiskey Rebellion of 1791? It represented the first instance of a sustained anti-government protest in the United States. Although President George Washington employed federal troops to decisively squash that uprising, Americans have continued to stage protests since that time.

Indeed, from the military draft riots of the 1860s to the civil rights movement of the 1960s, and then on to the Tea Party and Occupy Wall Street protests of the 21st century, Americans have continued to rally against their own government’s policies and practices. And today, the ongoing public demonstrations against police brutality extend this established tradition.

Every so often, though, social rebellion tends to erupt in unusual venues. Did any one expect, for instance, the suburban parents of grade school children in New York State to rebel against school testing practices?

The recent governmental emphasis on standardized tests originated in the No Child Left Behind law a decade ago. It then expanded under the recent Common Core initiative. But why are parents in New York now so concerned?

Apparently, the parents believe that an over-emphasis on testing is creating a destructive high pressure, high stakes culture that diverts resources from learning activities and encourages “teaching to the test.” They do have a point; after all, eight grade school educators in the Atlanta school system just received prison sentences for helping students cheat on their standardized exams.

New York is facing a similarly challenging situation because parents in the Empire State can elect to opt out of testing activities. In much the same way that California’s “opt out of pediatric immunizations” policy led to a measles outbreak and a public health crisis, New York’s “opt out of standardized testing” policy is leading to a public education crisis.

That’s because the bedrock foundation of any standardized testing activity is the presumption that the results of the tests are representative of the students in the education system. Once significant numbers of students opt out, an assessment system solely based on testing has no alternative means to gauge their needs.

Imagine, for instance, a restaurant owner who decides to transform his entire menu on the basis of information from a handful of little customer feedback cards. If many of his paying customers decline to hand in their cards, should the owner rely solely on the feedback that he receives from a few patrons?

At the moment, New York State Education officials are both exhorting and threatening parents who wish to opt out of the testing process. Many officials are encouraging parents who have already opted out to change their minds and opt back into the system. But no official has yet launched any initiative to address their complaints.

In a society where teachers risk prison to help students cheat, though, why not directly address the high pressure, high stakes testing culture? After all, if America’s Whiskey Producers, Civil Rights Protestors, Tea Partiers, and Wall Street Occupiers never responded to simple requests to cease their protests, why would the soccer moms of New York State act any differently today?

The Perils Of Measuring, And Rewarding, Performance

It’s important to measure employee performance, isn’t it? By measuring success, and by rewarding it, we can identify superior performers and encourage others to strive for excellence.

Indeed, the logic of this philosophy appears to be self-evident. And yet, in a number of recent cases, measurement and compensation systems appear to have backfired in a dramatic fashion.

Just two days ago, for instance, General Eric Shinseki of the United States Department of Veterans Affairs resigned from his leadership role in the wake of an exploding health care scandal. Apparently, many military veterans have died while waiting for appointments to receive care, although Department employees recorded that they weren’t waiting at all.

And why did those employees falsify their records? Apparently, they knew that the Department did not possess the primary care resources to serve the needs of the veterans. But they also knew that the Department was collecting wait time metrics, and that lower waiting times would be rewarded by higher compensation.

So, lacking the resources to improve the system’s performance, the employees falsified the measurements and collected the compensation. It was a simple, yet effective, scheme.

The case is reminiscent of many other situations in the education sector. Recent laws and programs such as No Child Left Behind and Common Core have heavily emphasized standardized tests. A school with students who produce low scores may lose its funding, and individual teachers who teach low scoring students may be penalized and even publicly shamed.

But public school funding levels have been slashed in the wake of the Great Recession, leaving fewer resources to invest in scholastic activities. So, lacking the means to improve their students’ test scores, many educators have resorted to falsifying those measurements.

An explanation, of course, is not an excuse. There is truly no excuse for falsifying measurements, certainly not with the intention of masking situations where veterans die awaiting care and children fail to receive a satisfactory education.

Nevertheless, when measurements are utilized to determine employee compensation during a period of scarce or inadequate resources, it isn’t difficult to explain why individuals will feel compelled to falsify records. In other words, these recent scandals certainly weren’t unforeseeable events.

How would you establish the right “mix” of performance measurement, compensation, and oversight activities at your organization?