Category Archives: Politics

Power broker by Robert Caro – Summary & Analysis of Chapter 25

PART 5 – The Love of Power

Chapter 25 – Changing

Moses’s need for power was strong and it was growing. He seemed to take pleasure in antagonising people who disagreed with his plans. He also started to act badly towards people who were nothing to do with his work. Sometimes because they were unable to fight back. An element of sadism seemed to have entered Moses’s character. He started to have physical encounters with people he knew could not fight back. He wasn’t content with ignoring opponents but was intent on destroying them.

A streak of maliciousness was becoming apparent as well. He ousted the members of the Columbia Yacht club from their clubhouse on a potential park site before they had time to consult with their members, merely because they asked for a few months delay to move their belongings. A judge agreed with the delay, but work went ahead. The clubhouse’s electricity was shut off. Then its water. By the time the injunction was put in force, trenches had been dug denying access. The clubhouse was then demolished even though the plans were not finalized for the park.

Moses’s methods were successful in that they intimidated people, allowing him to press on with his plans. He continued to create great works by creating new land and planting trees and flowers. His monuments were everywhere. The public cheered rather than moralized. The press were right back on side. His playground schemes were judged an unqualified success even though most of the playgrounds were placed in areas that needed them least. There were few in areas that needed them most, especially those containing black communities like Harlem, despite the evidence that the lack of well-run playgrounds was resulting in children wandering the streets and becoming involved in crime. Appeals were made directly to La Guardia but he was unwilling to cross swords with Moses.

Moses paid more attention to his expensive swimming pools. The success of these became a smokescreen to the failures of the playground program. His distaste for the black community was also evident here. Only white lifeguards and attendants were employed. At swimming pools in black neighbourhood, the water was kept significantly colder because Moses thought that this would deter blacks.

New parkways to were opened in 1936, but the traffic congestion returned in under three weeks. Moses’s solution was to build even newer parkways. The Triborough Bridge was also opened this year, to adulation from the public and the press. Soon after the opening New York City experienced one of its worst ever traffic jams. Again, Moses’s solution was to build more parkways. Again, the press agreed. But traffic growth was heading far ahead of estimates. It started to become clear that building more bridges and parkways increased the use of cars and this, along with the rise in car ownership, was the cause of the problem. There were calls to increase rail traffic to take the pressure off of the roads. However, Moses built the new $70 M Whitestone Bridge. It soon became jammed as well. Moses opened new city highways in 1939 and 1941. They filled up as quickly as the others.

Worst of all, Moses tore down the lively Third Avenue neighbourhood to make way for a ten-line highway which plunged Third Avenue itself into noisy darkness. Half the stores, restaurants and theatres were gone. Once it was a place for people, now it was a place for trucks and cars. The side streets, once the playground for children, were now too dangerous to play in. Third Avenue became a paradise for gangs, drunks and drug addicts, full of abandoned shells of cars, mattresses and rats.

Moses then turned his attention to his original dream, the Riverside Parkway heading north out of the city. The job had started in 1929 and over $100M had already been spent before being abandoned at the start of the Depression. Moses required $109M more. Moses found that the railroad owed the city $13M. This would provide Moses with a start. Moses needed to find a source of funds that the railroad could use to pay off the debt. He found this in funds available to build in the Grade Elimination Fund, set up to build bridges over railroads. Governor Lehman was persuaded to sign off the loan by promising that he would get the credit for the improvements. Moses got his money, but he needed $86M more. Moses scoured around for new funds to use and adapted his designs to qualify for them. The overall plans were labelled as Grade Elimination Plans to qualify for federal funding.

Although the fundraising was progressing, economies had to be made. This was made by drastically reducing the quality of work as it ran through poor areas as well as changing the route of the parkway to run straight through parkland. By these changes to the plan and strenuous fundraising, Moses need only $10M to complete his dream. He thought that this last pot of money would be the easiest to obtain, but it became the hardest. He attempted to interest Wall Street in a $10M bond issue, but the bankers would only release $3M. Moses worked to reduce the cost. As the PWA was to receive a new dispensation, he was able to get some funds from there, but he still had a significant shortfall. Then one of his engineers had a brainwave. They could build a smaller bridge, reduce the number of lanes, then strengthen and expand it when more fund became available. With this last economy, the funding for Moses’s dream was complete.

However, having the new parkway cut straight through a park – a park that was a considered one of the last great conservation areas of the city – created opposition. On top of this it was discovered that the original route was cheaper and would cause far less damage to the parks and connected waterfront. Moses refused to listen and pre-emptively began cutting down trees. Approval for Moses’s plan was given and by 1937 his dream was complete, but at a cost, during the Depression, of around two hundred million, skilfully hidden dollars and little of benefit to the poor and black neighbourhoods. As for the traffic congestion, this would continue to worsen. Despite these reservations, Moses’s reputation was at its zenith.

Analysis & Key Takeaways
  • Mary did his finances…
  • Moses was interested in grand design: not listening to the public. He was a kind of a Steve Jobs-type.
The Power Broker is a Pulitzer Prize Winner
Chapter 1Chapter 2Chapter 3
Chapter 4Chapter 5Chapter 6
Chapter 7Chapter 8Chapter 9
Chapter 10Chapter 11Chapter 12
Chapter 13Chapter 14Chapter 15
Chapter 16Chapter 17Chapter 18
Chapter 19Chapter 20Chapter 21
Chapter 22Chapter 23Chapter 24
Chapter 25Chapter 26Chapter 27
Chapter 28Chapter 29Chapter 30
Chapter 31Chapter 32Chapter 33
Chapter 35Chapter 36Chapter 37
Chapter 38Chapter 39Chapter 40
Chapter 41Chapter 42Chapter 43
Chapter 44Chapter 45Chapter 46
Chapter 47Chapter 48Chapter 49
Chapter 50

Robert Moses | The Power Broker | Notes On An Epic Pulitzer Prize Winning Book

The Power Broker is a Pulitzer Prize Winner
Robert Caro, 1990

  • Robert A. Caro’s The Power Broker is a Pulitzer Prize winning epic that was widely read by the politicians and civil servants in the US and abroad;
  • The keypoints are my interpretation of the events in the corresponding chapter; take with a grain of salt;
  • My opinions are subject to change at any future date as an intellectually free person; so if new information shows Moses to be even more “impure” I am free to change my opinion without judgement, thanks!;
  • Writing about Moses does not equal endorsing Moses obviously;
  • This article is my attempt to provide a chapter-ized summary so that you don’t have to read this 1255 pager. The physical book weighs a lot, too, as is Robert Caro’s way. Enjoy; 

Hero, Villain or Mixture of the Two? Probably a Mixture. He is both repugnant and visionary. Hate-able and laudable for “getting things done.” Moses famously responded to this Caro book by saying a) he wasn’t responsible for public transport (read: probably not of interest fee-wise), b) he wasn’t that powerful, c) Moses never addresses the racism he is accused of peddling…can we separate the progress from the possibly very repugnant man?

Part One – The Idealist

Chapter 1 – Line of succession

Robert Moses was born on December 18th, 1888. His mother Bella was the strong willed, daughter of Bernard and Rosalie Cohen. Bernard was among many German Jews who longed to escape repression and emigrate to the USA. Eventually he settled with his brother in New York and marrying his cousin, Rosalie Silverman. Bernard became interested in civic affairs. And became known as a decisive and visionary analyst of social problems. Rosalie Silverman bullied her husband. She was intellectual rather than maternal and as Granny Cohen was imperious, treating other people as underlings.

Bernard died in 1897 of pneumonia. Rosalie carried on energetically, marching around New York and dismissive of the soft life. In 1919 she calmly finished her crossword puzzle, got out of bed and rang the bell to summon her maid before calmly announcing “Martha, summon Doctor –, I’m dying”.

Bella, quiet and unassuming but thoughtful, spoke French and German fluently and retained the sharpness of her mother. In 1886 she married Emanuel Moses, a Jew from Cologne. Although he built a successful business, Bella was thought to have “married beneath her.” They settled in Dwight Street, New Haven, Connecticut, an elm lined street with substantial houses.

Bella disliked the lack of cultural activity in New Haven so eventually they moved to New York in 1897.

By 1907, 1 million Jews had fled to the USA to escape persecution. By 1917 this was 1.5 million. In the Lower East Side, settlement houses sprang up to cope with the influx, and Bella became involved. There was a certain snobbery exercised by the settled Jewish community towards new Jewish immigrants, many from Russia. They called them “Kikes” because of the endings of many Russian surnames. German Jews had a patronising attitude to the new influx of Jews from Eastern Europe. Bella’s attitude towards those under her wing were thought to be “You’re my children, I know best.”

Bella however, was more interested in urban planning than integration. Her proposals were well mannered but steely. She was known for getting her way. Once she became involved in a project, she became obsessed with the detail. Bella could always count on Emmanuel’s support, at work and in the home, an obvious parallel with her own parents. Bella was not religious, and although Emanuel was attached to the synagogue, her views prevailed.

In New York the family lived just off 5th Avenue; a large oak panelled brownstone at the centre of a rich Jewish sector. With assets of $1.2M and walls covered with Rembrandt and Durer prints, they were among the elite.

Bella was strict with children, organising their lives in minute detail. She was particularly interested in their education. All the children were sent to expensive schools, Robert eventually ending up at Yale.

Bella’s sons, Paul and Robert, were often mistaken as twins. Both were considered “stunningly” handsome but haughty, even arrogant. They were popular with both girls and boys. Although both were considered athletes, Robert was more of a loner, attracted to sports, but not team sports.

Both brothers were dismissive of their father but Robert and his mother formed an inner circle. Bella catered to Robert’s every whim, “doting” on him. Robert flattered his mother by praising her work in the community and mimicking her movements and deportment. The line of personality was clear: from Robert’s grandmother, to his mother, to him.

Analysis & Key Takeaways:
  • Robert Moses’ personality was shaped by the powerful women in his early life, women who had steely determination past down generation to generation;
  • Forming alliances can start at the Family level between siblings. Healthy competition is important, parents are people too and so they can and sometimes outwardly express their preferred child;
  • The instinct to know better than others is not without merit. However, it is difficult to evaluate the merit of ones ideas in isolation especially if the idea is based on a track-record, pattern recognition etc. Ironically, we are the worst evaluators of our own instincts (Dunning Kruger effect) which creates arrogance in some cases and brilliance in others. A way to check your instincts is to evaluate your predictions against the reality, however prediction is very luck based;
  • Loners seem to operate and run things; it’s lonely at the top therefore loners are predisposed to move to the top;
  • Everyone has a personal religious perspective, sometimes religion defines ones identity, other times it’s a footnote and other times a hindrance.
The Power Broker is a Pulitzer Prize Winner
Chapter 1Chapter 2Chapter 3
Chapter 4Chapter 5Chapter 6
Chapter 7Chapter 8Chapter 9
Chapter 10Chapter 11Chapter 12
Chapter 13Chapter 14Chapter 15
Chapter 16Chapter 17Chapter 18
Chapter 19Chapter 20Chapter 21
Chapter 22Chapter 23Chapter 24
Chapter 25Chapter 26Chapter 27
Chapter 28Chapter 29Chapter 30
Chapter 31Chapter 32Chapter 33
Chapter 35Chapter 36Chapter 37
Chapter 38Chapter 39Chapter 40
Chapter 41Chapter 42Chapter 43
Chapter 44Chapter 45Chapter 46
Chapter 47Chapter 48Chapter 49
Chapter 50

Factfulness by Hans Rosling – A Summary (Everything You Need To Know)

The following is a synopsis of Factfulness by Hans Rosling. It’s a great read on the Ten Reasons We are Wrong About Everything and Why Things are Not as Bad as We Think

Introduction: Why I Love the Circus

Hans Rosling was a physician, academic and public speaker. Together with his son, Ola Rosling and his daughter in law Anna Rosling Ronnlund, he founded the Gap Minder Foundation in 2005 to fight ignorance and encourage what he calls a more factful approach to life. Although this book, like his TED Talks, was written in his voice it is a collaboration between the three of them.

Although he pursued a career in medicine and became a leading academic, Rosling’s true passion as a child was the circus. He loved everything about it and was convinced he would one day live his dream and run off to become a performer. His parents had other ideas; they wanted him to enjoy the first-rate education they didn’t have and so he studied medicine instead.

Hans Rosling actually swalllowing a sword

When studying medicine, he discovered he could stick his hands down his throat further than anyone else. For a short time, he dreamed once again of joining the circus as a sword swallower. Because swords were in short supply, he decided to start with a fishing rod, but found it impossible. It was only later, when treating an actual sword swallower, that he learned the reason why he had failed.

The throat, he was told, is flat and can only take flat objects. To his delight he discovered he could actually do it and, later in life when he began giving talks, he often used it as a finale to his act.

He talks about sword swallowing for a reason. It’s one of those ideas which inspire people to think differently, to question perceptions and, as such, to accomplish the seemingly impossible. This is a key feature of the book.

Another is the continual need to test yourself and question your assumptions. To illustrate he lists 13 questions:

  1. How many girls finish primary school in low income countries around the world?
  2. Where does the majority of the world’s population live: low income, middle income or high-income countries?
  3. In the last 20 years, the number of people living in extreme poverty has increased or halved?
  4. What is the life expectancy of the world today?
  5. There are 2bn children aged 0 to 15 years old. How many will there be in the year 2100 according to the UN?
  6. The UN predicts that, by 2100, the world’s population will have increased by 2bn. Why is this: more younger people or more older people?
  7. How has the number of deaths from natural disasters changed over the last 100 years?
  8. There are 7bn people in the world. Where do they live: mostly in Europe, Africa, Asia or America?
  9. How many of the world’s one-year old children today have been vaccinated?
  10. 30-year-old men have spent ten years in school on average. How many years have women of the same age spent?
  11. In the 1990s tigers, giant pandas and black rhinos were all listed as endangered. How many are listed as more critically endangered than they were then?
  12. How many people in the world have access to some electricity?
  13. Over the next 100 years will the average temperature get warmer, stay the same or get colder?

He sets these tests to people around the world and the majority get them wrong. Our perception of the world is far removed from the reality. His aim in the book is to give people the tools to think in a factful manner, to challenge perceptions and understand the world more completely.

Chapter 1: The Gap Instinct

Our world view is often distorted thanks to the tendency to divide everything into two extremes with a space or a gap in between. For example, we often view the world through the perspectives of distinct groups such as ‘rich versus poor’, ‘us versus them’ or ‘developed and developing countries’.

This is simple and makes it easy to develop a view of the world, but he believes it’s wrong.

To demonstrate his point, he looks at our tendency to divide the global population into developing and developed countries. Those in developed worlds have better access to healthcare, live longer lives and have better access to electricity, while those in the developing world do not. However, the data shows that most people have access to all these things.

In reality, most countries fall into a gap between the perceived developed and developing worlds, with many moving towards the group of developed countries. As such, this divisive world view makes no sense.

Instead, he introduces four categories which can provide us with a better view of the world. These are:

Level 1: Earning less than $2 per day.

Level 2: Earning between $2 and $8 per day.

Level 3: Living off$8 to $32 per day.

Level 4: Bringing in more than $32 each day.

It doesn’t matter where you live in the world; people in each group tend to have a similar quality of life. Those in Level 1 suffer from poor nutrition, live hand to mouth and rely on walking to get where they need to go. In Level 2 people are better off; they can feed themselves have better access to electricity and education but they are not secure. At any time, an emergency could see them slip back to Level 1. At the top is Level 4 in which people can afford a car and an annual holiday.

This produces a more accurate view of the world, one which divides people by quality of life rather than simply where they are living. Even so, the traditional gap-based view of the world prevails.

To combat this, he cites a number of warning signs which can encourage us to slip into the gap-based world view.  

  • Comparing averages between two situations. We forget about the overlap which creates the illusion of a gap.
  • Comparing extremes: For example, thinking of the poorest versus the richest is wrong because most people are in neither extreme.
  • View from above: People in higher income levels look down on lower levels without any idea of the conditions in those levels. If you’re in Level 4, you might think of people in levels 2 and 3 as being poor when in fact they have a much better quality of life than you might think.

The reality of life is that there is no gap. Most people exist in the middle where the gap is supposed to be. Thinking about people in two groups distorts our view of the world. To form a fact-based world view, we have to recognise that many of our perceptions are filtered through mass media which loves to focus on examples which are extraordinary or extreme.

“There is no gap between the West and the rest, between developed and developing, between rich and poor,” Rosling writes. “And we should all stop using the simple pairs of categories that suggest there is.”

Chapter 2: The Negativity Instinct

“The world is getting worse”. It’s a view that we hear often and which, according to polls, most people share. However, it is also wrong. In truth, the world is getting better. We simply don’t notice when it does.

Most humans pay attention to the bad rather than good. As such, they believe the world is only getting worse.

There is some truth in this. The environment is deteriorating and terrorism is higher than it was 30 years ago. Even so, the state of the world is generally improving. However, according to Rosling, these improvements go unnoticed because they aren’t reported and we look back at the past through rose tinted spectacles.

Instead, minor setbacks receive greater coverage. If you look at the news, you’ll be forgiven for assuming that the world is set on a downward trend. However, the facts tell another story.

In the 1800s most people in the world were at income Level One. Extreme poverty was the norm for most people in the world. Today, only 9% of the world is still at level one. Life expectancy has improved from 31 years in the 1800s to over 70 years today. Slavery has been abolished, child mortality is down; plane crashes, hunger and deaths in battles have decreased. Access to electricity, water and health have improved.

Even so, the negative world view persists.

This view is caused by three things: mis remembering the past, selective reporting and the feeling that it would be insensitive to say things are getting better when they are still bad for many people.

When people start living better lives, they can forget how bad things were. They romanticise their youth.

Most reporting is negative. Good news is not news and neither are gradual improvements. A successful flight receives no coverage, but a crash will be splashed across all media outlets.

Rosling suggests three ways to control this negativity instinct.

  • Remember that ‘bad’ and ‘better’ are not mutually exclusive. Things can be bad but they can also be better than they were before. Saying things are better should not be confused with believing everything is fine.
  • Expect bad news. If we recognise that news is likely to disproportionately highlight negatives, we can be better prepared for it. Factfulness is remembering that most of the news which reaches us is bad news and there are plenty of positive developments in the world which do not make headlines. More news does not necessarily mean things are getting worse. It could equally mean that we are getting better at monitoring this suffering, which in turn will make it easier to alleviate it.
  • Avoid romanticising the past. Life was not as good as we think it was, if we present history as it was, we can realise that life, in general, is getting better.

Chapter 3: The Straight-Line Theory

Life does not always work in a straight line, but our thinking does. In this chapter Rosling examines our tendency to assume a certain trend will continue along a straight line in perpetuity. Reality is very different but our straight-line instinct stops us seeing life as it truly is.

He talks about an Ebola outbreak in Liberia. Like most people, he assumed the number of cases would continue in a straight line with each person infecting, on average, another person. As such it would be relatively easy to predict and control as most other outbreaks of disease are. However, he came across a WHO report which said the number of infections was doubling with each case. Every person infected two more people on average before dying.

This spurred him into action. He discusses an old Indian legend. Krishna is challenged by the King to a game of Chess and asked to name his prize if he wins. Krishna asks for one grain of rice to be placed on the first square with the number doubling with each square.

The King agrees assuming it will increase in a straight line. However, it takes him a little while to realise that, by the time it gets to the 60th square, he would have to find more rice than the entire country could produce.

Many people assume the world’s population is increasing. If nothing is done it will reach unsustainable levels meaning something drastic must happen to stop this tend getting any worse. However, UN data shows the rate of population increase is slowing. As living conditions improve, the number of children per family is falling. Instead, growth can be controlled by combatting extreme poverty.

Rosling uses the example of a child. In their first few years, babies and toddlers grow rapidly. If you were to extrapolate that growth for the future, ten-year olds would be much taller than they are. Of course, we know that doesn’t happen because we are all familiar with how the rate of growth slows over time.

When faced with unfamiliar situations, we assume a pattern will continue in a straight line. Instead, he suggests we should remember that graphs move in many strange shapes, but straight lines are rare. For example, the relationship between primary education and vaccination is an S curve; between income levels in a country and traffic deaths is a hump and the relation between income levels and number of babies per women is a slide.

We can only understand the progression of a phenomenon by understanding the shape of its curve. Assuming we know what will happen leads to erroneous assumptions and false conclusions which will in turn lead to ineffective solutions.

To control the straight-line instinct, we must remember that curves come in many forms and we will only be able to predict it when we understand the shape of its curve.

Chapter 4: The Fear Instinct

“Critical thinking is always difficult,” writes Rosling, “but it’s almost impossible when we are scared. There’s no room for facts when our minds are occupied by fear.”

This is why the ‘fear instinct’ can be so destructive. When people are afraid, their ability to tell fact from fiction falls off dramatically. Factfulness demands that we control our fear.

Never before has the image of a dangerous world been broadcast more widely and more effectively than it is today. We are frightened of almost everything, but the truth of the matter is that the world has never been safer or less violent.

Rosling starts the chapter by looking back to an old story from his days as a junior doctor. It was 1975 and news came in of a plane crash. The survivors were being rushed to his hospital; senior staff were at lunch which would leave just him and a nurse to handle the situation.

It would be his first emergency and, in his panic, he confused one of the survivors for a Russian pilot and became convinced Russia was attacking Sweden. He mistook a colour cartridge for blood and was narrowly stopped from shredding through a G suit worth thousands of dollars.

Fear stopped him from seeing the situation for what it was. Our minds have an attention filter which decides what reaches it. This is the useful. The word contains vast amounts of information and we have to filter it to avoid overload. However, what gets through tends to be the unusual or scary.

This is why newspapers are full of events which are frightening. However, the more of the unusual we see, the more we become convinced the unusual is actually the norm. Our fear instinct has been baked into our minds by millennia of evolution. Fear kept our ancestors alive, but even though many of these dangers have gone, the perception remains.

The dangers are more real for people in Level 1 and 2 income categories because they are more likely to suffer threats. For example, they might be more likely to be bitten by a snake which might make them jump if they see a funny shaped stick. However, for people in higher income levels, being bitten by a snake is much less likely. Even if they were to be bitten, they have access to good healthcare.

For them, the fear of the snake does more harm than good. Newspapers know these fears are hardwired into our brains so they use it to grab our attention. The same fears which kept our ancestors alive are keeping journalists employed today.

This GOES East satellite image taken Tuesday, Sept. 11, 2018, at 10:30 a.m. EDT, and provided by NOAA shows Hurricane Florence in the Atlantic Ocean as it threatens the U.S. East Coast, including Florida, Georgia, South and North Carolina. Millions of Americans are preparing for what could be one of the most catastrophic hurricanes to hit the Eastern Seaboard in decades. Mandatory evacuations begin at noon Tuesday, for parts of the Carolinas and Virginia (NOAA via AP)

The number of deaths from natural disasters has fallen as countries develop better healthcare and infrastructure. Organisations, such as the WHO and UN, help victims in these situations but people in Level 4 aren’t aware of their success because the media reports it as the most serious disaster in history.

It is important to look at things with a fact-based approach to make better use of resources. For example, the 2015 earthquake in Nepal which killed 9,000 people attracted global attention, but diarrhoea from contaminated water kills 9,000 children each year but receives very little attention in comparison.

2015 was the safest year in aviation history but this fact was not reported. The number of deaths from battle has fallen and so has the threat of nuclear war. All these good pieces of news slip under the radar.  

Following the Tsunami in 2011, 1,600 people died escaping Fukushima while nobody died from what they were running away from. Fear of chemicals such as DDT leads to deaths which could have been treated by DDT. The fear of an invisible substance leads to more harm than the substances itself.

Terrorism causes fewer deaths than alcohol but receives far more publicity.

Fear is a terrible guide for understanding the world. We pay attention to things we are afraid of but ignore things which can do us harm. Factfulness is knowing how to tell the difference between actual risks and perceived risks.

Chapter 5: The Size Instinct

From immigration to the number of deaths in hospitals, we consistently overestimate size. In this chapter, Rosling shows how this leads to a distorted view of reality and warps decision making.

He starts by going back to his time as a young doctor in Mozambique in the 80s when it was the world’s poorest country. One in 20 children died. He argued with a friend about the standard of treatment at the hospital. He felt they needed to provide better care outside of the hospital, but his friend believed he should concentrate on improving care within the hospital.

He decided to look at the number of children who died in the hospital compared to those who died outside. To his surprise he found that, while deaths were comparatively low inside the hospital, over 3,900 people died in the community. He therefore decided to go out into the community to provide better care to people who couldn’t get to the hospital.

When looking at a single number in isolation, it is easy to give it too much importance. For example, when he saw he was saving 95% of the children who came to the hospital it was easy to assume he was doing a great job. However, when he compared it to those who were outside the hospital, he realised he had to do more.

Journalists always give us numbers and exaggerate their importance. It leads to solutions which do not help. At the hospital, people would have assumed increasing the number of beds would reduce deaths but, with more information at their disposal, they realised the best path was to improve the levels of care and education within the community.

To avoid the trap of the size instinct, he recommends using the tools of comparison and division.

For example, two million children died before the age of one in 2016. This seems high until you compare it with 1950s number when 14.4 million children died before their first birthday. Infant deaths are falling, but you wouldn’t know this if you only looked at the first figure.

A Swedish hunter killed by a bear received more coverage than a woman killed by her husband. The first incident was a freak event; but it received far more coverage than the second which is a far more common and serious risk. Rather than being concerned by domestic violence, the media became obsessed with an event which is unlikely to happen again for many years.

Another example comes from the Swine flu epidemic which killed 31 people in 2 weeks. However, 63,000 people died from TB in the same period, but it received no coverage.

The lesson is that we tend to over state the unusual and ignore issues which are far more common. It distorts our world view and leads us to make poor decisions. Factfulness is understanding that just because something is more widely reported, doesn’t make it more common.

Chapter 6: The Generalisation Rule

As humans, we love to categorise and generalise everything. While this can help us to simplify our view of the world, it can also lead to distortions. Attributing one characteristic to an entire group based on one unusual example leads to serious misconceptions and can have quite serious consequences.

As he writes, the generalisation instinct “can make us mistakenly group together things, or people, or countries that are actually very different. It can make us assume everything or everyone in one category is similar. And, maybe most unfortunate of all, it can make us jump to conclusions about a whole category based on a few, or even just one, unusual example.”

For example, he begins the chapter by talking about his experiences working in the Congo when he was presented with a less than appetising dessert made from lava. To avoid eating it, he tried to convince them that it was against Swedish custom to eat lava.

Generalisations, he says, are mind blockers. They create a distorted view of reality and often lead people to miss important opportunities. For example, after polling financial experts, he says, he found that they assumed most children in the world were not vaccinated before the age of one. In fact, the vast majority are. For that to happen, countries need a lot of infrastructure, which is also the same kind of infrastructure which is required for factories and other forms of enterprise.

Statistically Valid Things

The belief persisted because these financial experts believed the images of extreme poverty presented about some countries in the media. As such, these experts were potentially missing out on investment and business opportunities because they believed these countries were more deprived than they were.

To combat the generalisation instinct, he suggests travelling. This helps you to get out into the world and gain first-hand experience of cultures as they actually exist, rather than the way they are portrayed in the press.

As with other chapters, questioning is vital. You should always question the different categories you are given. Look for similarities across and within groups; remember to be suspicious of generalisations and to be aware when you are generalising one particular group from another.

Many people generalise African countries but they are not all at the same level of development. This has enormous consequences. The Ebola epidemic in Liberia affected tourism in Kenya even though the two countries are thousands of miles apart.

Majority is an extremely blunt concept. It can be anything between 51% and 99%; which does not produce a realistic picture of any situation.

Examples give a poor picture. Many people around the world suffer from chemophobia, the fear of chemicals, when in reality most are beneficial.

Folders Icon with variations of colors

Assuming you are normal can lead to you generalising others and failing to understand the reasons behind their actions. What is normal to you is not necessarily normal to other people.

Factfulness is recognising what categories are used and keeping in mind that these categories can be misleading. While humans categorise and generalise everything, this can lead to stereotypes which can lead to poor solutions. By travelling and questioning assumptions, you can combat the problems caused by the generalisation instinct.  

He also focuses on what he calls the 80/20 rule. We should always look at items which take up more than 80% of the total. Looking at the world’s energy sources, for example, you might feel they seem equally important, but only three generate more than 80% of the world’s energy.

Divide it by a total to get a clearer idea of the situation. If you look at the total emissions produced by each country, it might seem that China and India produce more Co2 emissions than Germany and the USA, but if you divide it by the population, you’ll see that USA and Germany produce more emissions per head than either China or India. A single number does not provide a clear picture of any situation.

Chapter 7: The Destiny Instinct

When Rosling gave a presentation to a group of capitalists and wealthy individuals about the opportunities of emerging markets in Asia and Africa he was surprised by their reaction.

At the end of the talk he was approached by what he describes as a ‘grey haired’ man who told him, in no uncertain terms, that there was no chance that African countries would ever make it. Despite all the positive data about economic progress he’d seen in the presentation, this man believed there was something about African society which meant they were destined to be poor.

This is an example of the destiny instinct and its roots go back to the earliest history of man. As humans, we often assume that a nation, group or culture’s destiny is determined by general characteristic which we believe it shares. For example, white Europeans are destined to be developed and wealthy while black Africans will always be poor.

This attitude persists even in the face of contradictory data. Not only do people believe it to be true, but they assume there is nothing that individuals in this culture can do to change things. Destiny, as they say, is all.

The instinct stems from evolution when people lived in small groups and didn’t travel very far. It was safer to assume things would stay the same as they wouldn’t need to constantly evaluate the surroundings. It’s also a great way to unite a group.

However, today’s societies are constantly changing. These changes occur gradually which gives the perception that things are staying the same. As such, gender equality is perceived to have remained unchanged around the world, but in reality, things have largely improved.

There is also an idea that Africa is destined to remain poor. However, most African countries have reduced their infant mortality rates faster than Sweden did. Asian countries have moved into the category of developed nations and many countries have escaped extreme poverty.

It was also assumed that the number of babies a woman has would depend on her religion. Religious women were more likely to have babies than those with no religion. However, careful analysis of data shows that the number of babies depends not on religion but income levels.

Other examples include the rise of support for women’s rights and liberal ideas in Sweden. Concepts which might have been far from the mainstream in the past are now commonly accepted.

To control the destiny instinct, you should recognise that:

  • Slow change does not mean no change at all.
  • Be ready to update your knowledge. Knowledge is never constant in the social sciences.
  • Collect examples of cultural change.

Factfulness is the art of recognising that many things appear to be static just because change is happening more gradually. Groups are not defined by their innate characteristics and, just because something has been true once, it doesn’t mean it is set in stone for the future. Like many of the other attitudes discussed in this book, the destiny instinct is hard coded into our evolution, but while it might once have been helpful for our ancestors, it is holding us back today.

Chapter 8: The Single Perspective Instinct

We live in a world in which many people have strong opinions. However, when these opinions are set into a single world view, we can become blind to any information which contradicts us. This is the problem of the single perspective instinct and it can make it very difficult to understand reality.

“Being always in favour of or always against any particular idea makes you blind to information that doesn’t fit your perspective,” writes Rosling. “This is usually a bad approach if you like to understand reality.” 

The single perspective instinct can be alluring. It is the preference for simple explanations and simple solutions to the world’s problems, but life is somewhat more complicated. This single cause and solution view creates a completely warped view of the world.

There are two main reasons why we do this: professional and political bias. Professionals will always see the world from the perspective of their own expertise. A hammer will see everything as a nail and will probably adopt the same approach. Even experts in their field can be wrong.

A poll of women’s rights activists found that only 8% realised that 30-year-old women have spent only one year less in school on average than men. They were so intent on seeing the situation as bad that they ignored the progress their own efforts have brought about.

He warns against relying the media to form a world view. It’s like forming an impression of a person just from his or her feet. The foot is far from the most attractive part of the body, so it doesn’t give you a fair representation of the rest of the person.

In the same way, the media tends to present the worst of the world; the disasters, the catastrophes and the crime. If you form your world view based on media reports, you’ll imagine the situation is much worse than it actually is.

Campaigners often paint the world as getting worse, but they are not aware that progress happening. If they ditched the attitude that things are only getting worse, they could garner more support for their cause.

People love the idea of being able to point to a single cause and single solution. For example, many use numbers to illustrate all sorts of issues, but they do not always represent the best solution. They do not help you to understand the reality behind them.

He recalls a conversation with the Prime Minister of Mozambique who said he believed the economy was making progress. Rosling argued that the data did not show this, but the Prime Minister replied that he did not solely rely on numbers to measure progress. He’d look at the shoes people wore and construction projects taking place. If the shoes were old, it meant that people didn’t have money to replace them. If construction projects were overgrown with grass, it suggested there wasn’t enough money being invested.

There is never a single explanation to any situation. It limits your imagination. Factfulness is realising the limitations of this perspective and finding ways to view situations from a wider range of viewpoints. This will help people to develop a more accurate understanding of the world they live in and to challenge their own world views. 

Chapter 9: The Blame Instinct

We live in a culture which loves to apportion blame. This instinct assigns a clear cause to an event and finds someone who was at fault.

It’s a comforting approach. When things go wrong it is nice to think it’s because of bad people with bad intentions, but that seldom tells the entire story. We attach a lot of importance to individual groups or people, but it also stops us from understanding the world.

Once we find someone to blame, we stop looking for the actual cause of the problem and focus on punishing the person we think is at fault. The result is that we’re unable to prevent it from happening again.

For example, we might want to blame a plane crash on a pilot who falls asleep, but this does not stop another pilot from falling asleep in the future. Instead we should be looking at why the pilot fell asleep in order to stop it from happening again.

Hand in hand with the blame instinct comes the tendency to credit someone for an achievement even if the reality is more complicated. Someone has to take the blame or be given the credit. We love to point fingers if it confirms our belief

Even Rosling himself is not immune. When UNICEF hired him to investigate a company given a contract for malaria drugs, he became convinced that the company was acting improperly. Even before he finished his investigation, he started pointing fingers. In reality, the company was honest but simply had an innovative business model.

The same principle is at work when looking at the number of immigrants killed trying to cross the sea into Europe. It is common to blame the smugglers who traffic these people across the sea in small craft which are routinely dangerously overloaded. In reality, though, the problem is Europe’s immigration policies which state that an airline which brings illegal immigrants into the country will have to pay for their repatriation.

Airlines will not be able to tell if someone is truly an illegal immigrant in the few minutes they have before they board a flight, so they will ban anyone who doesn’t have a Visa. This means that refugees who have a right to enter Europe under the Geneva Convention cannot do so by any legitimate means. They are forced into the hands of the smugglers thanks to official European policy.

Any boats which bring refugees by sea are confiscated by the authorities which is why smugglers turn to cheap dinghies because they cannot afford to lose a larger boat.

On the other hand, we can also be in a rush to give credit to a single person or law. China’s low birth rate is accredited to Mao’s single child policy, but rates had started to fall before the law came into force. Instead the decline was down to institutions and technology that were in place.   

Factfulness is the ability to recognise when someone is being scapegoated and to understand that this stops people creating viable solutions for the future. It is easy to look for a clear solution when something bad happens, but it stops us developing a fact-based view of the world and coming up with a solution which actually works.

Chapter 10: The Urgency Instinct

Rosling’s tenth and final instinct is one which can bring all the others to the fore: the tendency to take urgent action to solve a problem. While this might have served us well in the past, it can cause us to make rash decisions based on incomplete information.

Doctors running for the surgery

The urgency instinct is embedded in our evolution, and in times gone by, it has served us very well. For example, if you think there is a lion in the grass you don’t want to spend time analysing your options; you simply need to start running. It’s always the safest option.

It can also be useful today. If you’re driving and someone slams on the brakes, you’ll have to take drastic action to avoid a crash. However, in today’s modern world, it can often create problems.

While Rosling was a doctor in Mozambique, a disease broke out that paralysed patients within minutes and sometimes caused blindness. He wasn’t certain that it was infectious, but the Mayor didn’t wait to find out. He ordered the military to set up roadblocks to prevent busses reaching the city. To get around these roadblocks, women asked fishermen to take them to the city by sea. It was a dangerous journey and many of these boats were overloaded. They capsized and causes the deaths of women and children.

After some research they discovered the root cause was eating processed Cassava. So, while the Mayor believed his prompt action was the safest approach, it actually caused a number of deaths which should have been avoided.

Alarm clock on laptop concept for business deadline, schedule and urgency

The principal of ‘now or never’, causes people to conjure a worst-case scenario. It kills the ability to think things through and encourages bad decision making. This is why salespeople come up with limited time offers. They are giving you a deadline and introducing a sense of urgency into your decision making in the hope you’ll be rushed into making a purchase.

To compel people to taking action, activists will often try to trigger the urgency instinct. They will stress how urgent a problem is and paint a worst-case scenario of what will happen if you don’t do something now. However, Rosling believes this is counterproductive.

Fear and exaggerated data can numb people to the risks campaigners are warning about which can lead to complacency and inaction.

For example, most countries say they are committed to fighting a climate change but aren’t tracking their progress. It begs the question: how can they truly fight climate change if they are not tracking their progress?

Rosling tells us that the world faces five serious risks: global pandemic, financial collapse, world war, climate change and extreme poverty. The first two have happened before while the second two are happening now.

They need to be approached with cool heads and data analysis rather than sparking fear and urgency. It’s about crying wolf. It can lead to these risks being ignored despite the dreadful consequences. We must worry about the right thing.

The idea of factfulness is to remember that things might not be as urgent as they seem. If you’re afraid and under pressure to act quickly, you are likely to make bad decisions. We must take a breath, take action based on data and be very wary of fortune tellers who insist they know what’s going to happen. Although the world’s problems need to be solved it is not always a good idea to take urgent or drastic measures.

Chapter 11: Factfulness in Practice

The final chapter brings everything together and demonstrates how all the lessons explained so far can be put to practical use. We see each of the ten instincts on show and how factfulness can lead to truly positive real-world solutions.

To demonstrate, Rosling takes us to a remote village in the DRC. He had travelled there to investigate a disease which was caused by eating unprocessed Cassava. The villagers believed he was collecting their blood to sell it and they were angry.

All the instincts discussed in this book were on display. The sharp needles and blood had triggered the fear instinct. The generalisation instinct made them categorise him as a plundering white man. Blame instinct caused them to assume he had malicious intent and the urgency instinct convinced them they had to act immediately, in this case by threatening him with machetes.

Things might have worked out very badly for both him and his translator if it hadn’t been for an old woman who successfully calmed the crowd down and explained that he was trying to help them. Although she was illiterate, she was bringing all the core principles of factfulness to bear in a very dangerous situation. As such, she managed to save both their lives.

In the same way we can bring it to our daily lives, in business, education and journalism and communities. Children should be taught to adopt a fact-based approach to life which will help them to develop a better view of the world and create better solutions. Children should be taught to be curious, to hold two different ideas at the same time. They should be willing to alter their opinions with new facts. This will protect them from ignorance.

Having a typo in your CV can keep you from getting a top job. However, people who make policies are placing a billion people in the wrong continent. Businesses have distorted world views and fail to understand that markets are growing in Africa and Asia. Being an American company is no longer a privilege which will automatically attract employees and customers. If investors relinquish their preconceptions about Africa, they may realise that it contains some of the best business opportunities in the world.

With a more factful attitude, journalists may become aware of their dramatic world views and present something more accurate and useful. However, it is a bit of a stretch to expect them to truly embrace all the principles of factfulness and start reporting the mundane alongside the unusual. The onus is on people to learn how to consume news in a more factful manner.

If you are ignorant at the global level there’s a good chance you’ll also be ignorant at the local level within your own community, company or organisation. They are all using erroneous data to manage their businesses and prepare for disasters.

Leaders in companies, cities, countries and organisations should carry out fact-based surveys to uncover ignorance within their organisations. Only by doing so can they develop a more accurate and realistic world view. Factfulness can be put into practice in all our daily lives, at home at work and in our communities.

Running a Company from the Financial Perspective | Accounting Analysis

Accrual Accounting versus Cash Accounting

Accrual basis = immediate recognition.

Cash basis = when the case is received.

Before we dive into earnings management as a subtopic within business analysis and valuation, it is helpful to understand the difference between Accrual and Cash Accounting. The cash basis is only available for use for companies has no more than $5 million sales per year.

The accrual basis is used by larger companies because matching revenue and expenses in the same reporting period so that the true profitability of an organization can be discerned.

Cashflows are harder to manipulate. The big difference between the two is when the transactions are recorded.

Cash basis: Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.

Accrual basis: Revenue is recorded when earned and expenses are recorded when consumed.

Revenue recognition is delayed under the cash basis until customer payments arrive at the company. Similarly, recognition of expenses are paid under the cash basis until such time as supplier invoices are paid.

Revenue recognition: a company sells $10K of green widgets to a customer in March which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice.

Expenses recognition: a company buys $500 of office supplies in May, which it pays for in June. Under the cash basis, the buyer recognizes the purchase in June, when it pays the bill. Under accrual basis, the buyer recognizes the purchase in May, when it receives the supplier’s invoice.

Creating Cookie Jars: by deferring revenue that was genuinely earned or by taking additional expense by taking on excessive reserves for bad debts (we’ll explore this in a future post)

Debt Covenants: Keeping ratios within certain ranges. Debt/Equity. Lender have a capped upside. So lenders like covenants; What if you are ear to violating your covenant? Then you might adjust the bonus threshold.

Opacity of the Firm: capital markets & stakeholders. Competitive consideration: opaque firms will use the argument that they can’t divulge financial statement performance to the same degree as other firms because of their competitors.

You have to sit in awe of the most in genius management invention of all: Plausible Deniability

STEP 2: ACCOUNTING ANALYSIS:

How to adjust financial statements for distortions?

How firms communicate with financial statements and how regulations and managerial discretion affect statements for distortions. There are several steps to Accounting Analysis:

Step 1: Identify Principal Accounting Policies:

Key policies and estimates used to measure risks and critical factors for success must be identified. IFRS require firms to identity critical accounting estimates. For example banks issue credit risk and interest rate risk. For airlines, depreciation is important because their biggest asset are the planes themselves. Therefore, for airlines, depreciation is a critical accounting policy. It is also where the accounting manipulation can occur.

Step 2: Assess Accounting Flexibility

Accounting information is less likely to yield insights about a firm’s economics if managers have a high degree of flexibility in choosing policies and estimates. If the firm is using GAAP accounting; there is limited flexibility for example look at how restrictive R&D and Marketing cost are under GAAP. How much of the flexibility has management already used? For other areas under GAAP, there is a lot of flexibility for example credit risk. Is the company being aggressive or conservative? A firm that is conservative now has the potential to be aggressive.

Step 3: Evaluate Accounting Strategy

Flexibility in accounting choices allows managers to strategically communicate economic information or hide true performance. How has their accounting differed from competitors? Are the accounting strategies changing regularly; think of CGIs accounting policy changes in the last decade. Does the firm have realistic assumptions in the past.

Issues to consider include:

  • Norms for accounting policies with industry peers
  • Incentives for managers to manage earnings
  • Changes in policies and estimates and the rationale for doing so
  • Whether transactions are structured to achieve certain accounting objectives.

Step 4: Evaluate the Quality of Disclosure

Managers have considerable discretion in disclosing certain accounting information. Is the firm providing adequate information about their strategy and explain the economics of its operations? Are those accounting policies justified adequately? Is the firm providing equally helpful disclosures in bad times? Firms that are more transparent are potentially far less likely to conduct earnings management.

Issues to consider include:

  • Whether disclosures seem adequate;
  • Adequacy of notes to the financial statements
  • Whether the management report section sufficiently explains and is consistent with current performance
  • Whether accounting standards restrict the appropriate measurement of key measures of success

Step 5: Identify Potential Red Flags

Unexplained transactions that boost profits. Here are a few examples.

  • Unusual increase in inventory or A/R in relation to sales
  • Increases in the gap between net profit and cash flows or tax profit
  • Use of R&D partnerships, SPEs or the sale of receivables to finance operations
  • Increasing Gap between Net Income and Cash Flow from Operations: firm may be fiddling with accruals.
  • Unexpected large asset write-offs (suddenly just write something off)
  • Large year-end adjustments
  • Qualified audit opinions or auditor changes
  • Related-party transactions (Valeant and Philidor)

Maybe we should list MORE!!!!…..

Red Flags in Accounting used for Earnings Management by (some) CEOs and CFOs Today

Note that Earnings Management is not illegal in some cases, in fact, it’s a strategy used by many companies believe it or not. Just like a Prime Minister who announces a snap election, a CEO can engage in earnings management (the manipulation of Financial Statements) behind a wall garden that only he or she and their team is privy to…..The following at POSSIBLE red flags, it’s hard to tell in reality, but here are things to look for with publicly traded companies:

Income smoothing: Companies love steady trends in profits, rather than wild changes in profits  No kidding! Income smoothing techniques (i.e. declaring high provisions or maybe deferring income recognition in good time) led to lower wild changed in reported earnings. Items to look out for is a pattern of reporting unusual losses in good operating years and unusual gains in bad ones.

Achieving forecasts: Is there a pattern of always meeting analysts’ earnings forecasts, an absence of profit warnings, or interim financial statements consistently out of line with year-end statements? Is a company making changes in accounting policies that revise profits upwards in years when underlying earnings have fallen, and vice-versa? Could be a redflag!

Profit enhancement: Current year earnings are boosted to enhance the short-term perception of performance which is what shareholders and analysts crave!

Accounting-based contracts: When accounting-based contracts are in place such as loan covenants, any accounting policy that triggers a shortcoming can circumvent the debt covenants….

Gap between earnings and Cash flows: Is there a large gap between earnings and cash flows? Is that gap increasing? If so there may be poor accruals.

Reported income and taxable income: Is reported income vastly different from taxable income, with no explanation or disclosure? That’s a problem.

Ratios: Do obsolescence analyses reveal old inventories or receivables, declining gross margins but increasing net margins, inventories/receivables increasing more than sales, or more leverage ratios?

Unusual financial statement trends: What is the relationship between revenue and (earnings per share) EPS growth? Is there a weird pattern of year-end transactions? What is the timing and recognition of exceptional items? What is the relationship between provisions for bad accounts and profits? It’s within a CEOs discretion due to asymetric information.

Accounting policies: Have there been recent changes in accounting policies, such as off-balance sheet financing, revenue recognition or expense capitalization? Furthermore, have the nature, purpose and effect of any changes been adequately explained?

Incentives for management: Are there incentives for managers to boost short-term profit to increase compensation (i.e. bonuses based on EPS and share option plans).

Audit qualifications: Are any auditors’ adjustments outlined in an audit report significant?

Related party transactions: Are these material and to what extent are directors affected

Manipulation of Reserves: Has there been under-provisioning in poor years, over-provisioning in good year, a manipulation of reserves, aggressive capitalization of costs, overly optimistic asset lives, accelerating expenses and increased write-downs in good years, and exceptional gains timed to offset exceptional losses?

Revenue recognition: Has there been a premature recording of revenues, recognizing sales prior to physical movement of goods, recognizing service revenue from service contracts prior to service being performed, upfront recognition of sales that should be spread over multiple periods, percentage of completion estimates out of line with industry norms?

Transaction timing: On the revenue side, have deliveries been sped up near the year end? On the cost side, have discretionary expenditures, such as maintenance and R&D, been delayed to future periods?

Regulated industries: Is there a pattern of engaging in accounting practices whose principal purpose is to influence regulatory decisions (i.e. lowering reported profits where the perception of excessive profits could prompt unfavorable regulatory action)?

Internal accounting: In a multi-division company there may be incentives to shift profits to divisions (or subsidiaries in relatively low tax jurisdictions) to reduce the overall tax burden.

Commercial pressures: In the anticipation of mergers, takeover bids or IPOs, there could be pressure to create a favorable perception by, for example, lowering credit standards to temporarily boost sales OR pumping up the value of the company at the risk of harming long-term customer relationships.

Other: When a company has foreign operations and is re-translating overseas subsidiaries’ results, a functional currency is determined for each entity. However, has the company taken advantage of ambiguous situations or facts, manipulating the selection to generate favorable currency gains or minimize currency losses? Has a company allocated joint costs among long-term contracts to create the appearance that no contract has produced losses, thereby avoiding an immediate loss provision?

The existence of these potential red flags do not indicate anything wrong per se, but should lead a prudent analyst to undertake diligent investigations to see if they are justified by company-specific factors. If distortions do exist, an analyst should, to the extent possible, undo the distortions to better evaluate a company’s financial performance within a historical and competitive context.

Step 6: Undo Accounting Distortions

  • Taxable income
  • Cash flow statement information
  • Management Guidance: no one is forcing management guidance, except management themselves.  What MG is specifically, is when a C-suite manager provides insight into the company to investors or analysts. If you are close to the target. I’d like to get that bump rather have a small loss. You want to cross the Threshold of Zero.

Elon Musk: Leaked Email in August 2016

So if you Tweet the kind of things that provoke strong reactions, that are basically the standard musings I might have made as teenager, you probably have no problem manipulating financial analysts! Expectation management is a tactic that Musk and other CEOs will leverage when the short-term performance for what is a long-term Bezos-style play (Tesla) . Elon Musk (graduated of Queen’s University in Kingston, Canada and whose mother is a Saskatchewanian) is of course a bat-shit crazy badass. In August of 2016, he was saying his Tesla Q4 expenditure will be huge, in the run up to new production line, so he’s providing a small negative estimate of profitability to his own employees and then intentionally leaking the email to the press to get the word out to financial analysts. Leaks in politics = leaks in business.

Here’s the full text that Bloomberg has published:

I thought it was important to write you a note directly to let you know how critical this quarter is. The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production. Once we get to Q4, Model 3 capital expenditures force us into a negative position until Model 3 reaches full production. That won’t be until late next year.

We are on the razor’s edge of achieving a good Q3, but it requires building and delivering every car we possibly can, while simultaneously trimming any cost that isn’t critical, at least for the next 4.5 weeks. Right now, we are tracking to be a few percentage points negative on cash flow and GAAP profitability, but this is a small number, so I’m confident that we can rally hard and push the results into positive territory. It would be awesome to throw a pie in the face of all the naysayers on Wall Street who keep insisting that Tesla will always be a money-loser!

Even more important, we will need to raise additional cash in Q4 to complete the Model 3 vehicle factory and the Gigafactory. The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not “Tesla Loses Money Again”, but rather “Tesla Defies All Expectations and Achieves Profitability”. That would be amazing!

Thanks for all your effort. Looking forward to celebrating with you,

Elon”

“Gap in profitability” So he can’t miss this target badly. In the end, he sold a large build up of environmental credits: so that they could hit Tesla’s target thus satisfying the analysts who wanted to short the stock.

  • Dead giveaways that this is for analysts? Um, technical language that his employees without financial training might not dig.
  • Also, just being a total douche communicator because he probably doesn’t like analysts.

https://cleantechnica.com/2016/09/07/tesla-ceo-elon-musks-august-29-email-employees-calls-3rd-quarter-rally-profitability-full-email-text/

Research & Development GAAP versus IFRS

As a side note: Under IFRS, R&D is significantly more complex. Under US GAAP you will have your R&D costs expense as they are incurred.  Under IFRS, research costs are expense but IFRS has broad-based guidance which require companies to capitalize development expenditures, for internal costs, when certain criteria is met. In IFRS, intangible assets are capitalized and amortized under IFRS but expense under US GAAP. Therefore, this difference means that for IFRS; you need to distinguish research activities with development activities.

Research costs are costs created to plan an investigation or undertake research with the aim of gainin new scientific or technical knowledge. Example, search activities for alternatives for concrete rail ties.

Development costs are incurred in the application of the research findings or knowledge to plan or design for the production of new or substantially improved products before the start of commercial production. Example, testing a new smart phone OS to replace the current OS.

Under IFRS, here was when you would start to capitalize development phase of a project. When it is technically feasible to complete the intangible asset so that it will be available for sale. Its intention to complete the intangible asset and use it is another trigger.