When it comes to assessing performance, business executives can be a lot like old-time baseball scouts, who have been around so long that they've developed a gut feel for which statistics matter most. But as Michael Lewis describes in "Moneyball," the Oakland Athletics discovered that the metric the team's scouts used to choose players had nothing to do with whether those players would score runs. They had been measuring the wrong thing, and executives may be making the same mistake. Theory and empirical research show only a shaky connection between value creation and two of the most popular performance measures: earnings per share (EPS) growth and sales growth. Yet executives cling to those metrics because they are overconfident in their intuition, they misattribute the causes of events, and they do not escape the pull of the status quo. The most useful statistics reliably reveal cause and effect. They have two defining characteristics: They are persistent, showing that the outcome of a given action at one time will be similar to the outcome of the same action at another time, and they are predictive--that is, there is a causal relationship between the action the statistic measures and the desired outcome. To choose the right statistics, you must define your governing objective, assess the financial and nonfinancial drivers of that objective, and figure out which employee activities support those drivers. You must also regularly reevaluate your metrics. The drivers of value creation change, and so must your statistics.

Mauboussin is the chief investment strategist at Legg Mason Capital Management and a leading exponent of how to navigate complex systems in financial markets and other aspects of life. He points out that biology is full of complex adaptive systems: an ant colony is a prime example. Each ant has a decision role but works only with local information; it has no sense of the global system. Ant colonies solve very complicated, very challenging problems with no leadership or strategic plan. People, however, are hard-wired to link cause and effect-which aren't clear in complex adaptive systems-and they believe that certain causes will lead to particular effects. In addition, they tend to listen to experts and to aggregate information poorly. To best deal with complexity, managers should surround themselves with cognitive diversity and extract unshared information for evaluation. Small experiments with controls can be a valuable aid.

Executives overestimate the relevance of individuals to collective behavior. Agent-level changes won't help you meet system-level goals - and they're likely to yield unintended consequences.

Our annual survey of ideas and trends that will make an impact on business: Stan Stalnaker heralds a peer-to-peer economy in which consumers become consumer-producers. Tamara J. Erickson dissects the expectations of Gen Y workers. Dr. Jerome Groopman writes a prescription for avoiding misdiagnoses in decision making. Michael Sheehan warns not to resort to the tools of competition when it's really opposition that threatens your company. John J. Medina conceives of a brain-friendly workplace that applies modern science to daily performance. Dan Ariely studies the minds of "honest" people when they cheat. Paul Root Wolpe and Daniel D. Langleben share truths about technologically sophisticated lie detection. Scott Berinato shines a light on the cybercrime service economy. Mark Kuznicki, Eli Singer, and Jay Goldman showcase Toronto, where a technology-driven event led to real social change. John Seely Brown and Douglas Thomas argue that online games are preparing the twenty-first-century workforce. Jane McGonigal calls alternate reality games the promising new operating systems for real-world business. Miklos Sarvary mines the history of broadcasting for wisdom about competing in the metaverses of the internet. Judith Donath asks how true to yourself you'll be in the virtual world. Jan Chipchase surveys the soon-to-be-charted territory of metadata trails. Lew McCreary points a finger at people who blame technology for their bad behavior. Jaime Lerner sees the city of the future in a turtle's shell. David Vogel catalogs the advantages of socially responsible lobbying. George Pohle lets the numbers prove the mass-market promise of China's second-tier cities. Aamir A. Rehman and S. Nazim Ali discuss the boom in sharia-compliant finance. Michael J. Mauboussin identifies the shrinking domain in which experts are the best problem solvers. Garrett Gruener reveals his list of sustainable and unsustainable trends.

Business decisions based on poor valuation practices can create significant losses. Here's a straightforward set of calculations that will help your company assess the impact of its valuation decisions on shareholder returns.