Invantage Advising

Tag: decision-making

  • Due Diligence: Why You Should Assess A Leader’s Capacity For Critical Thinking And Judgment

    Due Diligence: Why You Should Assess A Leader’s Capacity For Critical Thinking And Judgment

    Originally appeared in Forbes.com 1/25/18

    You might assume that “capacity to think” is something you don’t have to worry about if you’re in the process of selecting a new leader, whether it’s a new CEO or the founder of a company you’re investing in.  You’d be wrong.  Surprisingly, great credentials, a record of success and an impressive education do not guarantee that someone has the ability to do the high-level thinking required of a leader whose decisions have fateful consequences.

    Every search committee looking for a new CEO or organizational president and every investor evaluating the strength and promise of a business’ founder should include evaluation of the capacity for judgment and critical thinking as part of the vetting process when deciding to put the fate of their company in the hands of a new leader.

    How can someone even get close to a position as CEO or leader of a great organization without these fundamental cognitive strengths?  It happens all the time. Charisma, connections, luck, canniness, creativity and vision can all propel someone into a position of power.  It doesn’t mean their judgment is up to snuff.

    Elsewhere I’ve written about five core character traits and cognitive abilities that every leader who is responsible for the fate of an enterprise and its people absolutely must have.  Perhaps the most vital of all is the capacity for critical thinking and judgment. Which is not to minimize the importance of the other four:  empathy, trust (both the ability to trust others and inspire their trust), self-control/discipline and self-awareness.

    This model of the fundamental requirements for a leader is distilled from two broad sources—my own 35 years’ experience as a practicing psychiatrist, psychoanalyst and organizational leader, using the long traditions of thought and research in psychology and psychoanalysis, and a remarkable document (itself based on the same theoretical and empirical foundation), the Army Field Manual on Leader Development.

     Good judgment depends on the ability to think critically and strategically.  This can be broken down into multiple essential functions, including the ability to plan ahead in a way that is thoughtful and organized, the ability to organize information into a coherent and logical narrative and the ability to understand cause and effect.

    To my mind, the most important aspect of critical thinking is the capacity to anticipate consequences.  At the basic level, this is linear–what are the immediate, mid-term and long-term consequences of a decision?  But the best leadership mind anticipates consequences more expansively, perceiving a multidimensional outcome and, immediately, the range of complex secondary and tertiary outcomes that will spin off in response to each level of change.

    A leader’s thought process needs to be dominated by reason and facts, not emotion.  But it’s equally important for a leader to know the effects stress and emotion have on his own thinking and be able to discern when irrational forces are overtaking dispassionate logic.  This is harder than it might seem since we are all subject to unconscious mental forces that can distort thinking without revealing they are at work.

    Critical thinking requires the ability to compare current situations to similar ones encountered in the past, using the richness of previous experience with problems to inform present assessment.  But this necessary use of past experience has to be tempered by alertness to unconscious biases and fears.  Doctors are taught to beware of the “last grave error syndrome”–the tendency to overcompensate because you screwed up last time.  Just because you missed a case of heart disease doesn’t mean every patient you see now needs excessive cardiac testing.  In investing, just because you left a short position too soon and lost a mint doesn’t mean you should stay in your current short positions.

    The leader who can think clearly is able to set aside his own ego and self-esteem as he evaluates a situation.

    Critical thinking requires the ability to approach a problem with an organized assessment process:  knowing what information to gather, considering alternative explanations and points of view, actively seeking contrarian opinions and perspectives, identifying gaps in information and knowledge and identifying a process to fill them.

    Since problem-solving is dependent on thinking and judgment,  these capacities can be assessed by observing how the leader organizes her response to a crisis, an unexpected situation or a stalemate.

    How can you identify inadequacies in a potential leader’s critical thinking and judgment? Look for these specific signs of deficiency. Many of these I’ve extracted from the Army Manual, which does an invaluable job of operationalizing what otherwise would be abstract and difficult to assess capacities:

    • Signs of disorganization in thinking or speech.
    • Over-focus on details; inability to see the big picture.
    • Lack of clarity about priorities.
    • Inability to anticipate consequences.
    • Failure to consider and articulate second and third-degree consequences of an action or decision.
    • Inability to offer alternative explanations or courses of action.
    • Oversimplification.
    • Inability to distinguish critical elements in a situation from less important ones.
    • Inability to articulate thought process including the evidence used to arrive at a decision,  other options that were considered and how a conclusion was reached.
    • Unable to tolerate ambiguity/over-certainty.
    • Difficulty outlining a step-wise process to solve a problem or implement a change.
    • Thinking that is driven by emotion or ego.

    Besides recruitment and promotion, this conceptual model provides a useful framework in other contexts.

    Leadership coaches can use it to identify areas a client needs to attend to and strengthen. Mentors and managers developing leadership potential in individuals they’re working with can pinpoint strengths and weaknesses.

    Anyone in a leadership position herself or who aspires to one can also use this model, with its breakdown of the components of critical thinking, as a self-assessment and capacity development tool to identify personal deficiencies and look for ways to improve in this essential area.  Each of us has a unique hard-wired and learned set of cognitive tools and none of us has a toolkit that isn’t missing a few pieces.

    Critical thinking and judgment are among the most advanced and sophisticated cognitive skills, demanding difficult and fluid mental processes of synthesis, discrimination and complex analysis. Even the best thinker will lapse to a lower level of cognitive functioning at times of enormous stress, emotional overload, illness, sleep deprivation or fatigue.  Knowing when one’s capacity for critical thinking is sub-par is just as vital as being able to do it well.

    Additional reading:  The Unexamined Mind Doesn’t Think Well: Why Self Awareness Is A Fundamental Leadership Capacity and Empathy Is An Essential Leadership Skill–And There’s Nothing Soft About It

  • When Leaders Share A Goal But Differ On Strategy–What Do You Do?

    When Leaders Share A Goal But Differ On Strategy–What Do You Do?

    This post was originally published on Forbes online on 10/29/2017.

    Leadership requires some tricky navigating when you share the same final goal with others but disagree about tactics or strategy. This isn’t the most frequent leadership dilemma (except in a partnership where it can be more common) but when it does arise the potential for conflict, rancor and estrangement is significant. How do you negotiate the situation?How do you proceed?

    I recently found myself in this kind of dilemma.In thinking about it, I realized it’s not the first time in my leadership career. My suspicion is that some of us more often find ourselves disagreeing with the larger group. Maybe we’re more contrarian, or maybe we’re more apt to be lone wolves in our thinking.

    I distilled a handful of guiding principles and repetitive patterns during a recent iteration of this dilemma. Observing my own experience as well as those of clients, I also have some suggestions for a meta-strategy (a strategy about strategy) to help in navigating same-goal-different-strategy conflicts.

    Principles And Patterns:

    • Even when we agree on the end goal, it is too easy to see those who have a different strategy as opponents. They’re not.

    • It is incredibly easy to waste energy and time fighting about strategy and tactics and lose sight of the goal.

    • Outsiders (with a different goal) will lump you together, not caring about the strategic differences that you think are so important and only noticing that you share the same goal. These are your real opponents.

    • Emotional attachment to our own strategy idea can cause any of us to lose sight of the goal and forget who are ultimate allies are.

    • Emotions can be very high in these situations, so it’s worthwhile to back off repeatedly from your own passionate advocacy and go through an analytic process (see below).

    • Anxiety is a big (and often unrecognized) part of the problem. Any way you can find to relax or help your “strategic opponents” to do so will help. Ultimately, follow your own path and let your colleagues follow theirs. You can’t control them and their action doesn’t reflect on you. Nor do you have to give up your identity or beliefs.

    What Can You do? You Need A Meta-Strategy

    The solution is a little different depending on whether the disagreement on strategy is occurring within a clearly defined organizational hierarchy versus a loosely knit group of peer leaders or an equal partnership.

    When disagreements occur within a hierarchy, in some ways it’s easier. A CEO or organizational president can, in the end, say, “We’re going to do it my way.” Lacking ultimate decision-making authority, a subordinate can argue her position and then yield when she must.

    But problems can arise here too. If the CEO uses her power to chose a strategy that others disagree with, she risks the disaffection or lack of enthusiastic investment by her team. She even runs the risk of unconscious sabotage if people are angry enough. On the other end of the power dynamic, the subordinate leader who argues her case for a certain strategy and “loses” may be a realist and yield but not be comfortable with the outcome. She has to ask herself then if she can live with the winning strategy. If it’s against her personal ethics or character, she may face a tough decision about leaving the organization.

    When there’s no power hierarchy, as in a group of co-equal professional leaders, the calculus is a little different.

    Dealing effectively with this kind of daunting and draining situation begins with some self-reflection and analysis:

    • Think about the strategy you want to pursue. What are the reasons you’re committed to it? Why do you think it’s going to work?

    • Analyze the strategy of those who agree with you on the ultimate goal but differ on strategy. What’s your objection to their strategy? If your feelings about the “wrongness” of their approach are intense, spend some time thinking about what’s behind that intensity. Do you have a stylistic problem, an ethical problem, or a tactical problem?

    Next take some time to think about the possibilities in your relationship with the person or group you disagree with.

    • Is compromise possible? If everyone stripped away their emotional attachment to his or her strategy (this means you too!) would there be an opportunity for compromise?

    • Can you convert the others to your position?

    • Could you give up your preferred strategy and join them — allow yourself to be converted? Are you holding on to your position out of stubbornness or narcissism, or do you really believe it is the best or most ethical way to proceed?

    Going through this process, it’s important to be realistic about your own personality. Some people are more temperamentally suited to compromise than others. You may be more or less gifted at persuasion — converting others to your point of view. For others, being “converted” and giving up their own position is just too uncomfortable. If you’re not temperamentally suited for compromise, persuasion or conversion, the best path ends up being peaceful co-existence. Know what your talents, skills and predilections are and proceed with that in mind.

    If you’ve considered and rejected or exhausted these three options — converting your allies to your strategy, finding a viable compromise or yielding and joining them, it’s time to go your own way.

    Try to maintain cordial relations with your allies whose strategy you oppose. This can be tricky when the controversy is public. I’ve been put on the spot in a TV debate where I was asked point blank what I thought about my colleagues’ position. I scrambled to say I admired their passion, disagreed with their tactics but agreed on the goal. I was impressed and grateful that my counterpart was very gracious and complimented my work even though I had made it clear that I thought his approach was not just wrong for me but wrong.

    For me, solving this leadership problem is a work in progress, so I’ll close with an inspirational quote.  According to biographer Jon Meacham, Thomas Jefferson’s political genius lay in his “building contingent majorities and pressing ahead and cutting deals.”

    NY Historical Society

    He was totally devoted to the survival and success of the American experiment, and he would do almost anything to serve that end. He was not at all handcuffed by ideology; if he believed it would serve the American cause, he would do just about anything … And I think that’s what great politicians do. They are committed to a philosophy but are willing to part from dogma to make great things happen.

  • My New Forbes Post on Disavowal– The Most Treacherous Defense Mechanism You Never Heard Of

    My New Forbes Post on Disavowal– The Most Treacherous Defense Mechanism You Never Heard Of

    Defense mechanisms are psychological maneuvers that protect us from painful realities.  They are beneficial in low doses but can be catastrophic when taken to an extreme.  Get acquainted with “disavowal” and what you can do to mitigate its damage by taking a look at my new Forbes post, “The Cause of Your Worst Mistakes:  A Psychological Gremlin You Never Heard Of.”

  • For Professional Investors:  Why you won’t follow your own rules and What to do about it

    For Professional Investors:  Why you won’t follow your own rules and What to do about it

    Rule-Breaking:  Looking at the Psychology of Finance through a Psychoanalytic Lens

    Third in a Series

    Introduction

    Experienced investors believe in the importance of rules.  Rules that specify entry and exit triggers, acceptable volatility ranges, trade size parameters and so on. They organize their rules into trading plans and systems, the uniqueness of which gives them their edge. But except for someone who surrenders control entirely to a computer algorithm, there comes a moment when even the most experienced investor breaks one of his own rules.

    This post uses a psychoanalytic lens to explain why it is inevitable that you will break your own rules and how to  decrease the frequency and minimize damage.

    The Inevitability of Breaking Rules

    Rule breaking is often attributed to lack of consistency, discipline and/or confidence. (for example Crist and Dennis).

    This diagnosis is subtly moralistic.  If you break rules, you obviously lack discipline or confidence—the implication is you’re “bad” or “weak”. Besides being unhelpful, this viewpoint also ignores human nature and the inevitable power of emotion.

    So why do people, including those who are quite confident and disciplined, regularly and inevitably break their own rules? And this despite the pain that usually follows?

    Investment guru Howard Marks is closer to the cause with his focus on emotion:

    “Most people are driven by greed, fear, envy and other emotions that render objectivity impossible and open the door for significant mistakes” (The Most Important Thing Illuminated).

    Reasons for Rule Breaking[i]

    Temperament

    Temperament is your innate way of behaving and reacting, a stable way of perceiving and responding to the world.  Temperament and personal history effect decision making (and therefore rule breaking).  The variations are endless, but here are two common patterns:

    • Stimulus-seeking. Following rules is boring.  You wouldn’t be in this business if you liked doing things in a predictable, rule-bound way. Rule breaking can come from a drive to pursue excitement in the form of daring bets.  And inhibiting yourself can be irksome to the point of fomenting rebellion.
    • Market observers describe states of cyclical euphoria and despondency.  If your temperament includes a component of what psychiatrists call “cyclothymia” —mood variability that alternates between excited, energetic, overly optimistic highs and depleted, pessimistic lows– it’s likely that you will be extra-sensitive to the market’s mood swings which may resonate with and amplify your own. In an elevated mood state, people are universally more impulsive and risk taking.  In a down cycle, people are pessimistic and slow to make decisions.  These overall affective states can be powerful and could easily tip you into the temptation to break one of your rules.

    Group Psychology, aka Jumping on the Bandwagon

    This danger has been widely noted[ii] yet humans being humans, people keep jumping. This is not surprising, since we have evolved to be social creatures.  Our DNA whispers to most of us “stick with the crowd if you want to survive”.  The feelings and thinking of the group exert a magnetic, biologically based pull to match your thoughts and emotions with the herd. Especially if your rules dictate a position that is contrary to the larger group’s prevailing attitude and behavior, you’re likely to experience increasing internal tension. No one enjoys feeling left out of a party, or out on a limb when everyone else is retreating. You start to wonder, maybe everyone knows something you don’t know. The temptation to break your rules grows as your own positions depart from the herd’s.

    What about contrarians?  They are certainly less susceptible –though not entirely immune—to the pressure to join the herd. However, if you are a hard-boiled contrarian you can even rebel against rules you’ve placed voluntarily on your own trading.  I’m a contrarian myself so I’m sympathetic to this position.  If someone tells me I can’t do something I feel a nearly irresistible urge to do it.  If I tell myself I can’t do something, I just as strongly want to say, “oh yeah, just watch me.”

    Emotional forces

    Emotional forces are more fluid and tend to occur in reaction to specific experiences.  While cognitive biases have garnered most of the attention in discussions of the psychology of investing, a smart handful of people have warned about the power of emotion (Once again, see Marks, Buffet, Tuckett[ii] ) . Relevant emotional forces include those that are ubiquitous—everyone experiences them at some time or another–and those that are idiosyncratic-part of your unique makeup and perception/reaction system.

            Ubiquitous emotions

    Investment guru Howard Marks identifies a quiver of emotions and emotional forces that affect every investor:  greed, fear, tendency to conform to the view of the herd, envy and “ego”.  I would add the wish to avoid shame and humiliation. Any powerful emotion can lead you to rationalize departure from your system and rules.  Especially if you are unaware of them, emotions can always override rational thought and considered discipline.

            Idiosyncratic emotions

    Getting acquainted with emotional reaction patterns unique to you requires some practice in self-reflection.  Each of us has triggers for emotional reactions that are idiosyncratic and sometimes counterintuitive.  For one person, boredom becomes a nearly intolerable itch to act and make something happen. Another is hypersensitive to competition with sibling substitutes. Still another person reacts paradoxically to success.

    “Disavowal”

    This is a sneaky and pernicious psychological defense mechanism that everyone is vulnerable to and all investors should know about. It’s complicated, so I explain it in depth in a separate post.  Briefly, it’s a mental disconnect–the strange capacity of the mind to know something very clearly but act in a way that defies the implications of that knowledge.

     What can you do?

    Howard Marks: “What, in the end, are investors to do about these psychological urges that push them toward doing foolish things…Learn to see them for what they are…Be realistic—you’re not immune to these forces” [iv].

    His prescription? “Although we will always feel them [emotions], we must not succumb; rather, we must recognize them for what they are and stand against them.  Reason must overcome emotion. [emphasis added]”

    Marks’ prescription reminds me of Bob Newhart’s famous line as a TV psychotherapist faced with a patient’s irrational fear: “Stop it”.

    If only we could stop ourselves from being driven by emotion.  The Stoics tried it centuries ago, and I suppose a few people can pull it off. But for the clear majority of humans it’s important to understand you are beset by irrational emotional forces AND you can’t just will yourself stoically to resist them.

    Acceptance and Humility

    As Marks correctly insists, know you are as susceptible to these forces as the next person.

    Practice Self Awareness

    You need to learn how the forces of temperament and emotions –both ubiquitous and idiosyncratic– apply to you personally.The key operation in gaining self-awareness is looking at sequences.  Investors are used to doing this in analyzing the market.

    You start with a critical event—you broke a rule, made a mistake– and work backwards.  What mental state were you in before?  What emotions can you identify that preceded your action?  And what came before that spike in emotion?

    If you do this after-action analysis for every instance of rule-breaking, you’ll start to see typical patterns that will clue you into your personal, unique tilts, triggers and vulnerabilities. Take a look at my blog post on “Why professional investors need to know about the concept of psychological regression” which alerts you to some predictable situations that make rational behavior less accessible. Once you know when you are more susceptible to breaking your investing rules, you can set up extra stop-gaps and alerts to try to get you to think before acting when you’re in a similar frame of mind in the future.

    Make Two New Rules

    # 1 WAIT.  Hopefully, you now believe there will be times you want to depart from your system.  Try to put a wait time in place.  Even a 30-minute pause can give you a chance to reconsider your impulse and remember why you have a system in the first place.

    #2 TALK TO A DESIGNATED HUMAN BEING BEFORE YOU BREAK YOUR RULES.  Choose someone to be your external braking system.  The rule is you must get in touch with them before you break a rule or deviate from your system.  If you can’t reach them, you can’t make the trade.  You’re not asking for their permission; you’re just telling them you’re going to break your own rule and you’re willing to listen to their reaction.

    **

    What’s to stop you from this breaking these rules?  Well, you could do that too.  Then it’s time to ask yourself why you might be sabotaging your own success.  Meanwhile, I also suggest a goal of diminishing the frequency and impact of rule breaking, rather than eliminating it entirely.  Your best defense is to know yourself in as much depth as possible and be realistic about and alert to the ubiquity and power of emotional forces.

     

    [i] You might notice I’m not including cognitive biases, which are well known in the industry, as one of the causes of rule breaking. Disciplined following of a set of rules ought, theoretically at least, to eliminate the effect of cognitive biases such as loss aversion, confirmation bias, disposition effect etc.  So, departures from rules can’t be explained by the usual concepts from behavioral finance.

    [ii] See, for example, Howard Marks, The Most Important Thing Illuminated, David Tuckett, Minding the Markets, and Warren Buffett, The Essays of Warren Buffett

    [iv] Howard Marks, The Most Important Thing Illuminated

     

     

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    Copyright: Invantage Advising

    August 2017

     

     

     

     

  • Why Professional Investors Need to Understand the Concept of Disavowal

    Why Professional Investors Need to Understand the Concept of Disavowal

    Disavowal:  Looking at the Psychology of Finance through a Psychoanalytic Lens

    Second in a Series

    What is Disavowal and Why Does It Matter?

    Disavowal is a psychoanalytic term that describes a sneaky and pernicious defense mechanism that leads to very risky and foolish behavior.  It is the fundamental mental flaw behind most white-collar crimes. Disavowal is one of the reasons people break their own well-thought out investing rules.    Disavowal is the prime mover in the dumbest stuff you’re likely to do.

    Everybody knows about disavowal’s cousin, denial, which is so familiar it’s a part of everyday vocabulary.  Disavowal is not necessarily less common— and certainly not less dangerous— but it’s harder to understand, and that may be why you never heard of it before.

    Disavowal is not Denial, But They’re Related

    The easiest way to get at an understanding of disavowal is to understand the idea of denial, and then go through the looking glass to the crazy world of disavowal.

    Denial is straightforward.  Your mind rejects a fact, to avoid the pain that accepting it would cause.  A problem drinker does not believe she has a drinking problem.  A person with an illness does not accept that it has affected his performance.

    With disavowal, facts are accepted as true, but bizarrely, they have no impact your behavior.  It’s as if your mind has been split in two with a glass wall in between.  On one side is logic, a bunch of reality based facts, and awareness of consequences. You see it all.  You know it all.  On the other side is “you”, who really wants to do something, often something risky.  The reality and known dangers hanging on the far side of the wall are disconnected from emotion and your motivational system, and therefore fail to have an impact on the decisions you’re making.  You go ahead and do the Really Dumb Thing. 

    You know when a famous person, let’s say a Congressman or Governor, gets caught doing something illegal, immoral or incredibly embarrassing?  And they lose everything?

    We think, incredulously, “You’re a smart person! How could you be so stupid to think you wouldn’t get caught?”

    Intelligence, obviously, has nothing to do with it.  Most likely, the individual in question knew the law, the risks, even the potential consequences. He probably wasn’t even thinking “the rules don’t apply to me.”  He wasn’t thinking!   Knowledge was split off from emotion and a subjective sense of reality.  It just didn’t feel real, relevant, important, or worth paying attention even though a rational assessment would conclude that the consequences of ignoring reality could be dire.

    AKA Willing Suspension of Disbelief

    Famed investor Howard Marks, who understands the central role emotion plays in investing (especially as a source of mistakes!) borrowed the term “willing suspension of disbelief” from the world of theater to describe one of the key emotional gremlins that can lead the most experienced investor to do stupid things.  Marks writes, “Many times over the course of my career, I’ve been amazed by how easy it is for people to engage in willing suspension of disbelief…people’s tendency to dismiss logic, history and time-honored norms.” (The Most Important Thing Illuminated)

    I think what Marks is amazed at is the frequency with which people employ disavowal, which is the mental mechanism behind the “dismissal” of logic, etc.  It’s not that we bury known facts (such as laws and rules and the consequences of breaking them) —disavowal sets up a situation where these facts and the logical conclusions that link them can’t gain any traction and therefore, weirdly, don’t impact our decisions.

    Marks again: “Time and time again, the postmortems of financial debacles include two classic phrases: ‘It was too good to be true’ and “What were they thinking?’.”

    Adaptive in Small Doses, Catastrophic in Large Ones

    In small doses, disavowal is necessary for survival and essential for risk taking.  Who would get in a car or airplane if the known reality of potential accidents had a strong emotional impact?  We split off what we know about risks in life on an everyday basis in order to be able to do anything.  What surgeon would start an operation if she really felt the reality of what she was about to do?  No investor could tolerate any risk if he deeply felt the full impact of what could go wrong.

    But in larger doses, or when it becomes an organized way of living life, disavowal is tremendously dangerous and a very hard habit to break.

    What to do?

    If it’s you?

    • Be vigilant.
    • Don’t assume you’re too smart to be so dumb.
    • Don’t assume it can’t happen again, because the inherent structure of disavowal, that “split”, is that it can and will.
    • Have a trusted partner who knows your vulnerability to disavowal—what realities are you tempted to disconnect from—and give them the power to stop you when you need to be stopped.

    When it happens on your team

    • Teach the concept.
    • Be vigilant.
    • Take rapid action.
    • Don’t accept “It won’t happen again.”
    • Set alarms and fail-safes in place.
    • Assign a manager or coach specifically alert to this behavior to work with the investor.

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    Copyright: Invantage Advising

    August 2017