A Human CAPM

One of my preferred examples to use at work is the Fundamental Attribution Error ("FAE"). This bias was proven through the work of Edward Jones and Victor Harris in the late 60's and it is no accident that it is called "fundamental" because it is so common!

The FAE can be expressed through the equation a(Personal characteristics) + b(Situation or contextual characteristics) = any outcome. "a" and "b" are coefficients and imagine a + b = 1. The fundamental attribution error suggests that most people will overestimate "a" meaning that most folks will attribute more of any particular outcome to the personal characteristics of the persons involved. In actuality, the context/ environment/ situation is nearly always far more influential in determining an outcome.

Changing subjects is the capital asset pricing model ("CAPM"). My blogs will "hopefully" never be about corporate finance so let me really simplify why I'm bringing up CAPM. This model purports to be able to describe the price of an asset by analyzing that asset's exposure to different types of risk. The two types of risk most important to CAPM are a firm's idiosyncratic risk - risk that is unique to that firm or asset - and market risk - risk that all participants in any market will experience. This model is foundational to many investment approaches today such as diversifying away risk.

Here's how I think these two ideas - the fundamental attribution error and the CAPM - tie into what many HR professionals confront every day. When we think about how we're able to assist/drive business results, I suggest that there are certainly the individual contributions and special heroics that help things happen everyday. What I would also suggest is that the culture or the environment that employees work within each day also make a huge difference. The environmental context in my mind is the "situation" component of the FAE, it is the "market premium" component of the CAPM. It is a huge differentiator.

I try to think about this when talking to talent or looking to hire new talent. Finding that next "high potential" employee is hard enough. Focus on the work environment and create the right culture for all employees to contribute. Raise the bar and performance will follow.