{"id":5181,"date":"2011-12-30T23:35:35","date_gmt":"2011-12-31T04:35:35","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5181"},"modified":"2018-09-21T02:04:31","modified_gmt":"2018-09-21T06:04:31","slug":"leadership-lesson-for-the-eurozone-the-rule-of-small-groups","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/12\/30\/leadership-lesson-for-the-eurozone-the-rule-of-small-groups\/","title":{"rendered":"Leadership Lesson for the Eurozone: The Rule of Small Groups"},"content":{"rendered":"

Beginning with psychologist George A. Miller<\/a>\u2019s seminal 1956 paper, The Magic Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information<\/em><\/a>, scholars have consistently demonstrated that we human beings seem to have an upper limit to our ability to process information, especially within groups. For this reason, when it comes to group decision making, Miller argued, seven is the magic number. \u201cThere seems to be some limitation built into us either by learning or by the design of our nervous systems,” wrote Miller, \u201ca limit that keeps our channel capacities in this general range.\u201d Anthropologist Gregory A. Johnson, author of Organizational Structure and Scalar Stress<\/em><\/a>, also reached essentially the same conclusion, although he caps the size of effective groups at a slightly smaller number, six.<\/span><\/p>\n

Unfortunately, the spheres of investing and economic policy making do not account for this dynamic. Imagine the many groups that financial professionals encounter in their careers \u2014 boards of directors, investment committees, the G-20, and even the eurozone, to name just a few \u2014 and how important it is that these groups function and make decisions effectively. They often ignore the rule of small groups, however, causing the decision-making process to be cumbersome and often ineffectual.<\/span><\/p>\n

So what is it about the number seven, plus or minus a person or two? Researchers across many disciplines have developed a working theory: the number of relationships through which information is exchanged grows exponentially with each additional group member, and the human brain is limited in its ability to function under such complex situations.<\/span><\/p>\n

Studies nearer to finance have found an upper limit of seven as well. Consider, for example, Does Optimal Corporate Board Size Exist? An Empirical Analysis<\/em><\/a>, by Yixi Ning<\/a>, Wallace N. Davidson III<\/a>, and Jifu Wang<\/a>, in which they state, \u201cWe find a consistent and inverse firm performance board size association (t<\/em> =-2.04, significant at 0.05 level). . . . We find consistent and inverse firm value board association across all three board size categories even when we control for board composition, CEO characteristics, inside ownership, firm size, firm performance, yearly effects, and industry effects.\u201d In other words, the lower the number of board members the higher the value of the business, with the reverse also being true.<\/span><\/p>\n

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Correlation Between Board Size and Value of a Business<\/span><\/h4>\n

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