Puzzles vs. Mysteries

Malcolm Gladwell explores the difference between a puzzle and a mystery in the context of modern information sharing, concealing, and overload using the Enron scandal as his primary example (The New Yorker, 1/08/2007).

He writes, "If things go wrong with a puzzle, identifying the culprit is easy: it's the person who withheld information. Mysteries, though, are a lot murkier: sometimes the information we've been given is inadequate, and sometimes we aren't very smart about making sense of what we've been given, and sometimes the question itself cannot be answered. Puzzles come to satisfying conclusions. Mysteries often don't."

He draws comparisons to intelligence gathering and analysis during World War II and Watergate and notes that several people were able to see through the energy company's obfuscation by examining publicly available financial reports. He closes with this delicious tidbit about a paper written by business students three years before the troubles erupted and the company declared bankruptcy.

“In the spring of 1998, Macey notes, a group of six students at Cornell University’s business school decided to do their term project on Enron. “It was for an advanced financial-statement-analysis class taught by a guy at Cornell called Charles Lee, who is pretty famous in financial circles,” one member of the group, Jay Krueger, recalls. In the first part of the semester, Lee had led his students through a series of intensive case studies, teaching them techniques and sophisticated tools to make sense of the vast amounts of information that companies disclose in their annual reports and S.E.C. filings. Then the students picked a company and went off on their own. “One of the second-years had a summer-internship interview with Enron, and he was very interested in the energy sector,” Krueger went on. “So he said, ‘Let’s do them.’ It was about a six-week project, half a semester. Lots of group meetings. It was a ratio analysis, which is pretty standard business-school fare. You know, take fifty different financial ratios, then lay that on top of every piece of information you could find out about the company, the businesses, how their performance compared to other competitors.”

"The people in the group reviewed Enron’s accounting practices as best they could. They analyzed each of Enron’s businesses, in succession. They used statistical tools, designed to find telltale patterns in the company’s financial performance—the Beneish model, the Lev and Thiagarajan indicators, the Edwards-Bell-Ohlsen analysis—and made their way through pages and pages of footnotes. “We really had a lot of questions about what was going on with their business model,” Krueger said. The students’ conclusions were straightforward. Enron was pursuing a far riskier strategy than its competitors. There were clear signs that “Enron may be manipulating its earnings.” The stock was then at forty-eight dollars—at its peak, two years later, it was almost double that—but the students found it over-valued. The report was posted on the Web site of the Cornell University business school, where it has been, ever since, for anyone who cared to read twenty-three pages of analysis. The students’ recommendation was on the first page, in boldfaced type: “Sell”.