The Peter Principle: A Lesson for Today

As the stock market picks itself up, staggers to a lamppost where it holds on for a couple of sessions, then collapses again into the gutter, there is no shortage of experts to explain why the DJIA is stuck around 11,000. Hedge fund managers, analysts, market strategists, portfolio managers, economists, and college professors have all kinds of theories about why the market goes up, down, around, or retrograde oblique. Their inane, contradictory or downright nonsensical analyses and recommendations raise the question of how much they really know. Furthermore, the incompetence of hedge fund and portfolio managers who have made news lately by losing millions or billions for their employers call into question the ability of the firms themselves to hire and supervise able staff. The Peter Principle can help explain the chaos in our financial and equities markets.

According to the Peter Principle, “in a hierarchy every employee tends to rise to his level of incompetence.” The 1969 book, “The Peter Principle,” by Dr. Laurence J. Peter and Raymond Hull, explains how employees get promoted until they are in job they cannot perform competently. For a civil servant or a cog in a bureaucratic machine of any type, the Peter Principle is a transcendent revelation. It provides a rationale for all the frustrations of working in an organization that seems like a mental hospital where the patients are in control. It also explains many of the systemic breakdowns we see every day – the Kitchen Aid coffee maker that has to be replaced due to defective warmer pad coating, the $80,000 Lexus recalled for steering problems, the FEMA post-Katrina modular housing debacle, the regional blackout caused by overloaded electrical transmission equipment, or the house fire caused by failure to ground a broad-band cable coming into the attic.

The Principle holds that in a hierarchy, workers get promotions as long as they work competently. When they reach a position that is above their competence, they remain there, being unable to earn further promotions. Peter’s Corollary states that “in time, every post tends to be occupied by an employee who is incompetent to carry out their duties” and adds that “work is accomplished by those employees who have not yet reached their level of incompetence.”

The book is an eye-opener for employees who find themselves stuck in a position where they are surrounded by incompetents. It is also a wake-up call for those who are frustrated in their positions and do not know why. They may have reached their level of incompetence. Knowing this, they can relax and stop striving for a promotion that will never come, or look for an opportunity to move to a different occupation.

Hedge fund managers are assumed to be financial geniuses, when they may be as error-prone and unsophisticated as anyone else hired on the spur of the moment to fill a position. Dana Dealdo may be in charge of a hedge fund as a result of favoritism, nepotism, sexism, cronyism, racism, anti-racism, or blackmailism. Stock brokerages, hedge funds, arbitrage firms, and other market movers and shakers are just as susceptible to the Peter Principle as car companies, fast-food outlets, public utilities, and municipalities. The awe and reverence accorded them by the media may be misplaced.

This is not just a plug for a book, although “The Peter Principle” was one of the most insightful books I have read. It is to urge a recognition that we cannot expect that things will always go right and we cannot rely on the recognized “experts” talking heads on television turn to for commentary. It is necessary to think analytically about every aspect of our lives. Without becoming survivalists, it is important to recognize and prepare for the possibility of a widespread failure of our power grid, communications network, or water supply. The Fukushima nuclear accident shows that there are incompetent executives at the highest levels of government and industry. Without turning our backs on nuclear power, it is necessary to develop idiot-proof policies for the siting of reactors and development of safety protocols. Above all, we need to be realistic about the level of competency we expect, whether it is a cashier in a dollar store or a legislator in Congress.


John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
©2011 John B. Payne, Attorney