ISBN: 1473669944
Read: March 2018
Rating: 7/10
Amazon page for more details and review (affiliate link)
A valuable primer on network theory. Sandra Navidi pairs concepts with real life examples, a lot of which is based on her experiences and career as a consultant and attorney. The book includes fascinating anecdotes involving some of the world’s most powerful figures from Ray Dalio to George Soros.
Notes
Recognizing the power of the elite few is all the more important as there is no one controlling force, no real checks and balances.
Network science mathematically substantiates the structure and behavior of networks , thereby demonstrating how seemingly amorphous webs of relationships form . Networks consist of “ nodes , ” which are connected by pathways called “ links . ” All networks , whether natural or man – made , behave in the same manner .
According to the law of “ preferential attachment , ” all nodes prefer to attach to other nodes with the most connections , because a greater number of connections increases the chances of individual survival .
The best – connected nodes at the center of networks are called “ superhubs . ”
Superimposing network science onto the financial system allows us to see how people become superhubs by instrumentalizing status , access , and the transaction potential of social capital .
The World Economic Forum – Davos
The real reason why heavy hitters spare no effort or expense to attend? The endless peer – to – peer power – networking opportunities . The WEF is one of the most famous and efficient fora for connecting leaders in the financial industry , with seven hundred journalists present , who broadcast their importance to the world . Contacts made here ripple through professional and personal lives like concentric circles . As the Davos saying goes , “ Three days of attendance saves three months of travel . ” This is a key benefit for people who can always make more money but can never make more time .
This system is not simply interlinked by institutions and transactions , but it is fundamentally a human system , because on the most basic level it is the result of human interaction . Understanding the interconnections of the key players is vital if we want to understand the system as a whole .
Why should we care ? Because the actions of a relatively small group of individuals influence everything from national economies to the stability of the system as a whole . The heads of banks , private equity firms , hedge funds , and central banks make fundamental strategic decisions that directly impact industries , jobs , and living standards — our industries , our jobs , our living standards . Yet , despite their pervasive power , these moguls are still simply human .
An individual ant , through communication with other ants , receives instructions on how to behave . There is no “ leader – ant ” that determines the dynamics of individual interactions or the colony as a whole ; together , all ants contribute to a well – functioning and efficient system .
By the same token , in the global financial system , the actions of autonomous individuals lead to collective activity . Who are the players in this system ? They are executives at financial institutions , such as banks and investment funds ; leaders of public – sector institutions , such as central banks and the International Monetary Fund ; and many other formal and informal actors who interact in complex transactions across national borders .
The key players understand that the ultimate competitive advantage relies on the extent and depth of personal bonds and alliances — the network of links or connections that gives a person influence . They understand the system itself , the complex relationship architecture , and the “ magic formula ” of developing powerful connections . From their superior perspective , they can see how their networks provide them with unprecedented opportunities , resources , and support , and thus a greater ability to influence the system as a whole .
Douglas Rushkoff poignantly notes , “ If you don’t know how the system you are using works , chances are the system is using you. ”
Davos epitomizes the principles of network science as they apply to human beings . These meetings tangibly demonstrate that similar people attract each other — and that those who already have the most connections attract even more . The Davos success formula ? The resort is hard to reach , isolated , and difficult to navigate . Deprived of their usual environments , infrastructure , and privileges , leaders are crammed into a vacuum with nowhere else to go . Constantly caught in bottlenecks of security controls , coat checks , bus lines , and traffic jams , they have no choice but to become engaged in conversation . You literally cannot escape mingling , and it is this inefficiency that actually drives the über – efficient networking dynamics . Other conference organizers have tried to compete with similar concepts , yet so far none have succeeded .
Examples of Superhubs
Examples of major superhubs include bank CEOs like Jamie Dimon of JPMorgan ; George Soros , the billionaire hedge fund manager ; Christine Lagarde , the managing director of the IMF ; and economist Nouriel Roubini .
They have successfully built and navigated personal networks based on shared trust , experiences , and backgrounds . While their individual relationships make them powerful , their combined power is exponentially higher and leaves its imprint on the world .
Because these relationships are invaluable in regard to access to resources and crucial information , they constantly travel around the globe to cultivate them , despite the significant investment of time , energy , and money . These leaders can outsource all kinds of professional skills , but they cannot outsource the interpersonal skills needed build deep and resilient relationships .
From the vantage point of ordinary citizens , finance has become increasingly abstract , impenetrable , and disconnected from their worlds . One of the main reasons for this disconnect is that the powerful self – reinforcing dynamics of the financial system have led to financialization of our economy .
Today eighty people hold the same amount of wealth as the world’s 3.6 billion poorest , and the combined wealth of the richest 1 percent will soon overtake that of the other 99 percent .
This development has been exacerbated by the fact that the wealthy can capitalize on returns on ownership rather than solely on labor , a practice known as “ rent – seeking . ” In other words , they can let their money work for them , and over time these investments yield a higher rate of return than the economy’s rate of growth . In contrast , salaries derived from labor don’t rise as quickly as the returns on capital .
Serial entrepreneur , superinvestor , and billionaire Nick Hanauer has cautioned his fellow zillionaires that the pitchforks are coming . An unapologetic capitalist , he argues that the U.S . is changing from a capitalist to a feudal society . In his opinion , this wealth accumulation is socially destabilizing and will inexorably lead to a revolution , which will likely be triggered by a sudden and unforeseen event .
Hedge fund billionaire Paul Tudor Jones echoes that view , opining that “ income inequality will end in revolution , taxes , or war . ” While he also praises capitalism , he feels “ we’ve ripped the humanity out of our companies . . . threatening the very underpinnings of our society . ”
George Soros
Billionaire and hedge fund legend George Soros has built one of the largest and most powerful global networks in the world . It is so vast and complex that it is almost difficult to fathom . Soros has attended the World Economic Forum ( WEF ) in Davos for the last two decades and , as a veteran , truly knows how to optimize his time in this surreal place . He is meticulously scheduled for nonstop bilateral meetings with prime ministers , presidents , central bank governors , and billionaire businessmen.
Focusing on making money is regarded as somewhat one – dimensional , but giving it away is an effective method for increasing one’s standing in society . In 1979 , Soros began engaging in philanthropy with his Open Society Foundations , which work to build tolerant societies with accountable governments and support education , health , and justice systems , among many other causes . They now have offices all over the world , and their networks are interlinked with other Soros and non – Soros – related networks . Moreover , in the nineties Soros helped establish the International Crisis Group , which is committed to preventing and resolving deadly conflict , and Transparency International , which monitors and publicizes international corruption . All organizations are independent , nonprofit , and nongovernmental .
Being a well – known philanthropist has given Soros access and helped his business , although he argues that he does not need philanthropy for business purposes and , quite to the contrary , worries that it may cloud his judgment .
What George Soros does understand is the importance of creating a vast network of personal relationships ,which is what has helped catapult him into the realm of the financial elite , and has made him a “ superhub . ”
Network Theory
In every network , the nodes exist in a hierarchy : The majority of nodes have only a few connections . Some nodes , which have several connections are known as hubs . 7 Only a select few nodes , the superhubs , have so many connections to other nodes , hubs , and superhubs that they are virtually connected to the entire network .
Every network — be it the universe , an organism , or a financial network — has a natural tendency to expand . Expanding networks do not follow a normal distribution ; nodes prefer attaching to other nodes that are already more connected , because the more links a node has , the greater its chances of survival . Thus , it is advantageous for one to be connected to a stronger , healthier , more robust node . As a result , a few nodes , so – called hubs , attract a disproportionate number of links and become central connections .
Due to power – laws , you can anticipate that the behavior of the network will be influenced by many nodes trying to create links to hubs and especially to superhubs . Thus , a few nodes , the superhubs , will have the most influence within the network , and their actions and interactions will have broad effects throughout the network . That is certainly true in our financial system .
Therefore , a network that consists of nodes with only a limited number of connections is more robust , because fewer connections will make it harder for failure to trigger a domino effect and spread . Our financial system consists of many human superhubs with high connectivity and is most definitely not immune to the failures of those with the greatest influence .
Human superhubs can often be easily recognized . You can literally observe network science in action when they enter a room : All those other nodes in black suits automatically turn toward them like magnets , eager to connect . Soros is the quintessential financial superhub , with countless strong connections to powerful people and institutions and broad influence through his words and actions .
Any other node in the network would be ecstatic if they could develop a connection with George Soros . Why ? He , like all other superhubs , has status and access that he can transfer to others . In any human network , the value of a person’s position is determined by the number and the quality of his connections .
Status
Status is an intangible and somewhat imprecise unit of measurement of an individual’s rank or position in society , largely based on other people’s perceptions . It reflects prestige , authority , and dominance and represents the influence and power a person has in the community relative to others .
Status has economic value as well ; it can be transacted to acquire other things of value such as favors , information , and promotions .
Superhubs may bestow status by association on others , because they like and trust them , feel that they are a good complement to them in some way , or that they can help them realize their interests . Improvement of position in a network and an increase in status are synonymous .
Even in the event of a massive failure , the superhubs ’ tight network connections often prevent peers from falling through the cracks . Loyalties and social capital are a strong base on which relationships are cemented , and most of the executives who lost their jobs during the financial crisis later resurfaced elsewhere .
Dunbar’s Number
Building and maintaining a large network is challenging — the larger the network , the greater the time and effort required . So superhubs prioritize quality over quantity and discriminate . 20 According to “ Dunbar’s Number , ” our minds only have the cognitive capacity to retain approximately 150 true connections or relationships .This natural limitation makes access all the more valuable . The concept of Dunbar’s Number is widely recognized in business circles , particularly in client – oriented professions .
Convening power is a power multiplier . Superhubs are already powerful , but by linking up with other powerful and like – minded individuals , they increase their influence exponentially . Their power is twofold : By virtue of their status and reputation they have access to the most powerful people , and with their credibility they have the authority to convince those powerful people to join their cause . Klaus Schwab , the founder of the World Economic Forum , and George Soros are good examples . When they call , people line up , eager to join the cause whatever it may be . That convening power , in turn , increases their status .
Furthermore , superhubs have a great amount of control over network flows because they reside in its nerve center . They can open up access to one node by another , control the distribution of information , and limit access of other nodes , essentially playing the role of gatekeeper with regard to coveted opportunities .
In financial networks , the most important outcome of access to powerful people is access to the network currencies they control : information , financial capital , and opportunities . These are the essential links in the global financial network.
In the networks of the superhubs , every request for a favor is a complex negotiation , and favors are like loans collateralized by the status of the borrower .
Social capital complements financial and human capital and is one of the forces that drive economic growth .
Financiers follow an unwritten honor code when it comes to relying on someone’s word , so the exchange of favors balances out most of the time . When it does not , the obligor is in danger of being penalized with status – lowering gossip or , worse , expulsion from the network .
His own powerful networks serve as a crucial resource and when Soros calls , people respond .
Money and Central Banks
Money , as a means of exchange and store of value , exhibits typical network properties . For instance , paper currency travels in patterns and at a speed similar to viruses .
Today almost all countries have central banks , which are independent government agencies , such as the Federal Reserve , the European Central Bank , or the Bank of England . Their mandate is to attain stable growth at low inflation and maintain the stability of the financial system . To achieve these goals , they use monetary policy : setting interest rates , regulating and supervising financial institutions , and providing liquidity in times of crises .
Since 2008 , central banks have pumped trillions of dollars into the global financial system to give politicians time to create more fundamental solutions . They now rank among the biggest investors in world markets . 2 Central banking has become a quasi “ asset class in and of itself ” as they move global markets with their decisions .
In contrast to political institutions , they can make quick decisions and execute them . As a result , central bankers are now among the most powerful people in the world — in many respects more so than elected officials — due to the sheer scale of their financial firepower and their ability to quickly pull the trigger . They co – determine the course of the global economy and have a huge impact on all of our lives .
Central bankers live in a rarefied and peculiar world . Due to the length of their terms and frequent meetings throughout the world , they know and trust one another and communicate on the same frequency . Highly educated and with a deep passion for economics , this small group of experts tends to be friendly , unpretentious , and approachable , though somewhat reserved , because they must be careful of what they say.
The increased interconnectedness of our world and constant crises and emergencies have shaped a transnational central banker identity , further homogenizing an already fairly uniform group .
Ben BernankeThe chairman of the central bank of the U.S . , the Federal Reserve , is perhaps the most powerful person in the country besides the president .
Bernanke comes across as a genuinely nice and regular guy . He is always friendly , albeit slightly reserved , and markedly different from other financial top executives . He lacks the typical alpha male trait of a big ego , which might have interfered with his sober and prudent decision making .
The mild – mannered , soft – spoken , and unassuming Bernanke , who had overnight acquired almost unfathomable power , had suddenly taken a strong and courageous lead . Some of his measures may have lacked democratic legitimacy , but while in normal times democracy is effective , in times of an existential crisis , a more imperial style may sometimes be expedient . Bernanke warned that monetary policy was no panacea , but he was forced to step in to compensate for political inertia . Taxpayers may not have been adequately compensated for the risks taken with their money , but the system was saved , at least for the time being .
Although Bernanke lacked the strong relationship portfolio possessed by his well – connected predecessor , Alan Greenspan , once he became Fed chief , he actively embarked on developing relationships with members of Congress and the White House , while also relying on the much better connected Hank Paulson and Fed board member Kevin Warsh .
BIS
Every other month , central banks meet at the Bank for International Settlements ( BIS ) in Basel , Switzerland . The oldest international financial institution in the world , the BIS is the bank for sixty central banks around the world and counts among its members the Fed , the ECB , and the Bundesbank . As the nerve center of the international financial system , it acts as a prime counterparty for central banks , supporting monetary and financial stability and conducting research and analysis .
Set up in 1930 primarily to manage Germany’s World War I reparations , the BIS’s unusual history has to a large extent been driven by the strong personalities of central bankers . 10 Its offices are located on sovereign soil not subject to Swiss law , and its employees enjoy quasi – diplomatic status and Swiss tax exemption .
“ Regular ” banks take deposits and in turn pay interest to depositors . Then they put the deposits to work to generate revenue , usually by giving loans for which they receive interest or by investing .
Savings banks are focused on accumulating money , commercial banks on working with businesses , and private banks on servicing high – net – worth individuals .
Investment banks do not have banking licenses and do not take deposits from savers . Rather , they invest on their clients ’ behalf , render investment advice , and engage in corporate transactions such as mergers , acquisitions , and initial public offerings .
Shadow banks is a catchall term for all financial service providers that lack a banking license , such as investment banks , broker dealers , investment funds , and money market funds . Shadow banks have recently come into focus as much business has fled from heavily regulated banks to the lightly regulated and nimbler shadow banks . In fact , they have received such large capital inflows that they are now considered a potential risk for financial stability .
The International Monetary Fund ( IMF ) promotes global monetary cooperation , financial stability , international trade , employment , and economic growth . Established at the Bretton Woods Conference in 1945 , today it has 188 member countries11 and holds regular Conferences around the world for its staff to meet with central bankers , finance ministers , policy makers and representatives of the private sector .
The meetings were governed by the Chatham House Rule, meaning that information could be used but not attributed to any particular person .
In finance , the most valuable currency is actionable information that can be converted into monetary gain . People with access to the right information to capitalize on business opportunities have an invaluable advantage — and the most efficient and reliable way to obtain information is to get it directly from the source .
As the decisive catalyst for our thoughts and actions , information has enormous network power because its movement holds together the links and nodes that comprise the network and determine its operation .
The Internet has become a democratic platform , and as
Eric Schmidt , executive chairman of Google , notes , “ We’ve gone from a hierarchical messaging structure where people are broadcast to , and information usually had local context , to a model where everyone’s an organizer , a broadcaster , a blogger , a communicator . ” As a result , we are suffering from information overload , which makes filtering relevant information all the more challenging . Big data showing statistical correlations only adds to the inundation .
Since the results of these often elusive constructs only materialize in the future , verifiable information is all the more critical . However , publicly available information gives an incomplete picture at best and a skewed or inaccurate one at worst . The media covers finance from all angles , as do bloggers , tweeters , and other social media users , in addition to experts , pundits , and thought leaders . The research that financial institutions publish is naturally biased , because it is a vehicle for them to sell their products and bolster their reputations .
The Information War
In the information war , public relation agencies and corporations spend exorbitant amounts of money to surreptitiously invade traditional journalism . They have hired legions of journalists at attractive salaries , who often — under the guise of serious journalism — combine compelling storytelling with stimulating and entertaining multimedia content to present the company in the best light .
Perception is reality , and the line between favorable reporting , spinning , and outright manipulation is blurry .
Another currency in financial markets is misinformation . Spreading rumors to induce others to trade has long been a tool of market manipulation and profiteering . A prime example is the fall of Lehman Brothers . Rumormongers , mostly short sellers , spread whispers that Lehman would be the next Bear Stearns , which led to a self – fulfilling prophecy : a run on the bank , a precipitous fall in share price , and the institution’s eventual demise .
In a complex environment and crisis atmosphere , distinguishing fact from fiction can prove near – impossible , especially when there is a good chance — as in the case of Lehman — that enough fiction over time will be perceived as fact .
Homophily
The glue that binds original sources together is homophily — social ties based on shared backgrounds , personalities , and qualities that facilitate communication and trust .
Whereas people with strong ties are reliable and easily accessible sources , weak ties are equally important because they open up access to new information outside of established business and social circles .
By virtue of their centrality , superhubs are nerve centers and information brokers , because they have access and control over the information flow . The information inundation , which makes it increasingly difficult to filter the signal from the noise , has only amplified their information power .
Consulting and Speeches
There are no barriers to entry as it is not a licensed profession , and anyone can call him – or herself a consultant . Therefore , having top academic credentials , policy experience , and access to high – caliber networks provide thought leaders with distinct competitive advantages that propel them into the league of superhubs .
For U.S . thought leaders , the rate for a one – hour speech usually starts at $ 75,000 in addition to first – class tickets and five – star hotel accommodations . An overseas speech can exceed $ 150,000 depending on the remoteness of the location .
The great demand for them is remarkable , considering that most economists ’ forecasts have been notoriously incorrect . The spectrum of their misjudgments ranges from the movements of the stock markets to the breakup of the euro .
In a different world of low global growth , increasing political instability , and incalculable macroeconomic risks , CEOs look for unbiased guidance and innovative perspectives . Jamie Dimon once said that CEOs are terrible forecasters who can only see the recent past . High – level executives often operate in an echo chamber of homogeneous thinking , which can lead to tunnel vision and “ analysis paralysis . ”
Thought leaders are the signals among the noise of groupthink , and they can help CEOs generate fresh ideas and see the big picture . By influencing the influencers , thought leaders ’ ideas become part of the economic and financial evolution , providing them with “ expert power . ”
Some argue that , figuratively speaking , CEOs give these advisers their watch so that they can tell them the time . Others criticize that consultants only provide CEOs with cover and justification for poor performance or unpopular measures such as layoffs .
Social Capital
Another commodity that superhubs exchange within networks is social capital , which consists of resources such as information , services , and the leveraging of influence . Social capital is an investment that pays a return , as the analogy “ capital ” implies . The higher one’s position in the hierarchy , the greater one’s creditworthiness , meaning one’s wealth in social capital and the ability to transact it .
Ultra – capitalist superhubs are as rich in social capital as they are in relationships , and in network commodities that they can exchange . In a sense , social capital serves as a vehicle for the transaction of other network commodities such as money and information .
Opportunities are both the cause and the effect of inextricable links between people , money , and information — with social capital serving as a conduit . They are also subject to power laws , according to which the more you have , the more you get .
The rich get richer
The more quality connections you have , the greater your access to additional connections , capital , and information , which in turn leads to more opportunities . These properties — social capital , financial capital , and information — are interdependent , meaning that the more you have of one of them the more you can get of the other .
George Soros had the prerequisite network , capital , and information to bet on the British pound , a trade that is rumored to have netted him a $ 1 billion profit . His global connections , especially in the political realm , provided him with information that was not generally known . Because he had access to so many pieces of the puzzle , he was able to zero in on the opportunity and convert his insights into monetary gain . Of course Soros is brilliant , but speculation is always , at least in part , based on information . The better the network , the better the information ; the better the information , the better the analysis ; and the more money bet , the more profit yielded . In 2016 , Soros’s net worth amounts to $ 24.9 billion .
Larry Fink , founder of BlackRock , has created sophisticated , world – leading risk analysis systems that build upon existing information to yield even more valuable insights . Beyond merely having access to information , he produced new information , thus becoming an information hub . The more sophisticated information he produced , the more capital he attracted , the more his network grew , and the greater his opportunities became .
Emotional Intelligence
One of the most indispensable skills leaders must possess is emotional intelligence .
Evolved leaders run institutions more smoothly and successfully because they are more comfortable facing their shortcomings , their limitations , and criticism from others .
Selling ideas and products requires social and persuasion skills . Since finance is abstract and intangible , and its performance only materializes in the future , it is vital for executives to build trust and create convincing narratives for transactions .
Having a premium brand is an invaluable competitive advantage ; it facilitates sales and can be a precondition for obtaining access to desirable client segments . Accordingly , most superstar CEOs are “ brand masters , ” marketing billion – dollar companies as well as their own personal brands , which in many cases are synonymous with the firms they represent . Dimon has established his own brand to stand for leadership , strength , and a fortress – like balance sheet .
Today the perception of performance has become even more important than performance itself . In contrast to the nineties , most careers today fail due to adverse perception regarding performance or personalities . Therefore , executives must actively manage perception through communication . Reputation , or the perception of others , results from integrity , performance , and consistency .
IQ
High intelligence and academic achievements at top schools are indispensable to becoming a network’s nucleus .
Superhubs are typically open – minded , intellectually curious , creative , and receptive to considering new opportunities .
They are equipped with mind – sets that can cope with and even thrive on times of uncertainty and change , since they understand how our complex , nonlinear world operates .
Contextual intelligence — the ability to understand evolving environments and capitalize on trends — is another important aspect of cognitive ability . Being connected and understanding interconnections are an important source of relevant power .
With their ability to look beyond facts and think outside of conventional parameters , superhubs are better able to anticipate change , develop a vision , and execute . To keep their minds crystal clear , the newest trend among superhubs is thousands of years old : meditation . Hedge fund bigwigs Ray Dalio and Paul Tudor Jones , as well as many Goldmanites , invest time and money in introspection to clear their minds and gain a competitive edge .
Original Ideologies
Another common characteristic of intellectually curious superhubs is that they often construct their own theories or ideologies , rather than follow those of others . In their quest to crack the code of the world’s operating system , they fine – tune their intellectual discipline and intuition , and posit their own framework of successful strategies .
How a philosophy course at Harvard inspired him to base his thinking on the assumption that nothing is provably certain . The daily decisions he made on Wall Street were based on probability : “ Success came by evaluating all the information available to try to judge the odds of various outcomes and the possible gains or losses associated with each . ”
These theories often reflect an understanding of the psychology of human nature , markets , trends , and turning points — in short , the system and the mastery thereof .
The theories themselves may not be the most important factor — and , indeed , are not always that innovative — but they reflect the typical superhub’s underlying skepticism , intellectual discipline , and intuition , which lead to clarity of thought and result in prudent decision making .
Structured thought parameters also seem to provide orientation and a focal point that helps superhubs stay in control of their emotions .
For many superhubs , having their own intellectual creation is also a matter of prestige and a way to distinguish themselves .
While this is likely an exaggeration , top executives in the financial world generally have big egos , a phenomenon that seems more pronounced in the commercial sector than in the policy world . However , due to the financial crisis , the zeitgeist has changed in recent years . As a result of political and shareholder pressures , the imperial and hard – charging celebrity “ chief ego officer ” has fallen out of favor and been replaced by “ boring is the new sexy ” : low – key , risk – conscious , and conciliatory personalities .
Ray Dalio
Dalio invests on the basis of macroeconomic trends . His rigorous analysis , disciplined investing , and consistent performance have garnered the attention of many sophisticated investors . Dalio showed great foresight when he warned of the financial crisis well in advance and throughout it outperformed the market when many other funds faltered . Like many successful billionaire money managers , he is not primarily motivated by money , and unlike most of them , he lives rather modestly .
What Dalio lacks in material pretensions , he makes up for in intellectual ones . He does not want to be seen as merely a speculator or trader , but instead — driven by the desire to make a social impact — as a philosopher and educator , explaining how the world works to make it a better place . He credits much of his success to transcendental meditation , which he practices religiously .
Robin Hood Foundation
Robin Hood’s board members , a who’s who of Wall Street , have a combined net worth of $ 25 billion . They bear all the costs of the event , ranging in the millions , so that all donations can flow directly to funding projects . So far , Robin Hood has donated to 200 charities . Paul Tudor Jones has redefined the standard of fund – raising and is considered one of the pioneers of “ venture philanthropy , ” a performance – based and results – oriented form of giving . His “ anchor guests , ” or superhubs , have been an incredible draw for Wall Streeters ; the charity provides an inroad to access for top executives , and if you want to “ belong , ” you must pay up . It is peer pressure at its best for a good cause . In this parallel social universe , power players revolve around each other like binary stars , and the law of homophily — of similarity breeding connection — creates a gravitational field of attraction .
For them , the dimensions of time and space have shrunk as they continuously circle the globe on planes , zigzagging between cities and continents within the space of a few days . Often they spend more time in the air than on the ground , with jet lag as a constant companion . Being able to swiftly travel anywhere in the world allows them to take advantage of more opportunities than the average person , in business and otherwise .
The old adage that “ the higher you climb , the lonelier it gets ” rings true in that points of relation with regular people are few and far between : All menial work is outsourced , and chauffeured cars , private jets , and private elevators physically separate them from the rest of the world .
Their personal and professional lives are closely intertwined , and friendships evolve over the course of time . Typically , financial executives do not work to live , but they live their work . Through their social interactions , they strongly influence one another , thereby homogenizing their sphere even more .
Individuals who “ share a common employment history and educational backgrounds , gender , and social status ” relay privileged information directly , which can provide an important advantage in identifying and exploiting business opportunities . 4 By the same token , a high number of contacts ensures quick dissemination of information . The financial elite tick the same way , and emit the same social signals . Knowing each other’s history and reputation enables them to make better judgment calls . In contrast , out – of – network acquaintances do not provide any context and the parameters needed to calibrate one’s decision – making process .
Meritocracy
A perfectly just system should be meritocratic , but true meritocracy has proven elusive . In 1995 , Newsweek featured a cover story titled “ The Rise of the Overclass , ” which included numerous Wall Street stars — women and various ethnic groups among them . This was seen as evidence of a diverse meritocracy . But diversity has proven to be illusory in the world of high finance.
At the entry level , human capital has indeed become more diverse , but the most senior positions are still primarily occupied by white males .
In order to have a chance to climb the ranks , the safest bet is to adapt and try to pursue as many commonalities as possible . However , there is one commonality that is difficult to achieve without an advantaged socioeconomic background : sophistication .
The vast majority of firms require a “ cultural fit , ” which usually means having the right accent , being well – traveled , having similar experiences , and employing the same social etiquette — in short , characteristics that require an upbringing in a reasonably wealthy household and an investment of time and money .
Students buying into that network learn how to interact with high – level professionals and how to maintain and grow those relationships . They form deep bonds for life by spending intense time with peers in classrooms , in libraries , and working together on projects , thereby learning to think along similar lines and developing similar world views . It is an exclusive club , with the default assumption that anyone who has not attended a top school is not quite on par , or — even if of comparable qualifications — at the least , very different .
The old boys ’ network is less conservative and stereotypical than it used to be , but it is still alive and well . Its members have similar social backgrounds and usually live in an exclusive bubble of privilege . Because of their influence , they determine the culture , define norms , and set the tone . The more – senior members recognize themselves in the younger ones and relate to their personal and professional struggles . Based on loyalty , they provide mentoring , introductions , and favors . Since both old and young club members share similar views , they reinforce one another , thereby becoming even more conformist .
Since both old and young club members share similar views , they reinforce one another , thereby becoming even more conformist .
In the insider – outsider dynamic , members of the old boys ’ network — without premeditation and perhaps subconsciously — exclude others merely by sticking together .
The vice chairman of the U.S . Federal Reserve and former central bank governor of the Bank of Israel , Stanley Fischer , was once the MIT professor of former Fed chairman Ben Bernanke and ECB president Mario Draghi . Fischer had previously occupied positions as deputy managing director at the IMF , chief economist at the World Bank , and vice chairman at Citigroup . His students also included former U.S . treasury secretary Larry Summers and Greg Mankiw , who chaired the Council of Economic Advisers during the administration of George W . Bush . Fischer had also been in the running to become IMF chief when Dominique Strauss – Kahn resigned , and Fed chairman after the end of Bernanke’s term . Fischer’s , Bernanke’s , and Draghi’s aligned thinking was reflected in their similar approach to quantitative easing during the financial crisis and in its aftermath . The central bank governor of the Bank of England during the crisis was Mervyn King , who had also once taught in MIT’s economics department . It is quite incredible how much our world has been shaped by the few who attended the same school .
Think Tanks
Think tanks are more influential in the financial system than I had initially realized . The term sounds abstract and esoteric , but within think tanks there are real people with real power and real money actively exerting influence . They are seamlessly interlinked with the business , financial , and — perhaps most importantly — political establishment and , therefore , have all – encompassing access . These nonprofit organizations also bring together experts who conduct research , generate ideas , and advocate interests .
The Brookings Institution is considered the most influential one , counting the heads of Carlyle and Deutsche Bank as trustees . Another influential think tank is the Council on Foreign Relations ,
INET works on reforming economic theories to better serve economies . It was founded by George Soros , and the organization quickly found support from other financiers . Its gatherings are prime examples of executive networking , as they attract a truly mind – blowing assortment of Nobel Prize laureates and otherwise überaccomplished academics , central bankers , and top financial executives .
Goldman Sachs
The epitome of the old boys ’ network is Goldman Sachs . It is the most exclusive of all exclusive clubs and artfully illustrates how the power – laws of network science correlate with actual network power . Due to the fact that Goldman always seems to make money regardless of the circumstances , it has been vilified as the “ great vampire squid wrapped around the face of humanity ” 17 and alleged to have caused as well as profited from various financial crises . Goldmanites are everywhere , as the firm hires former high – level public sector employees , and partners leave the firm to take public office .
Financiers generally believe that compensation is purely performance based and , because it is measurable in terms of profits , well deserved . However , in the complex and opaque world of finance , objective performance measurement is challenging .
There are many unknown variables beyond executive control , such as the blowup of a previously hailed asset class , like energy , or the bursting of a bubble like the Internet . A systemic financial crisis may even reveal that all asset classes are in fact negatively correlated .
The National Bureau of Economic Research suggests that rising salaries are the result of contagion , because boards are influenced by the higher pay awarded by other companies . 19 Rather than traditional compensation for services rendered , today’s pay packages have aptly been described as resembling prizes won at tournaments .
The twenty – five best – paid hedge fund managers in 2013 earned a total of $ 21.1 billion , in 2014 $ 11.62 billion , and in 2015 $ 12.94 billion . 24 As the Guardian points out , the $ 1.7 billion that the two top earners , Kenneth Griffin of Citadel and James Simons of Renaissance Technologies , made in 2015 , is equivalent to the annual salaries of 112,000 people at a minimum wage of $ 15,080 . In fact , Simon’s earnings were so large in 2015 that if he were a country , it would rate as the world’s 178th most productive nation Superhubs as a rule tend to cluster around one another .
WEF History
The WEF is one of the least understood and most controversial organizations in the world . Its mystique may result from the fact that it is the creation of only one person , and doesn’t seem to neatly fit into any box . Even though the Forum was originally focused on economic issues , it now embraces a holistic approach that includes science , politics , and culture . It is perhaps the most effective and powerful network platform and incubator of our time . Like a giant think tank , it focuses on pressing issues and provides a framework for solutions , often by joining or brokering public – private partnerships .
Schwab established the forum in 1971 as a modest gathering of European business executives . With vision , intuition , a curious mind , and laser – sharp focus , he developed the Forum into an exclusive global brand . Now in his seventies , he is still the driving force of the organization and a continuous source of innovation .
What is the magic formula of Schwab’s network power ? Like many other top leaders , Schwab developed a theory at the outset of his career that would become the foundation of all his endeavors . According to the stakeholder principle , “ the management of an enterprise is not only accountable to its shareholders , but must also serve the interests of all stakeholders , including employees , customers , suppliers and , more broadly , government , civil society and any others who may be affected or concerned by its operations . ” He later expanded this concept to include global corporate citizenship , which views “ corporations as stakeholders in global society , together with government and civil society . ”
Schwab’s theory tapped into a worldwide trend , which at the WEF’s inception was only beginning to develop : globalization and the emergence of transnational power elites . The declining power of nation states , the lack of global leadership , and the emergence of powerful conglomerates have increased the relevance of the stakeholder concept . Based on Schwab’s theories , the WEF’s mission takes an all – inclusive approach , inviting representatives of nonprofit organizations and young global leaders without charge . The stakeholder principle provides the WEF with legitimization , authority , authenticity , and a purpose for its platform — to improve the state of the world .
Schwab slowly developed from a node to a hub and then a superhub . Apart from creating a sound ideology and distinguishing himself academically in Switzerland , he also earned a master’s degree in public administration from the Harvard Kennedy School of Government . There he gained international exposure , made numerous important contacts , honed his skills , and solidified his reputation . Among other innovations , he conceptualized the annual Global Competitiveness Report , which also includes sustainability considerations .
He perfectly exemplifies the fact that every network needs a nucleus around which other nodes can circulate .
Schwab cleverly chose a secluded mountainous location devoid of distractions for the WEF’s annual gathering , where he could assemble a high concentration of superhubs .
Moreover , he chose neutral Swiss ground and focused on participants ’ commonalities rather than their differences . By stressing elements of homophily , he ensured a greater draw , as people tend to gravitate toward others with whom they have something in common .
Today more than ever , power is defined by who is the most connected and knows how to best use those connections . Network strength provides network power , and the most successful executives reach the top not solely based on their analytical skills , but because of their strong relational aptitude .
Relational capital
We all begin our professional lives with our own personal human capital , but at a certain level executives are expected to cultivate wide and deep professional networks . Relational capital is an intangible asset that reflects the value inherent in a person’s relationships . The more high – level the relationships and the greater their strength , the more valuable the “ relational capital ” . It is a prized asset , because in a knowledge economy where almost everything can be replicated , a person’s relationships are unique .
“ Relational capital ” creates “ network capital , ” which increases the “ return on relationships . ”
An executive’s relational capital is considered most valuable , because it expands the institution’s own network and , thus , its profitability .
One of the most valuable resources is network intelligence , as we explored in Chapter 3 . The most crucial information comes from other people , not theoretical resources , and this serves as a strong link among superhubs .
As Klaus Schwab noted , contextual emotional intelligence cannot be acquired in reading papers , but only through interactions with other people .
building a deep , diverse , and dynamic network is imperative for leaders , because in order to succeed they must remain informed , have access to opportunities , and the resources to be able to seize them . Strong networks enable superhubs to connect with peers and weak ties alike in order to weave an ever – tighter web that extends beyond the echo chamber of homogeneous thinking and covers any blind spots . Such alliances provide resources , support , and greater influence .
More an Art than a Science : Attraction + Interaction = Transaction
The scarcer human interactions become , the more valuable they will be .That’s why over scheduled financiers , time – pressed CEOs , and over stimulated billionaires invest time and effort to attend international gatherings around the globe .
Networking is aimed at building , maintaining , and using informal relationships to facilitate work – related activities and gain access to resources .
The best networkers practice a holistic approach of “ positive linking , ” because they are genuinely interested in other people , always want to learn through the mutual exchange of thoughts , and enjoy communicating and connecting .
Malcolm Gladwell recognized that a small number of people , the connectors , have a truly extraordinary knack for making friends and acquaintances . They are the threads that tie society together and are an extremely important component of our social networks .
Superhubs all have this network mind – set ; they are the “ chief network officers ” of Me , Inc . Throughout their lives , they tirelessly and effortlessly cultivate a circle of influence . Everything they do promotes networking in a feedback loop of cause and effect . Networking feels natural to them , and they have a knack for placing others at ease . They value quality over quantity , connecting over collecting , and farming over hunting . Often , long – term relationships start out without any specific motivation or business purpose and mature over time , withstanding trials and tribulations before culminating in mutually beneficial relationships .
Having a networking mind – set entails being open – minded . Successful CEOs are curious , seek challenges , push boundaries , and are unafraid of risks or failures . In their lifelong quest to learn and expand beyond the status quo , they embrace the opportunity to meet new people . They usually have a positive view of humanity , seek out new acquaintances , and build relationships for the long term .
Generally , when we meet new people , we quickly prejudge them in line with our biases to save time and stay within our comfort zone . Great networkers keep an open mind ; with their high emotional intelligence , they create true connections and make others feel comfortable in their presence . That’s important , because “ people will forget what you said , people will forget what you did , but people will never forget how you made them feel . ”
Top networkers are memorable . It is not simply who you know but , even more important , who knows you . It helps to stand out in a positive way , be it by way of charisma , intelligent contributions , quick wit , or acts of kindness .
Deep and resilient relationships cannot be built on schmoozing alone ; they must be based on content . Superhubs like to spend time with interesting people who bring conversational currency to the table .
Klaus Schwab , the founder of the WEF , has emphasized that great networkers are not only seekers of knowledge but also catalysts in the exchange of ideas .
Networks are only as valuable as the caliber of people comprising them and as strong as the relationships within them . Since a specific network configuration can increase its effectiveness , CEOs increase their connectivity if their contacts are well connected in turn .
Exclusive networks by definition exclude the majority of people , often by instituting high barriers to entry . Superhub platforms are like invitation – only clubs where the demand for memberships exceeds the supply , and superhubs know how to overcome high barriers by way of status , reputation , and connections .
Homogeneity within a group facilitates familiarity — or at least the illusion thereof — and peers typically respect one another’s achievements , even if they compete .
They combine substance with personality and have the ability to focus on someone with undivided and genuine attention , which makes others feel special . They project a strong presence , draw attention to themselves , and enrapture audiences . With their self – confidence and ability to charm , they manage to persuade and align people , furthering their own objectives .
Most people at the top have a great sense of humor — an expression of social intelligence that is supremely helpful in disarming and bonding with people . Their often self – deprecating quick wit bridges differences in culture , status , and interests .
Many of the most successful networkers take the initiative to build big and bold networks . For instance , Steve Schwarzman initiated the Schwarzman Scholars program , which provides scholarships for international students at Tsinghua University in Beijing to help develop their professional networks .
George Soros , who has started many think tanks and charities , knows that the best strategy to achieve access and influence within a network is to initiate its creation .
Many international financial firms have embarked on the popular strategy of hiring “ princelings ” , the children of the “ Yuan ” percent . Buying directly into the networks of the Asian governing and corporate elite is a convenient shortcut to obtaining access to business opportunities . However , this practice isn’t without pitfalls . Hiring in exchange for business violates U.S . anti – bribery laws , and many major banks have been implicated in this practice .
According to a study from the University of Toronto , professional networking can create feelings of moral impurity and physical dirtiness .
People included in the study felt conflicted when they were motivated by a selfish rather than an altruistic concern . However , those already in power are more comfortable with networking , which reinforces and advances their positions , thereby fortifying existing power structures .
In today’s world , we are all dependent on one another , and creating connections is not about deliberately taking advantage of people , but rather creating opportunities for all . If executed properly , it is mutually beneficial . Self – interested and predatory people repel others and will not get far . Only balanced relationships with real give and take will be sustainable and stand the test of time .