Michael K. Shaub, October 1st, 2018
As I began writing this on a Friday afternoon, Tesla’s stock was down almost 14 percent as a result of the Securities and Exchange Commission filing suit against Elon Musk for securities fraud, and seeking his removal as the company’s CEO. This follows Musk’s decision on August 7 to tweet, “Am considering taking Tesla private at $420. Funding secured.” At the time, that represented roughly a 20-percent premium to the stock price. The SEC (and many others) believe that he rounded the price to $420 as a marijuana reference to impress his girlfriend. But the market’s immediate reaction during the rest of the day was a 6 percent increase in the share price. And, unfortunately for the Tesla CEO, he had arranged no such funding.
On a number of occasions recently people have asked about Elon Musk, “What was he thinking?” and sometimes even, “What was he smoking?” It is not just his recent appearance on Joe Rogan’s podcast apparently smoking a blunt, but his initial willingness to put his company at risk through refusing a relatively gentle SEC settlement offer. Instead, the SEC sought to ban him from serving as an officer or director of a public company, leading him to agree on Saturday to a $40 million penalty (half of it to be paid by him), removal as chairman for at least three years, and the addition of two independent directors to Tesla’s board.
Most agree that Elon Musk is an innovative genius. But smart people do stupid things for a variety of reasons. Psychologist Robert Sternberg identifies five fallacies of thinking that are often drivers of this decision-making: egocentrism, a false sense of omniscience, a false belief about one’s omnipotence, perceived invulnerability, and unrealistic optimism. Others have arguably checked all five boxes, like Martin Shkreli of Turing Pharmaceuticals, who mocked those opposing his choice to dramatically raise the prices of certain critical drugs. This included referring to members of Congress as “imbeciles” on Twitter after citing his Fifth Amendment rights against self-incrimination when he was called to testify before them. He was sentenced to seven years on fraud charges related to a hedge fund and forfeited over $7 million dollars.
Despite Elon Musk’s many successes, an argument can be made that he is characterized by all five of the fallacies as well. It is not uncommon that a CEO would have a streak of egocentrism, but a visit to his Twitter feed, especially as he engages with those who are shorting his stock, will give you a sense of self-preoccupation. He is extremely knowledgeable, but he could use some help from a veteran CEO or a more involved board to check his tendency to project himself as omniscient. At the very least, he could use someone who understands federal securities laws. His oblivious $420 tweet reflects a false sense of being powerful enough to do whatever he wants. Toking on YouTube is just one example of his sense of invulnerability. He has also been sued for making potentially libelous accusations, without apparent support, about a British diver who questioned the usefulness of Musk’s mini-sub to rescue Thai boys trapped in a cave. And while unrealistic optimism alone is hard to criticize, his consistently aggressive assumptions about both car production and operating cash flow have earned him broad criticism.
What is ironic is that Tesla is likely finishing a record quarter in production, if not cash flow. They seem to potentially be turning the corner on some measures, even while they still have real challenges ahead. And eliminating the uncertainty with the SEC resulted in a predictable Monday morning bounce back in Tesla’s share price.
Of the five fallacies of thinking, all but egocentrism are really just bad calculations of reality, and sometimes it takes a cold bucket of water to make a person come to grips with reality. If you want to run a public company, an SEC suit to ban you from serving as an officer or director officially qualifies as a cold bucket of water.
For now, it seems to have been enough to bring Elon Musk to his senses. Only time will tell if it is enough to keep him there.