After last week’s post, here’s another one based upon a gem from Nassim Taleb’s Fooled by Randomness. It’s called the bias against self-contradiction and it goes like this – if you make a bet that the market will go a certain way and it doesn’t, you tend to stick with your bet and your viewpoint a good bit longer than you would have, had you been a perfectly rational person. Over time, this will likely lower your performance as an investor. According to Taleb, some investors that he has great respect for – people like George Soros – change their minds often.
The stubbornness (or stick-with-it-ness, if you want to be generous) of the person making the investment decision depends upon how many people know about his decision. If it is just me and my brokerage account, and I make a bet, say an investment in gold ETFs, which then proceed to drop like a stone, I might stick with my bet for a bit. But to unwind my positions, I just have to admit to myself that I was wrong. Not too difficult when it’s just old me and my brokerage account. It gets harder in an investment firm since more people know about the investment. I had probably pitched my idea to the investment committee, defended my idea and finally received approval to invest a large chunk of the firm’s money. Admitting that I was wrong and pulling out is a little harder in this case. More than likely my Portfolio Manager is going to overrule me and force me to unwind my positions.
Outside of investment firms, which are typically quite secretive, big strategic shifts are made by companies every so often. These decisions are made with imperfect information and certain assumptions have to be made about the future (for example, “the internet is the future of our company”). These decisions and the accompanying prognostications about the future are public knowledge. Not just that, they are generally communicated over and over again, so that the rank and file in the company is crystal clear about the new program. Since there is some crystal ball gazing involved in the process of creating this new strategy for the company, it stands to reason that the new strategy will fail with a fairly high frequency. But then why don’t we hear more CEOs and top execs admitting that a mistake was made?
You might correctly point out that the CEOs, especially here in the US, aren’t generally around to admit their mistakes. But there are many cases where the mistakes are not big enough to put the CEO’s job at risk, but still, unwinding them takes a long time. For instance in the dotcom days, many retailers (Staples, Nordstrom) formed subsidiaries, funded with venture money, to sell their own merchandise. Everyone knew it made no business sense, but who could argue with the valuations the Street was giving to pure play internet retailers? After the bust, it took years to pull these back in. Obviously, someone in the board room was dragging their feet, refusing to admit that it was wrong-headed to do this in the first place.
Why does this happen? I don’t know. But clearly it does. Some people are more stubborn, some people less, some may even be “flip-floppers” who don’t stay with the implementation of their ideas even until they can show some results. But on average people stick-with-it longer than they should. This behaviour is stronger the more people know about the decision. We don’t like being wrong, but absolutely hate being wrong in front of lots of people.
Politics and government is the biggest public stage there is. As one would expect, politicians don’t often admit their mistakes. The ongoing war in Iraq is testimony to that. But politicians are creatures of our own creation. The voting public and the media, doesn’t easily forgive mistakes. So Hillary Clinton’s vote in favour of the war in 2002 being inconsistent with her current position on the war, is something that she will be reminded of over and over again until the elections. It’s almost as if we can forgive our leaders’ mistakes, as long as they don’t admit them.
John Maynard Keynes, who was also a politician, once said in reply to an accusation of being inconsistent, “When the facts change, I change my mind. What do you do, sir?” He was a rare politician, and not a very successful one, from what one understands. One can see why.
While stubbornness has its perils, flip-flopping can be pretty bad too. But flip-floppers rarely get to positions of power where they could do any damage of significance. They are seen to be weak of conviction and unsuitable to lead. Stubborn people on the other hand, often get into positions of power, as long as they are not always making the wrong bets! In bureaucratic organizations, neither type does well – inaction, while giving the impression of a lot of action, is the best course.
So is there any solution here or must we resign ourselves to stubborn leaders who will be correct only sometimes? There’s no silver bullet, but there are a few things that you could do if you happen to be the one leading.
As a decision-maker one must seek out as much information as possible. In most situations the best people to talk to are outside the company, but talking it over inside the company can also bring out hidden pitfalls.
Next, start small. Starting early is also important. If you delay starting till you are under duress from your circumstances, you lose the option of starting small. Starting small with a pilot or a proof-of-concept, allows you to make mistakes that don’t threaten the whole system.
But eventually, you will come to a point-of-no-return where you have to bet the farm. At that time, be bold, but have the humility to realize that you could be wrong. And that the final path that you put your organization or country on is probably the best path, but just probably.
At the end of the book he argues, and proves, that the job of topmost execs (ouch, that’s you!) involves highest amount of randomness. They make may be less than dozen mega decisions ion their career (likes of Compaq acquisition by HP, etc.) It is extremely difficult to judge their performance when available data points are so few. Compared to that job of say a chef is far less random as performance is measurable. Chef may get it right once, but to get it right a thousand times requires skill and not luck.
So, execs don’t admit mistake(s) as the chances of them getting another opportunity (to commit the same mistake) are extremely low.
This book has been such a wonderful read. I’ve already started The Black Swan.
Something i read a few months ago that maybe relevant here…and this applies to both personal and professional situations: Decisions (at least the kinds we are talking about here) are not really right or wrong; it is what one does after taking that decision that goes a long way in making it right or wrong.
So, assume i take a decision on starting a new business or entering a new market, and that is based on imperfect information (nothing new here) – i need to then work to make that decision become ‘right’ for me, through dedication, perseverance, funding etc. And if it doesn’t, and there could be several reasons why, external and/or internal, i need to have the maturity to admit it and move on.
Seems like a great book…will pick it up soon.
Shashi, your point is well made, which is why setting CEO compensation is so tough. You don’t know if you are rewarding randomly ocurring positive outcomes or true performance. But I do believe that a fairly large part of a CEO’s job and its outcomes are non-random in nature, which is the point Arun is making. Expanding margins because of a weak dollar may not be something the CEO can take credit for. But assembling a top class team and keeping them motivated and performance oriented for instance are non-random and non-trivial as well.
On the investment allegory, sometimes fund managers admit their call going wrong by reasoning that “it’s just a temporary blip, an outlier (quants often say this while licking a wound) or a 1 in 500 probability that happened” – which may or may not be it.
But for the CEOs and Politicians, they have fixed tenures and hence timing matters. They would rather do it when the impact is minimal, on them personally. CEOs risk their severance pay and erosion in value of their huge unexercised/unvested stock options if they open up and capitulate before the end of their term. They will rather wait until their options are vested, exercised and liquidated and then open up when the others discover it so that the damage has minimal impact on them. Ken Lay of Enron and his coterie did exactly that, selling their stock even as they exhorted their employees and other shareholders to stay put.
Politicians, if they are closer to the end of their term, may not risk getting toppled at the hustings if they intend to run for the next immediate term with that stigma on. They would rather let it be found out later, lie low for a while and re-emerge after it loses steam, relevance and recall by another, more topical gaffe.
Given that topic of current discussion is Investing Decisions and rationale behind the same wanted to recommend another excellent book which has hit the shelves recently.
“Your Money & Your Brain” by Jason Zweig offers a fascinating insight into new discipline Neuroeconomics (Psychology +Neuroscience+Economics &Investment).
I found it an excellent read.
I wouldn’t put it stubbornness alone. Each person secures a livelihood on the basis of their self-worth, sustaining it on the same self-worth and the value they believe it brings to the table where the folks who sit at the table are those paying for it.
To back track would mean a drop in self-worth, and hence the value it brings to the table, and the risk it entails.
More than stubbornness, it is survival that makes one clutch at the straw even if it means drinking the sea through it. 🙂
By all means bet the farm . . . but only if the cows inside belong to you 🙂
It’s really a nice compilation of human mentality,I totally agree with the view that the more no of people know the decision the more stubborn we become in deviating from that even if it results in disaster , but coincidentally sometimes the external environment make sure that your stubborness makes sense( like the stock markets in India are proving everyone right).
I have been reading your posts since inception but in today’s post last but one paragraph made a lot of sense to me.