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The natural progression of how good ideas go wrong

Leave it to Warren Buffet to offer a thoughtful perspective. In a memorable, hour-long PBS interview with Charlie Rose during the 2008 crisis, Buffet gave a master class in how the world got into its economic mess and what we can learn from it.

At one point, Rose asked the question that scholars, pundits, and plaintiffs attorneys will be debating for years: “Should wise people have known better?” Of course they should have, Buffet replied, but there’s a “natural progression” to how good new ideas go badly wrong. He called this progression the “three Is.” First come the innovators, who see opportunities that others don’t and champion new ideas that create genuine value. Then come the imitators, who copy what the innovators have done. Sometimes they improve on the original idea, often they tarnish it. Last come the idiots, whose avarice undermines the very innovations they are trying to exploit.

The problem, in other words, isn’t with innovation itself — it’s with the imitation and idiocy that follow. “People don’t get smarter about things as basic as greed,” Warren Buffett warned Charlie Rose. He’s right. But there’s no reason we can’t be reasonably intelligent about what we learn from the idiocy of the last few years and how we move beyond it.

Read the article

The best advice I’ve ever been given is to read all of the shareholder letters from Warren Buffett. I can assure you that these letters really do contain more wisdom then a full two-year MBA program. Book nuts will appreciate one of the best books written on Buffett: The Making of an American Capitalist

What Separates World-Class Performers from Everybody Else

Practice activities are worthless without useful feedback about the results.

Here is a wonderful excerpt from Talent Is Overrated: What Really Separates World-Class Performers from Everybody Else:

The best performers observe themselves closely. They are in effect able to step outside themselves, monitor what is happening in their own minds, and ask how it’s going. Researchers call this metacognition – knowledge about your own knowledge, thinking about your own thinking. Top performers do this much more systematically than others do; it’s an established part of their routine.

Metacognition is important because situations change as they play out. Apart from its role in finding opportunities for practice, it plays a valuable part in helping top performers adapt to changing conditions…[A]n excellent businessperson can pause mentally and observe his or her own mental processes as if from the outside:…Am I being hijacked by my emotions? Do I need a different strategy here? What should it be?

…Excellent performers judge themselves differently from the way other people do. They’re more specific, just as they are when they set goals and strategies. Average performers are content to tell themselves that they did great or poorly or okay. The best performers judge themselves against a standard that’s relevant for what they’re trying to achieve. Sometimes they compare their performance with their own personal best; sometimes they compare with the performance of competitors they’re facing or expect to face; sometimes they compare with the best known performance by anyone in the field…

…If you were pushing yourself appropriately and have evaluated yourself rigorously, then you will have identified errors that you made. A critical part of self-evaluation is deciding what caused those errors. Average performers believe their errors were caused by factors outside their control: My opponent got lucky; the task was too hard; I just don’t have the natural ability for this. Top performers, by contrast, believe they are responsible for their errors. Note that this is not just a difference of personality or attitude. Recall that the best performers have set highly specific, technique-based goals and strategies for themselves; they have thought through exactly how they intend to achieve what they want. So when something doesn’t work, they can relate the failure to specific elements of their performance that may have misfired…

…Since excellent performers go through a sharply different process from the beginning, they can make good guesses about how to adapt. That is, their ideas for how to perform better next time are likely to work…They approach the job with more specific goals and strategies, since their previous experience was essentially a test of specific goals and strategies; and they’re more likely to believe in their own efficacy because their detailed analysis is more effective than the vague, unfocused analysis of average performers. Thus their own effectiveness can help give them the crucial motivation to press on, powering a self-reinforcing cycle.

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Still curious? Read the book and understand the difference between practice and deliberate practice.

The Inevitable Failure of Organizational Planning

A beautiful excerpt from Herbert Simon’s Strategy and Organizational Evolution:

Anticipating the future means detecting, preferably prospectively,novel features in the environment that may affect the firm significantly in the future, and determining at what point in time attention should be focused on them and energy devoted to dealing with them. The available management time and attention is never sufficient to deal with all the contingencies that may arise; relative priorities for attention, planning and action need to be revised continually. A major function of strategic planning is to conserve scarce managerial, engineering and science attention for the things that matter. …

Large organizations are plagued by a kind of Gresham’s Law: the pressures of everyday activities and of crises drives out planning. Short-term concerns create priorities and deadlines that absorb managerial attention and energy at the expense of long-range concerns. The obvious remedy for this universal problem is to create special organizational units whose sole responsibility is to handle various facets of the strategic planning activity. With such a definition of its base function, such a unit has no excuse to be diverted.

There are two reasons why creating specialized planning units does not automatically repeal Gresham’s Law of Planning. First, if the planners are sagacious and effective, they are sure to experience increasing demands on their time for advisory services to top management and to other divisions across the organization. They will have to be very strong-minded indeed to ward off these interruptions of their mainstream activities, and not to find themselves increasingly entangled in short-run deadlines.

Second, the more tightly a planning group is sealed off from the day-to-day affairs of an organization, the more difficult it becomes for its plans to influence company operations. Participation of many organizational members in the strategic planning process is the surest way of securing the dissemination of ideas that is the basis for implementation; and isolation of the planning activity from the rest of the organization greatly complicates the process of dissemination, among other reasons because those who have not participated in the process will find it hard both to understand and to accept its product.

The problem of isolation of the planning unit arises not only in general strategic planning but in the development and introduction of new products as well. One of the advantages that Japanese manufacturing firms have exploited in their international competition is the speed with which ideas for new products or product improvements are converted into actual production lines. Observation has shown that this speed is possible because manufacturing engineers and even sales engineers participate in the design process almost from the beginning. This enables design engineers to take manufacturing constraints and convenience into account in the designs. Conversely, it involves the manufacturing staff in the product from the outset, secures their commitment to it, and enables them to begin planning the manufacturing operations while design is still going on. At the same time, of course, this procedure does shift some of the attention of design engineers to manufacturing problems and perhaps creates a danger that they will be diverted from their basic responsibility for product innovation.

As in most matters of organization, what is called for, in order to secure a proper attention to strategic planning but at the same time maintaining strong communication links between planning and operating units, is balance, and top management attention to maintaining that balance. On the whole, it is probably unwise to allow specialists to make their whole careers in planning, while others spend their carers in line responsibilities. Some rotation, even at some short-run expense to expertise, can do a great deal to disseminate the products of strategic planning, while keeping planning units in touch with the realities of the world of operations.

Institutionalizing intelligence activities
How can a firm organize so that it will scan the horizons with sufficient vigor, identifying potential problems and potential opportunities? It is no accident that the eyes and ears are located on the surface of the body and not in its interior. Intelligence requires continual contact with the relevant environments, and in the case of business firms two of the most relevant and important environments are the end-use (customer) environment and the science and technology (research and development) environment. Other parts of the firm should not be excluded from the search for information, but these are perhaps the two most important in it.

The marketing function is not simply a function of selling and distributing products to customers. It is equally a function of acquiring, through contact with the end-use environment, information about the future of the firm’s markets and of markets into which it might enter. Salesmen and sales engineers may play an important role in this intelligence activity, but only to the extent that it is an explicit part of their function, they are trained to do so and they are linked effectively in communication with top management, planning and design units. Specialized units may also provide various kinds of intelligence—products of customer polls, for example. I shall not attempt to describe in detail how one organizes intelligence about the end-use environment, but simply call attention to its importance.

Research and development organizations are commonly thought of as aimed at inventing and developing new products, but this is only a small part of the function they should perform. Just as sales organizations are windows on the world of customers, so R&D organizations are (or should be) windows on both the world of nature and the scientific and engineering communities that are engaged in examining nature. A scientist or R&D engineer is not merely an inventor but also a channel of communication between the company and the discipline in which he or she works.

Scientific disciplines operate as huge blackboards (collections of journals and books, professional meetings) on which the discoveries of all of the participants are recorded. Only a tiny fraction of the knowledge that any one scientist holds, including very new knowledge, was produced by his or her research or the research of the home laboratory. Most of it was read off the blackboard. Thus, the knowledge that a company R&D department produces should be not only the product of its own laboratory effort, but also the whole body of relevant knowledge that it obtains from the blackboards belonging to is professional domains.

Too great a preoccupation with the patentable products invented by the R&D department will obscure its broader intelligence function, and restrict its contribution to the strategic planning effort. The NIH (‘not invented here’) syndrome is endemic in R&D organizations that do not understand that their intelligence responsibilities extend far beyond their laboratory research programs.

Companies in industries where there is a rapid turnover of products (clothing and pharmaceuticals are salient examples) usually take conscious pains to organize their intelligence activities. If they did not, they would not survive long. They are prime examples of organizations where success at a particular time will be short-lived unless it is followed continually by new successes. To the extent that they can patent new products or develop brand-name loyalties, they may be able to buffer to some extent the volatility of their environments. But basically they live, not by making isolated innovations, but by organizing to produce a steady stream of innovations. Without strongly developed intelligence capabilities, they are unlikely to be successful at this.

CONCLUSIONS
Strategic planning is aimed at dealing with the enormous uncertainty and constant change that modern organizations find in the environments to which they must adapt. A market ‘niche’ is typically a transient thing. Statistics of firm growth show that special firm advantages typically have half-lives measured in a few years rather than in decades or generations. The task of strategic planning is to assure a stream of new ideas that will allow the organization to continue to adapt to its uncertain outside world.

In my remarks, I have tried to view the strategic planning function in its broader setting of the whole decision-making process in an organization. Making choices and evaluating them are simply the final stages in the decision process, and seldom the most important stages. Before choices are made, the occasions for choice must be identified, effort must be focused on problems or opportunities and possible courses of action must be designed. Classical decision theory has relatively little to say about these crucial initial stages of decision but students of strategic planning have become increasingly aware that problem identification and alternative generation are crucial components of strategy. Cognitive science and artificial intelligence have learned a great deal about these processes in recent years, and are becoming important sources of ideas for planning theory and practice.

Strategic planning will not happen by itself, or even if we simply set up organization units formally charged with doing it. The planning effort will be effective only to the extent that it permeates the entire organization and only if its products are disseminated effectively. A central idea (call it a ‘mission’ or a ‘company goal’ or ‘basic principles’), embedded in many heads where it is evoked on the occasion of decisions, is more crucial than an elaborate written list of things that are somehow supposed to happen. Organizational identification, essential to the implementation of strategic plans, is a good deal more than simple loyalty. Identification implies absorption of strategic plans into the minds of organization members where they can have direct effect upon the entire decision-making process, starting with the identification of problems, continuing with the design of alternative courses of action, and leading ultimately to effective implementation.

If you’re interested in learning more about Herbert Simon, I recommend reading Models of My Life. Also, if you liked this article you’ll like Solution by Recognition and Choice Under Uncertainty.

Herbert Simon: Scientific Research has much in Common with Successful Stock-Market Investment

This is a fascinating expert from How Managers Express Their Creativity” by Herbert Simon that deals with information flow within grounds and organizations. Simon compares successful scientific research with successful stock-market investing. Both scientists and investors are looking for mis-priced bets

In this respect, successful scientific research has much in common with successful stock-market investment. Information is only valuable if others do not have it or do not believe it strongly enough to act on it. The investor pits his knowledge, beliefs and guesses against the knowledge, beliefs and guesses of others.

In neither domain—science or the stock market—is the professional looking for a “fair bet.” On the contrary, he or she is looking for a situation where superior knowledge—knowledge not yet available to others—can be made, with some reasonable assurance, to pay off. Sometimes that superior knowledge comes from persistence in acquiring more “chunks” than most others have. Sometimes it comes from the accidents that have already been mentioned. But whatever its source, it seldom completely eliminates the element of risk. Investors and scientists require a “contrarian” streak that gives them the confidence to pit their knowledge and judgment against the common wisdom of their colleagues.

If you’re interested in learning more about Herbert Simon, I recommend reading Models of My Life. I’ve also written about Simon before (here, and here).

Choice Under Uncertainty

We use heuristics – rules of thumb – to make judgments. These can lead to certain predictable biases.

These can lead to certain predictable biases. For instance, we classify situations based on their representativeness. We judge the frequency of events based on the availability of examples in our minds. We interpret problems based on how they are framed. These heuristics have important implications for individuals and society as a whole.

Here are some common heuristics and how they can lead us astray.

Insensitivity to Base Rates

In statistics, a base rate is how probable something is in the absence of other information.

When we receive information about the base rate of something, followed by some additional information, we tend to ignore the former. We disregard the base rate in favor of irrelevant information. For instance, if you tell study participants that 70% of the people in a room are lawyers and the rest are engineers, then ask them to guess the profession of a random, simply described person. People will guess they are a lawyer only half of the time, even though the probability is 70%.

Insensitivity to Sample Size

A sample size is the number of things observed in a statistical study, such as the number of people who answer a survey. 

We often misjudge probabilities when we fail to consider the influence of sample size. For example, if you ask people to estimate the probability that more than 60% of the babies born in a hospital during a given week are male, people do not adjust their estimates based on the total number of babies. This is despite the fact that a percentage above 50% is more likely in smaller samples due to randomness.

Availability

The ‘availability’ of something refers to how easily it comes to mind. We tend to think things which are more available are more common than those which are harder to recall.

In one experiment, subjects heard a list of names of both male and female people. They were then asked to judge whether there were more men or women named. In one list, the men were more famous, in the other the women were. Participants judged that there were more men when the names were famous and vice versa. The names were more available in their minds.

Framing and Loss Aversion

The way in which an uncertain possibility is presented may have a substantial effect on how people respond to it. When asked whether they would choose surgery in a hypothetical medical emergency, many more people said that they would when the chance of survival was given as 80 percent than when the chance of death was given as 20 percent.

Source: Decision Making and Problem Solving, Herbert A. Simon

Solution By Recognition

Herbert Simon describes the difference between experienced decision makers and novices in his autobiography Models of My Life.

In so doing, he highlights the value of mental models and collecting a repository of possible actions that can be called upon when needed.

One can train a man so that he has at his disposal a list or repertoire of the possible actions that could be taken under the circumstances…A person who is new at the game does not have immediately at his disposal a set of possible actions to consider, but has to construct them on the spot – a time- consuming and difficult mental task.

The decision maker of experience has at his disposal a checklist of things to watch out for before finally accepting a decision. A large part of the difference between the experienced decision maker and the novice in these situations is not any particular intangible like “judgment” or “intuition.” If one could open the lid, so to speak, and see what was in the head of the experienced decision-maker, one would find that he had at his disposal repertoires of possible actions; that he had checklists of things to think about before he acted; and that he had mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decisions arose.

Most of what we do is to get people ready to act in situations of encounter consists of drilling in these lists into them sufficiently deeply so that they will be evoked quickly at the time of the decision.

Simon points out three advantages of the experts: (1) a repository of actions; (2) A checklist of things to think about before acting; and (3) making the process conscious. Let’s briefly explore these.

A repository of actions — It’s a biological instinct to copy others. If you’re below average or a novice at something, copying what others do will quickly get you to average. Most of us copy what we see and most of us work with average people. If you want to be exceptional, not only do you have to copy the best practices, but you have to innovate on top of them. You need not limit yourself to the living. You can build a repository of possible actions from the greats of history too: Rockefeller, Mellon, etc.

A checklist of things to think about — you want to consider all of your decisions through a two-step process. First what are the variables that govern the situation. For this you can use your specific understanding as well as a general knowledge of the world. Second, you want to consider all of the ways in which you can trick yourself.

Making the process conscious — It’s easy to use your intuition and just make a decision. It takes a lot of work to make the process conscious, looking for errors.

The novice spends a lot of time considering a possible course of action whereas the expert spends a lot of time thinking about where the action leaves him.