Holiday Reading List 2018 – The Rationalist Delusion

Finally, this last year, long overdue, I picked up Daniel Kahneman’s Thinking Fast and Slow (2011). And what a book it is. If you still thought you were a rational human being, deliberately making judgements, weighing pros and cons for every decision you make, consider this quote from Thinking Fast and Slow:

(..) emotion now looms much larger in our understanding of intuitive judgments and choices than it did in the past. The executive’s decision would today be described as an example of the affect heuristic [a mental shortcut], where judgments and decision are guided directly by feelings of liking and disliking, with little deliberation or reasoning.

This resonates so strongly with the work of Jonathan Haidt in The Righteous Mind, that it made me think of one of the themes of that book, the rationalist delusion:

As an intuitionist, I’d say that the worship of reason is itself an illustration of one of the most long-lived delusions in Western history: the rationalist delusion. It’s the idea that reasoning is our most noble attribute, one that makes us like the gods (for Plato) or that brings us beyond the “delusion” of believing in gods (for the New Atheists). The rationalist delusion is not just a claim about human nature. It’s also a claim that the rational caste (philosophers or scientists) should have more power, and it usually comes along with a utopian program for raising more rational children.

How’s that for some provocative ideas worth exploring this holiday?

Haidt’s The Righteous Mind is not on this year’s list because I used it in the past for a number of blogs on biases (see this one on morality bias; and this one on confirmation bias). But the ideas of that book strongly influenced the way I progressed onto the books of this year’s list. Here we go:

Thinking Fast and Slow. Daniel Kahneman. A landmark book if you want to make better decisions. Kahneman shows, that by relying mostly on system 1 (mental shortcuts based on feelings, emotions and morality) in decision-making, and not on system 2 (our rationalist selves), we make predictable errors of judgment. The intuitive system 1 is a lot more influential than your think. Kahneman:

This is the essence of intuitive heuristics [rules of thumb]: when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.

Learn how you fool yourself and read about: the availability heuristic (or What-You-See-Is-All-There-Is heuristic), anchoring bias, the law of small numbers, availability bias, the halo effect, and many, many more.

The Economist have their own way of describing the rationalist delusion in a review of this outstanding book:

As Copernicus removed the Earth from the centre of the universe and Darwin knocked humans off their biological perch, Kahneman has shown that we are not the paragons of reason we assume ourselves to be.

The Master and His Emissary – The Divided Brain and the Making of the Western World. Iain McGilchrist. A different dichotomy than intuition and reason is discussed in this ‘fascinating book’ (Financial Times). The leading question here is: ‘Why is the brain divided?’ McGilchrist:

(..) the hierarchy of attention, for a number of reasons, implies a grounding role and an ultimately integrating role for the right hemisphere, with whatever the left hemisphere does at the detailed level needing to be founded on, and then returned to, the picture generated by the right.

This book is almost two books into one: the first part is steeped into neuroscience, tells us why the brain is divided, and which functions the left and right hemispheres perform. (If I would have to place Kahneman’s systems 1 and 2 in McGilchrist’s left and right hemispheres, system 1 would reside in the left, and system 2 in the right hemisphere.) In the second part of the book (called ‘How the Brain Has Shaped Our World’), the story unfolds in a dramatic way. McGilchrist takes us on a tour through the Ancient World (Plato, again, also see my blog on him here), the Renaissance, Enlightenment and the Industrial Revolution, to come to some daring propositions. One of the most striking ones is that the left hemisphere (the Emissary) has become so dominant that it has seized power over the right hemisphere (the Master), creating a Western culture with an obsession for structure, narrow self-interest and a mechanistic view of the world. I had to think of books on the 2016 reading list by John Gray and Matthew Crawford when I read this. True, or not, it makes for some great reading and stuff worth discussing over a good glass of wine during the Holidays.

Why Buddhism Is True. Robert Wright. No, I’m not going religious on you. And no, I’m not going Buddhist on you. Lauded by The New York Times Book Review, The Guardian, The New Yorker and Scientific American, this book is Darwinian in nature. There’s also a good deal of Kahneman and McGilchrist here:

Again, the part of the brain that controls language [system 2; left hemisphere] had generated a coherent, if false, explanation of behavior  ̶  and apparently had convinced itself of the truth of the explanation. The split-brain experiments powerfully demonstrated the capacity of the conscious self to convince itself that it’s calling the shots when it’s not. (..) In short, from natural selection’s point of view, it’s good for you to tell a coherent story about yourself, to depict yourself as a rational, self-aware actor. (..) It is possible to argue that the primary evolutionary function of the self is to be the organ of impression management [note: Haidt has a similar wording in that he talks about the press secretary].

With the help of modern evolutionary psychology, Wright explains that the mind is increasingly seen as having a modular design. Different modules were created by evolution to size up different situations and take action towards these situations. Much of this action goes on without you (the CEO) even knowing that action is being undertaken. Think about things such as fear, lust, love and many other feelings: are you calling the shots? From a very different angle than Kahneman’s, namely the angle from Buddhist mindfulness and meditation, Wright ends up at the same conclusion:

(..) our ordinary point of view, the one we’re naturally endowed with, is seriously misleading.

Wright goes on to explain why meditation can help us understand ourselves better:

Mindfulness meditation involves increased attentiveness to the things that cause our behavior  ̶  attentiveness to how perceptions influence our internal states and how certain internal states lead to other internal states and to behaviors.

This is an extraordinary book that takes mindfulness meditation out of the esoteric realm. It puts it straight into evolutionary psychology and hands us a tool to help us understand, and improve, our own decision-making.

Mindfulness for Creativity. Danny Penman. Now that I introduced mindfulness meditation above, there needed to be a book on the actual practice of meditation on this year’s list. Mindfulness meditation is still ‘weird’ enough that you have to explain to the world that you are not a tree-hugger, an anarchist or, well, a useless creature in general. Bill Gates, far from being a useless creature, put a book on meditation on his 5 best books of this year. However, even he still felt the needed to explain what the benefits of meditation for creativity are, and that it’s nothing to freak out over:

Back when I was avoiding music and TV in the hope of maintaining my focus, I knew that lots of other people were using meditation to achieve similar ends. But I wasn’t interested. I thought of meditation as a woo-woo thing tied somehow to reincarnation, and I didn’t buy into it. Lately, though, I’ve gained a much better understanding of meditation. I’m certainly not an expert, but I now meditate two or three times a week, for about 10 minutes each time. I now see that meditation is simply exercise for the mind, similar to the way we exercise our muscles when we play sports. For me, it has nothing to do with faith or mysticism. It’s about taking a few minutes out of my day, learning how to pay attention to the thoughts in my head, and gaining a little bit of distance from them.

Well, if it’s something that Bill Gates and Steve Jobs buy into (founders of two of the most valuable companies in the world), I think we should at least give it a try.

If you need more book recommendations, check out the summer reading lists of 2016, 2017 and 2018, and the holiday reading lists of 2016 and 2017.

Happy holidays, and happy reading!

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Five Ways to Introduce Climate Smart Business Decision-Making

 

Source: COSO and WBCSD, based on risk assessment World Economic Forum

 

As a follow-up on last month’s post on business risk stemming from climate change, this post shows you how to incorporate thinking on climate change in your business processes and decisions. The list of ideas is by no means intended to be exhaustive, but it contains a number of ideas I stumbled on while following the excellent Climate Action course by the Sustainable Development Solutions Network of the United Nations.

1.   Include climate change risk in Enterprise Risk Management (ERM)

Now that climate change risks in particular – and ESG-risk in general – are increasingly becoming mainstream for the business community, the calls to integrate these risks in existing frameworks are getting louder. The survival of your business may be at risk according to the WBCSD (World Business Council of Sustainable Development):

Businesses are facing an evolving landscape of emerging environmental, social and governance (ESG)-related risks that can impact a company’s profitability, success or even survival.

The leading organization for ERM, or Enterprise Risk Management, COSO, has teamed up with the WBCSD to update the COSO-framework with ESG-related risks. This is as much proof as you will ever need to convince your fellow management team members that it’s time to start integrating ESG-risk in your business processes. The joined COSO-WBCSD team published an executive summary on how to best integrate ESG-risk into an existing ERM framework. High-level steps include:

  • Establish governance for effective (ESG) risk management.
  • Understand the business context and strategy.
  • Identify ESG-related risks.
  • Assess and prioritize ESG-related risks.
  • Respond to ESG-related risks.
  • Review and revise ESG-related risks.
  • Communicate and report ESG-related risks.

Please note that all actual mitigation strategies, such as moving production locations, switching to different raw materials and preparing for extreme weather, are the outcomes of your risk management process. In other words, by updating your ERM with climate (and other ESG) risks, you lay the groundwork to be able to mitigate those risks. For more on risk mitigation for the different risk categories stemming from climate change, see last month’s post.

2.   Disclose climate change related risk using an existing framework

The Task Force on Climate-related Financial Disclosures (TCFD), chaired by Michael Bloomberg, is rapidly emerging as the standard for core elements and recommendations to report on climate-related financial risk. The task force is part of the international Financial Stability Board, and the TCFD principles are backed by some of the leading firms in the world, such as ABN AMRO, Akzo Nobel, BlackRock, Coca-Cola, KPMG, Olam, Philips, Shell, Suez, Tata, Tesco and Unilever.

The recommendations of the TCFD revolve around a number of key features:

  • Adoptable by all organizations.
  • Included in financial filings.
  • Designed to solicit decision-useful, forward-looking information on financial impacts.
  • Strong focus on risks and opportunities related to transition to a lower-carbon economy.

Core elements of climate-related financial disclosures, as drafted by the TCFD, are:

  • Governance. The organization’s governance around climate-related risks and opportunities.
  • Strategy. The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
  • Risk Management. The processes used by the organization to identify, assess, and manage climate-related risks.
  • Metrics and Targets. The metrics and targets used to assess and manage relevant climate-related risks and opportunities.

While the COSO-WBCSD recommendations on risk management mainly focus on internal risk management for the company itself, the TCFD recommendations should be taken to heart because it tells your company what your external stakeholders are seeking in terms of climate related disclosures. It is advisable to use an existing framework for your disclosures (e.g. GRI or IIRC) and, as an add-on for the climate related disclosures, make sure you integrate the TFCD’s recommendations to make it more relevant for your stakeholders.

3.   Use internal or shadow price for carbon in business decision

The mitigation strategy to prepare for a world where there’s either an emissions trading system (ETS) for carbon or a carbon tax, is using an internal (or shadow) price for carbon. An internal price puts a monetary value on all of your carbon emissions (or indeed on all GHG emissions), which you then use in investment decisions. The idea is that this helps your company prepare for times when policies are put into place that restrict or tax your carbon or GHG emissions. In the post on climate change risk, a number of big firm are mentioned that already adopted this practice. Among them are Microsoft, DSM, AkzoNobel, Carrefour and Sainsbury’s. How this works is revealed by The Economist in a recent article titled Low-carb diet:

Investors increasingly demand that companies take that possibility [of carbon taxes] seriously – 81 countries mention a carbon cost in their national pledges to limit global warming under the Paris climate agreement of 2015. Plenty of the Paris promises remain just that for now, but bosses ignore them at their peril, cautions Feike Sijbesma, who co-chairs the Carbon Pricing Leadership Coalition, which groups green-minded governments and business under auspices of the World Bank. In his day job as chief executive of Royal DSM, Mr Sijbesma has made the Dutch food producer examine all proposed ventures to check whether the sums still add up if a ton of carbon dioxide cost €50, well above the going rate of €6 or so in the European Union’s emissions-trading system (..). Where they do not, alternative feedstocks or cleaner energy suppliers must be found. If a project still looks unprofitable, it could be discarded altogether.

A third way to introduce climate change thinking in your business decisions would therefore be to adopt internal GHG prices into your investment and operational decisions.

4.   Join industry initiatives

Setting public goals, and reporting against those goals, might be one of the most powerful communication tools towards your stakeholders. If you want even more credibility, you can opt for tying these goals to science-based measures or work together with other companies in industry initiatives. The last option gives you the obvious advantage of learning from others, and you thus do not have to re-invent the wheel. Credible industry initiatives engage with important NGOs, think tanks and research organizations to set climate or sustainability related targets and implementation plans. Thus, proactive membership gives you an invaluable ‘line of defense’ in the sense that your company can always refer to the industry initiative to explain the decisions taken on action plans, goals or metrics used. This blog post is obviously not the place to give an exhaustive list of all industry initiatives for mitigating climate change. However, as an example, the WBCSD is (again) a good place to start:

  • Through the Rescale project, leading energy and technology companies are working together on solutions to accelerate the deployment of renewables and the transition to a low-carbon electricity system. Companies that signed up to the Rescale project are, among others, Unilever, Nestlé, DSM, Enel and ABB.
  • Sustainable fuels. The below50 project works towards sustainable fuels that emit at least 50% less as compared to traditional fuels. Some of the organizations involved are United Airlines, Audi, UPS, Arcelor Mittal and the Port of Rotterdam.
  • Climate Smart Agriculture. Through the three pillars of Climate Smart Agriculture (productivity, resilience and mitigation), this initiative is contributing to increasing the resilience and productivity of farmers in our food system to make 50% more food available and strengthen the climate resilience of farming communities, whilst reducing agricultural and land-use change emissions from agriculture by at least 50% by 2030 and 65% by 2050. Major names that signed up are Starbucks, Walmart, FrieslandCampina, Olam, Pepsico and Kellogg’s.

More of these initiatives under the auspices of the WBCSD exist (i.e. for the cement, freight, chemicals, buildings and forest products industries), and importantly, your organization might be more effective by joining an industry initiative with an agreed upon implementation plan, than creating climate strategies from scratch.

5.   Follow the debate(s) on climate change

A lot is written on climate change. There is still a lot of controversy over climate change, though we leave climate change naysayers in the same category as people who deny the link between smoking and lung cancer.  One of the main points of controversy that you may not yet heard of, is literally the sucking of carbon out of the air. This is one of the lesser known, but needed, strategies to reduce CO2 particles in the atmosphere according to The Economist:

Fully 101 of the 116 models the Intergovernmental Panel on Climate Change uses to chart what lies ahead assume that carbon will be taken out of the air in order for the world to have a good chance of meeting the 2°C target.

There are many arguments put forward by the opponents of carbon capture (different technologies exist: carbon capture and storage (CCS), carbon capture and utilization (CCU), bio-energy with carbon capture and storage (BECCS)), but the reality is the IPCC argues that we need a fair amount of it if we want to have a chance of living in an under 2°C world. Without taking a position here (just check the articles with the tag ‘slippery slope argument’ for some thoughts on that), it’s advisable to follow debates such as the one on carbon capture. It will raise awareness of the different viewpoints and from which angles your firm can expect criticism once you opt for a certain climate mitigation strategy (e.g. carbon capture). Maybe not so much a direct pathway to integrate climate change into your business processes, but by following the debates on climate change and disseminating information in your management’s risk meetings, you will create awareness of the controversies about mitigation strategies and, in turn, you will create a platform for further discussion.

By way of conclusion

From last month’s blog we’ve learned that climate change poses risks for your business, and how you can mitigate those risks. In this post, five ways for introducing climate change in your business lexicon have been put forward:

  • update risk management with climate risks;
  • disclose climate risks;
  • use internal carbon prices;
  • join industry efforts;
  • follow the climate change debates.

By adopting these strategies, climate change risks will be more easily identified and, in turn, more creative thinking on mitigation strategies in your organization will take hold.

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6 Tips to Foster Practical Wisdom in Decision Making

Aristotle might be best known for ‘inventing’ science (see my discussion of The Lagoon – how Aristotle invented science) and being a rather rational kind of chap. Although this is certainly true, and you can learn a lot from reading his treatises (his extant works read more like lecture notes than books) such as On the Soul, Physics, and Metaphysics, I stumbled upon the interesting Aristotelian term phronesis that translates as ‘practical wisdom’.

In The Nichomachean Ethics, Aristotle explains that practical wisdom (phronesis) is something else than scientific knowledge (epistēmē). In the sense that practical wisdom is rooted in action and can essentially create different realities (or outcomes) by taking action; scientific knowledge, instead, describes how reality is:

(..) since scientific knowledge involves demonstration, but there is no demonstration of things whose first principles are variable [such as decision making in reality], and since it is impossible to deliberate about things that are of necessity, practical wisdom can not be scientific knowledge nor art [technē, a technique, in the sense of making things]; not science because that which can be done is capable of being otherwise, not art because action and making are different kinds of things. The remaining alternative, then, is that it is a true and reasoned state of capacity to act (…).

This passage is pregnant with implications for managerial decision making. Although you should make use of scientific insights if they are available, and you should take into account knowledge on how to build real-life things (i.e. cars, bridges, consumer products, etc.), managerial decision making often has other, less tangible characteristics. For example, think about creating a strategy, an organizational structure or a company culture. Some characteristics of this kind of decision making that spring to mind are:

  • Uncertainty. You probably do not have all the knowledge and all the details. Outcomes cannot be predicted with certainty and are, thus, contingent.
  • Context-dependent. You are not taking a decision in isolation: How will my competitors act? What will my employees think and do? How will my stakeholders react?
  • Non-demonstrable outcomes. There are no scientific rules. There is not even an exact copy of the problem at hand.
  • Action-oriented. Your decision entails an actual follow-up in the real world; in a way, you will alter reality with your actions.
  • Multiple outcomes possible. Your actions will alter reality. But, the outcome is not fixed as it would be if there was scientific certainty. You change the outcome by taking different actions: you can create endless variations in strategies, organizational structures or cultures, for example.

Professors Ikujiro Nonaka and Hirotaka Takeuchi, in their Harvard Business Review article, call for ‘wise leaders’ to make decisions in such a context:

Dependence only on explicit knowledge prevents leaders from coping with change. The scientific, deductive, theory-first approach assumes a world independent of context and seeks answers that are universal and predictive. However, all social phenomena – including business – are context dependent. (…), the world needs leaders who will make judgments knowing that everything is contextual, make decisions knowing that everything is changing, and take actions knowing that everything depends on doing so in a timely fashion. They will have to see what is good, right, and just for society while being grounded in the details of the ever-changing front line. Thus, they must pair micromanagement with big-picture aspirations about the future.

Echoing Aristotle and Nonaka & Takeuchi, I therefore conclude that (managerial) decision making is not a science (epistēmē) and not a technique (technē). But, rather, it is applying practical wisdom (phronesis) to a situation that demands an analysis and a wise decision when facing uncertainties and incomplete information. Now, with Hardin, we can ask ourselves the question ‘What operations are implied by these statements?’ Or, ‘What does this mean in practice?’

In the following paragraphs, I will therefore offer 6 tips to operationalize the concept of practical wisdom.

Tip 1: use your mission and vision as a guiding principle in decision making

In taking on any decision, hold it against your mission and your vision. Your organization’s mission tells you the organization’s reason-of-being: why does your organization exist in the first place. The vision tells you what you are trying to achieve in the medium to long term. For more on one of the most important aspects of business (i.e. your mission), see my blog on business fundamentals.

Tip 2: get to the essence of a problem or a decision

Always ask yourself these questions: Why is there is a problem? What are we trying to solve? What are we trying to achieve? Nonaka and Takeuchi describe it as ‘relentlessly asking what the basis of a problem or a situation is.’ They go on to describe routines to do just that at two Japanese multinationals:

At Toyota employees ask “Why?” five times to get to the root cause. At Honda they ask the “A, A0, and A00” questions. A questions are about specifications – such as “What should the horsepower of this engine be?” A0 questions are about concepts – such as “What is the idea behind this engine?” A00 questions are about the essential goals of the project – such as “What is this engine for?”

Tip 3: understand the difference between epistēmē and phronesis, and when to use it

You don’t usually need scientific knowledge to make wise decisions (although it can be part of the data that you need for to make a decision, of course). Recognize the existence of practical wisdom (phronesis) as opposed to scientific knowledge (epistēmē). In a funny example, Nassim Taleb explains how relying on epistēmē in a situation where phronesis might be more suited, can lead to serious mistakes. He calls this the green lumber fallacy:

In one of the rare noncharlatanic books in finance, descriptively called What I Learned Losing a Million Dollars, the protagonist makes a big discovery. He remarks that a fellow named Joe Siegel, one of the most successful traders in a commodity called “green lumber”, actually thought that it was lumber painted green (rather than freshly cut lumber, called green because it had not been dried.) And he made it his profession to trade the stuff! Meanwhile the narrator was into grand intellectual theories and narratives of what caused the price of commodities to move, and went bust.

Tip 4: use heuristics (rules of thumb)

According to Taleb ‘heuristics are simplified rules of thumb that make things simple and easy to implement. But their main advantage is that the user knows that they are not perfect, just expedient, and is therefore less fooled by their powers.’ Using heuristics does not require scientific knowledge but can give you insight into what’s going on pretty quickly. In turn, you might be able to use these shortcuts for your decision making. A powerful heuristic, for example, is the 80/20 rule or Pareto principle that states that in many events 80% of the effects come from 20% of the causes.

Tip 5: develop your own heuristics through practice and experience

In practical wisdom, experience and practice take precedence over scientific rules. Through practice in the real world, you might be able to create your own heuristics about your specific (business) contexts and realities. In time, you will develop rules of thumb, or even a ‘feel’, for how things play out for your organization in a specific (Aristotle uses particular) situation. In The Nichomachean Ethics, this concept is illuminated as follows (emphasis mine):

Nor is practical wisdom concerned with universals only – it must also recognize the particulars; for it is practical, and practice is concerned with particulars. This is why some who do not know [i.e. do not have scientific knowledge], and especially those who have experience, are more practical than others who know; for if a man knew that light meats are digestible and wholesome, but did not know which sorts of meat are light, he would not produce health, but the man who knows that chicken is wholesome is more likely to produce health.

As an example, read why I use redundancy (as a heuristic) in project plans.

Tip 6: read widely

Now that we have established that (organizational) decision making is practical wisdom instead of science, you might want to practice as much as possible (and create your own practical heuristics along the way). Another way to expose yourself to as many situations as possible, and see how people react to and solve problems, is reading. Peter Drucker famously said that management is a liberal art. Liberal because management is about broadening general knowledge and experience; and an art because management is practiced by doing. So, pick up some philosophy, some history, and some literature once in a while to broaden your exposure to more Aristotelian particulars. A place to start? See last year’s holiday reading list.

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A Roadmap Back to Business Fundamentals

One of the catch phrases I picked up in my university days, and still use when appropriate, is: ‘There’s nothing more practical than good theory’. During change efforts in any type of organization (i.e. profit, nonprofit, government), whether they are design changes or execution changes, it is always a good idea to keep a number of business fundamentals in mind to get, or keep, your organization on course. If it is true that it is more beneficial to study older literature that is still in print (see here) rather than reading the latest management book that might turn out to be another fad, you can do worse than read an old (2002) favorite of mine: What Management Is, by Joan Magretta, a former top editor at Harvard Business Review.

In a review of this book, Peter Drucker, arguably the most prolific writer on general management, wrote:

First rate as an introduction for the non-manager and especially for the beginner, but equally excellent as a rounded, complete, and comprehensive “refresher course” for the most experienced executive.

What Management Is defines a number of core management principles that, I suggest, should be at the core of what you, as a manager, try to achieve through your daily activities. By providing you with essential quotes from this book, I attempt to get the business fundamentals back into every activity and every change effort you pursue to help improve the performance of your team, department, business unit, or organization.

Throughout what follows I will use bullet points to highlight – what to me seem ­–fundamental insights into eight crucial management ideas. Beginning with why we need management in the first place, we then move onto the ideas themselves.

Why do we need management as a discipline?

  • Wherever our needs exceed our resources, we need management.
  • Management allows us to achieve a vast array of purpose that none of us could achieve acting alone.
  • We think we live in worlds of our own and can contribute as individuals, but this is only possible because some form of organization (through management) makes the specialized work we do productive.
  • Management is turning complexity and specialization into performance. As the world economy becomes increasingly knowledge based and global, work will continue to grow more specialized and complex, not less. So, management will play a larger role in our lives, not a smaller one.

Management Idea 1: Value Creation

  • Management’s mission, first and foremost, is value creation.
  • Value takes many forms and comes from many sources: a product’s usefulness, its quality, the image associated with it, its availability, the service. The more intangible the value appears, the more important it is to recognize that value is defined by customers. Value is not defined by what an organization does but by customers who buy its goods and services. There is really only one test of a job well done – a customer who is willing to pay for it.
  • Efficiency can be defined as doing things right; effectiveness as doing the right things. Effectiveness is what customers value.
  • The value chain is the sequence of activities and information flows that a company and its suppliers must perform to design, produce, market, deliver, and support its products:
    • you begin to see each activity not just as a cost, but as a step that has to add some increment of value to the finished product;
    • it forces you to see the entire economic process as a whole, regardless of who performs each activity. Managing across boundaries, whether these are between the company and its customers, or the company and its suppliers or business partners, can be as important as managing within one’s own company.

Note: for a discussion on shareholder value versus stakeholder value, see Beyond Shareholder vs. Stakeholder Value.

Management Idea 2: Business Model

  • A business model is a set of assumptions about how an organization will perform by creating value for all the players on whom it depends, not just its customers. Business models reflect the systems thinking that is so central to management.
  • A business model is a story of how an enterprise works.
  • A business model is a story about the basic human activities of making and selling. The twist in a new business model is almost always a variation on some aspect of an existing value chain.
  • Much of what ultimately determines a business model’s success is the behavior of people and organizations in markets.
  • For nonprofit or government agencies, the story always hinges on how the organization will change the world, or at least the specific aspect of the world its mission targets. Here, the twist in the plot – the critical insight about value – is what is sometimes called the organization’s theory of change.

Note: as tempting as stories on winning business models are, be aware that’s just what they are: stories. On why you should be very careful with prescriptive writing on business models, read Successful Businesses and the Halo Effect.

Management Idea 3: Strategy

  • Strategic thinking begins with a good business model.
  • Strategy goes further because the business model does not factor in competition.
  • When you cut away all the jargon, this is what strategy is all about: how you are going to be better by being different?
  • Strategy is about choices: which customers and markets to serve, what products and services to offer, and what kind of value to create.
  • Try to be all things to all people, and your organization will fail to find distinctive ways to compete.
  • A company’s profits are what’s left after subtracting costs from revenues. It follows, then, that there are only two ways one company can outperform another. It can get its customers to pay higher prices or it can operate on lower costs. To do either of those two things, it has to be different – or how else could you explain its ability to charge more or use fewer resources? That’s the simple arithmetic of superior performance.
  • One of the most effective roadblocks to pure competition is a unique positioning.
  • The five forces model (Michael Porter, 1979) has become a foundation of the strategy field. Porter identified the underlying forces that determine the attractiveness of any industry: the competition among existing players, the threat of new entrants, the power of suppliers, the power of customers, and the availability of substitute products. It is the interplay of these forces that determines where on the spectrum of competition – from perfect competition to monopoly – an industry is likely to be.

Note: in the last years, your organization’s positioning on non-financial aspects as environmental, social and human rights matters have become increasingly important for your customers and other stakeholders. For a discussion of non-financial aspects in relation to strategy, see What every manager should know about: Non-Financial Disclosure.

Management Idea 4: Organizational Structure

  • Management’s job, turning complexity and specialization into performance, requires it to draw three different kinds of lines. First, the boundary lines, which separate what’s inside and what’s outside. Second, the lines of the organizational chart, which map how the whole is divided into working units and how each part relates to the others. Third are the somewhat invisible, but always important, lines of authority. These determine who gets to decide what, and how the internal game is played.
  • Because strategy is dynamic, organizations must be flexible. Drawing the lines of organization is an ongoing struggle to stay relevant, not a job done once and for all.
  • Why do companies draw and redraw the lines that define how many of the steps in the value chain they perform themselves? Again, it’s a question of matching strategy and structure, of finding the organization best able to deliver a particular configuration of value at a particular moment in time.
  • Backward integration often made sense for two reasons: first, better coordination leads to lower costs; second, ownership guarantees a source of critical raw materials. With ownership, however, you lose the powerful incentive of the marketplace: the nervous edge that keeps suppliers on their toes.
  • Using participation instead of hierarchy, Toyota developed a host of techniques (collectively known as Total Quality Management, or TQM) to improve the quality of the manufacturing process: participation from everyone, cross-functional teams to solve problems, and cooperation and information sharing across company lines.
  • There is no one best way to organize. Scale, scope, and structure are enormously contingent on what you’re trying to do.
  • Designing an organization is frustrating, because most of the important decisions are at best trade-offs you’d rather not have to make. Treat the latest approach as a panacea, and you will surely be disappointed. Understand the trade-offs that have been made well enough to compensate for them, and everyone will perform better, whether it comes to drawing new lines or living within the existing ones.

Note: the need to manage ESG-risks in your supply chain can be another reason for backward integration. For an example, see the article on IKEA in my list of LinkedIn posts.

Management Idea 5: Measures for Your Mission

  • An organization’s purpose or mission determines what results are meaningful and what measures are appropriate.
  • One of the most fundamental managerial challenges of all is translating mission into action and into performance.
  • For most organizations, performance is multifaceted; it comes from striking the right balance. No one measure can capture 100 percent of what an organization needs to do to perform. And, like medicines, all measures have side effects, some of which can be dangerous to an organization’s health. In short, you can’t manage without measures, but neither can you apply them without thinking long and hard about how well they fit what you have to do.
  • As imperfect as any one measure might be, it’s impossible to work systematically on performance without them. Good managers know they can’t live without performance measures, but neither can they live by them without respecting their limitations.
  • Performance is all about realizing the mission. Performance and mission are never in conflict, if performance is properly understood and defined.
  • Whether we’re talking about a business or a nonprofit organization, performance is impossible without a mission.

Note: investors are increasingly calling for better performance on KPIs relating to ESG-factors, see for example my LinkedIn post on Impact Investing. This may call for an entry of some ESG-topics in your organization’s mission statement.

Management Idea 6: Innovation

  • Innovation is a very special kind of problem solving. It’s the search for new ways to create value, and new value to create.
  • An entrepreneur who doesn’t learn how to manage won’t last long. Nor will a manager last long if he doesn’t learn to innovate.
  • Gathering the information you need to create better bets requires active engagement, not just passive listening. It requires you to actively suspend your own intuition, to observe how other people behave, and without imposing your own logic, to ask why. This takes discipline because it goes against the grain in a number of ways. Most people prefer talking to listening. The more successful they’ve been, the more in danger they are of believing that when it comes to their business, they know best. True curiosity about other people – a passionate interest in understanding why people do what they do – is rare. Suspending judgment, observation, and curiosity – these are the necessary complements (and sometimes antidotes) to the prompting of instinct, intuition, and industry lore.
  • The fact that things can turn out in more ways than one is perhaps the defining characteristic of managerial decision making. You are forced to commit resources today toward performance in an uncertain future.
  • People confuse the best case (what they hope will happen) with the base case (what’s most likely to happen). The cash flows you lay out are only as good as your answers to these questions: What could go wrong? What could go right? How likely is it that those things might happen?
  • We forget that, like all models, Net Present Value rests on a number of assumptions. First, that you can translate your expectations about future events into a specific forecast of revenues and costs. Second, that you can capture the impact of both time and risk in the discount rate you use to adjust those cash flows. And third, that once you set out on the path those cash flows represent, you won’t change your mind along the way.
  • Without innovation and risk taking, there would be no economic progress. The discipline of management helps to increase the odds that the risky business of innovation will pay off.

Note: Magretta talks about ‘suspending your own intuition’. Tools to do just that, I described in Three tools to overcome confirmation bias.

Management Idea 7: Focus

  • Paraphrasing Pareto’s Law, performance will depend disproportionally on doing a few things really well. This is why it is critical to match an organization’s resources to those activities that make a difference.
  • Overriding point of Pareto’s Law: In most instances, a few things matter far more than others. An important corollary of the 80-20 principle is that averages and aggregate numbers are useless, if not misleading, because they obscure most of the decisions that are important to performance.
  • Drucker noted repeatedly that the greatest obstacle to innovation is the unwillingness to let go of yesterday’s success, and to free up resources that no longer contribute to results. The solution, says Drucker, is the discipline of “systematic abandonment”, a discipline Jack Welch applied at GE: ‘If you weren’t already in the business, would you enter it today?’ If the answer is no, then ask yourself: ‘What are you going to do about it?’
  • People much prefer to carry on in the hopes that their earlier decisions will be vindicated. The discipline of sunk costs (investments of time or money that can no longer be recovered or put to other use) helps managers avoid this trap, and can deter them from throwing good money after bad.
  • Benchmarking and best practices. These related disciplines are keeping more and more organizations marching to the steady drumbeat of continuous improvement. The idea is to compare the performance of your products or processes with those that are best in class, even if this means going outside your organization or industry.

Management Idea 8: Managing People

  • Most people are deeply – and rightly – resistant to being managed. In fact, the real insight about managing people is that, ultimately, you don’t. The best performers are people who know enough and care enough to manage themselves.
  • Management creates performance through others. Without the willing cooperation of others, management can accomplish very little.
  • Shared beliefs constitute an organizational culture – its set of assumptions about how we do things and who we are.
  • An organization’s values, unlike ethics, are matters of deep belief about which honest people can disagree. The question isn’t whether one company’s values are better than another’s, but which are better-suited to helping the organization achieve its purpose. The real measure is fit.
  • Setting an example is not the main means of influencing others, it is the only means.’ (Albert Einstein)
  • We saw earlier how performance measures make an organization’s mission concrete. Similarly, story, ritual, and symbol are powerful ways of making values tangible.
  • If management had its own golden rule, it would be this: Trust others as you would have them trust you.
  • If management is not trustworthy, employees will neither share their best ideas nor give their all.
  • Increasingly, economics has become a quantitative discipline, one of the “numbers” subjects. But its underlying aim has always been to explain human behavior. Its eighteenth-century pioneers, like Adam Smith, studied ethics and moral philosophy.
  • A manager can help people discover their strengths, and help people get better at what they’re good at, but a manager can’t and shouldn’t change who a person is.
  • Empathy is yet another instance of the outside-in perspective, of seeing the world through other people’s eyes. Working effectively with other people means accepting the limits of your own authority and of your own perspective.
  • As individuals we’re slow to apply the principles of value creation to our own efforts. We persist in defining our performance by how hard we work at something, rather than by the results we achieve.

Now ask yourself: How is my organization doing on these business fundamentals? And how can we improve our performance by looking more closely to what a manager should really do?

 

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Decision Making: What We Can (Not) Learn from Plato

                  “An early management training on rational decision making(Hulton Archive/Getty Images)

When I started this blog, I was determined to write some posts on decision making. I am fascinated with the fact that humans think we are rational beings, while all the latest research (on moral psychology, neuroscience, etc) clearly contradicts this. I have tried to write about what I ‘discovered’ to be true (by reading other people’s books that is): that we suffer from a number of ‘errors’ that keep us from taking rational decisions. See for example my posts ‘morality binds and blinds and ‘three tools to overcome conformation bias.

How we came to worship reason: enter Plato

As interesting as new research on these topics is, how we came to think of ourselves as rational decision-makers in the first place, seems a relevant topic in itself. In an – undoubtedly futile – attempt to work through the entire list of Great Books, I managed to make it through a number of works by Plato. As everybody who enjoyed the classical education will surely know, Plato is considered the high priest of ratio. Two quotes from Republic (Plato’s attempt to describe the ideal state) show just how high his regard for reason was:

‘.. when one tries to get at what each thing is in itself by the exercise of dialectic, relying on reason without any aid from the senses, and refuses to give up until one has grasped by pure thought what the good is in itself, one is at the summit of the intellectual realm.’

.. reason ought to rule, having the wisdom and foresight to act for the whole, and the spirit ought to obey and support it.’ [Italics added.]

I often found it hard not to be dragged along by Plato’s arguments. He writes with such passion and comes up with many wonderful stories that are still known today. Think about the myth of Atlantis (to be found in the Timaeus), the metaphor of the cave (see Republic), and the famous comparison of the soul to a charioteer with two horses (read Phaedrus). It all makes for fantastic literature actually.

Plato’s unrelenting belief in reason, however, turns him into an enemy of anything that distracts us from pure thought. Poetry, art, passion, emotion, he will have nothing of it. Why? What follows takes quite some effort to grasp (and likely some leaps of faith):  Plato argues that reason leads to pure knowledge, and only pure knowledge can lead to what’s truly good, and what’s truly good ultimately leads to happiness. He then argues (in Republic) that everything that is in the realm outside pure thought – like impressions, appearances, beliefs, emotions, and opinions – could thus never lead to a happy life. In short, using rational thought is the only way to go about your life; emotions and the senses do not have a place in leading a good life or making the right judgments or decisions. This was a defining moment in history: reason won, emotions were out. Or as Jonathan Haidt puts in The Righteous Mind:

‘Western philosophy has been worshiping reason and distrusting the passions for thousands of years. There’s a direct line running from Plato through Immanuel Kant to [20th century psychology].’

Evidence why Plato is wrong: enter ‘moral reasoning’

Plato beliefs that we use (should use) rational thinking because it will lead us to the truth. Plato believes that we argue to get to the truth. In fact, most of his dialogues feature Socrates engaging in arguments about all kinds of topics with the aim of getting  to the truth of the matter. An opposing view would be that we do not argue to get to the truth, but we argue to win the argument: we have a sense or intuition for the right course of action, and we use our reasoning to justify our intuition. This is exactly what the field of moral psychology is proposing, and there’s overwhelming evidence that our decision making is highly influenced by emotions (or gut feelings if you will) instead of pure reason. As journalist Stephen Hall puts it in his highly readable Wisdom:

‘What if moral judgment, so central a notion to all schools of philosophy and the centrepiece of every major religion, is not the conscious, deliberate, reasoned discernment of right or wrong we’ve all been led to believe, but is, rather, a subterranean biological reckoning, fed by an underwater spring of hidden emotions, mischievously tickled and swayed by extraneous feelings like disgust, virtually beyond the touch of what we customarily think of as conscience? What if Plato, Socrates, and Aristotle were nothing but a bunch of two-bit, fork-tongued, post hoc rationalizers? What if, every time we decide what is the “right” or “good” thing to do, we are merely responding, like dogs, to the otherwise inaudible whistling of the emotional brain? That is where moral philosophy is headed these days, and it’s being driven by a new generation of philosophers and social psychologists, who have adopted the uniform of the lab coat.’

One of these social psychologists is Jonathan Haidt, who did a lot of ground breaking work on understanding where our moral reasoning comes from. One of his catch phrases is ‘intuitions come first, strategic reasoning second’. To buttress this claim, he finds indications in research that shows that ‘moral thinking is more like a politician searching for votes than a scientist searching for truth’. Some disturbing conclusions he draws about our thinking are:

  • We are obsessively concerned about what others think of us, although much of the concern is unconscious and invisible to us.
  • Conscious reasoning functions like a press secretary who automatically justifies any position taken by the president.
  • With the help of our press secretary, we are able to lie and cheat often, and then cover it up so effectively that we convince even ourselves.
  • Reasoning can take us to almost any conclusion we want to reach.
  • In moral and political matters we are often groupish, rather than selfish. We deploy our reasoning skills to support our team, and to demonstrate commitment to our team.

Why should you care? Or: how can you improve your decision making?

Why should you care about what the latest research has to say about reasoning? You may think you always make use of rational thinking and never engage in moral reasoning, especially not in the workplace. Think again. There are very few domains that are immune to moral reasoning. The exception might be science. But science obviously does not include the business environment, which is highly politically motivated and thus vulnerable to moral reasoning.

To improve your business decision making, you might ask yourself these two questions prior to making decisions:

  1. Am I trying to get to the truth (and set my ego aside) or am I trying to win the argument?
  2. Am I tackling this problem logically or am I caught in moral reasoning to try to justify a position I intuitively feel is right (also known as post hoc rationalization)?

Whenever the answer points into the direction of argumentative reasoning or post hoc rationalization, seek the advice of others. Others that have opposing views that is. Because the research I have been discussing also shows that we are very well equipped with coming up with my-side arguments, but terrible in coming up with other-side arguments. Reading Plato is still recommended – especially to learn where and how our adulation of reason came about –, but to improve your decision making you had better stick to the latest insights from psychology and neuroscience.

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Three thinking tools to overcome confirmation bias

Understanding that your reasoning is undermined by bias, is one of the most valuable insights into your own decision making capabilities. I wrote another piece on biases (Morality Binds and Blinds), but the title might have been such that it was my least successful blog entry measured by number of reads. Or, it might just be too unsettling to think and read about the flaws in your own reasoning. Nevertheless, I think understanding biases are hugely important for better decision making, and offer you three thinking tools to overcome the arguably most famous of all biases: confirmation bias.

Falling into the trap of confirmation bias, we all do it

An intriguing discussion of confirmation bias can be found in Jonathan Haidt’s The Righteous Mind:

(…) confirmation bias, the tendency to seek out and interpret new evidence in ways that confirm what you already think. People are quite good at challenging statements made by other people, but if it’s your belief, then it’s your possession – your child almost – and you want to protect it, not challenge it and risk losing it.

People outside Haidt’s realm of moral psychology and moral philosophy also figured out that people mainly reason to be right instead of reasoning to get to the truth. Here are some quotes that sum up human nature pretty well, I feel:

The eye sees only what the mind is prepared to comprehend. (Robertson Davies, fiction writer, in: Tempest-Tost.)

For it is a habit of humanity to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not fancy. (Thucydides, chronicler of the Peloponnesian War, 4th century BCE.)

We human beings are egotistical animals; each of us wants to win the argument. (Garrett Hardin, human ecologist, in: Filters Against Folly.)

You would think that educating people will surely get rid of the confirmation bias. Or surely the more intelligent people are they will be able to come up with many more reasons for both sides of any argument? Think again. The opposite is quite true (again from The Righteous Mind):

The findings get more disturbing. Perkins found that IQ was by far the biggest predictor of how well people argued, but it predicted only the number of my-side arguments. Smart people make really good lawyers and press secretaries, but they are no better than others at finding reasons on the other side. Perkins concluded that “people invest their IQ in buttressing their own case rather than in exploring the entire issue more fully and even handedly”.

This is probably why rhetoric is simultaneously admired and met with scepticism. Is the rhetorician building a solid rational case? Or is she only trying to win people’s minds over for her own view? Plato famously bashed rhetoric and sophistry in his dialogues Gorgias and Republic, making the case that winning arguments with rhetoric is more about persuasion than knowledge. (Plato, in turn, was of course also accused of only coming up with supporting reasoning for his worldview. Even the greatest of thinkers are not immune to conformation bias it seems.)

If we agree that conformation bias is indeed a serious problem, it limits our capacity to reach the best outcomes by thinking that we are rational beings always arriving at rational conclusions. Haidt and others (e.g. John Gray; see my blog post on progress for a short discussion of his book The Silence of Animals – on Progress and Other Myths) even go so far as to call this the rationalist delusion. What to do?

Three thinking tools to overcome conformation bias

1. Put together a group consisting of members with different backgrounds.

Jonathan Haidt’s suggestion: always use several people with different ideologies and background when making a decision so they can disprove arguments put forward by individuals (emphasis added):

(..) each individual reasoner is really good at one thing: finding evidence to support the position he or she already holds, usually for intuitive reasons. We should not expect individuals to produce good, open-minded, truth-seeking reasoning, particularly when self-interest or reputational concerns are in play. But if you put individuals together in the right way, such that some individuals can use their reasoning powers to disconfirm the claims of others, and all individuals feel some common bond or shared fate that allows them to interact civilly, you can create a group that ends up producing good reasoning as an emergent property of the social system. This is why it’s so important to have intellectual and ideological diversity within any group (..).

This short passage reminded me of a method I used some time ago to try to get the most out of a group of experts who were all convinced of the superiority of their own solution to the problem at hand:

2. Use parallel thinking to have members look at the problem from the same angle and then switch angles a number of times using six different ‘hats’.

Once you have put together a diverse group of people, engage in parallel thinking. This method has been perfected by psychologist and management thinker Edward de Bono. In his book How to Have A Beautiful Mind, he echoes Haidt and others in noticing:

Argument is an excellent method and has served us well. At the same time (..) it is unsophisticated. Each side makes a ‘case’ and then seeks to defend that case and prove the other ‘case’ to be wrong. It says, in short: ‘I am right and you are wrong.’

De Bono gives a summary of his highly effective way of looking at decision making processes (emphasis added):

  • The direction of thinking is indicated by six coloured hats, each of which indicates a mode of thinking. At any moment everyone is ‘wearing’ the same colour ? hat. That is what is meant by ‘parallel thinking’.
  • The white hat indicates a focus on information. What do we have? What do we need? How are we going to get the information we need?
  • The red hat gives full permission for the expression of feelings, emotions and intuition without any need to give the reasons behind the feelings.
  • The black hat is for ‘caution’ and the focus is on faults, weaknesses, what might go wrong and why something does not ‘fit’. [This is the classical argumentative mode we often find ourselves in, trying to disprove other people’s arguments.]
  • With the yellow hat the focus is on values, benefits and how something can be done.
  • The green hat sets aside time, space and expectation for creative effort.
  • The blue hat is to do with the organization of thinking. This means setting up the focus and also putting together the outcome.
  • The hats make sure that everyone is using his or her own thinking fully to explore the subject. If you want to show off you now do this by out-performing others on each hat.

Using the six thinking hats is a useful approach to cure confirmation bias. The subject is really explored and should defuse argumentative behavior. The actual quality of the arguments put forward (checked through the black hat) can benefit from a third thinking tool proposed by Garret Hardin in Filters Against Folly:

3. For every argument put forward use the black hat to check against Hardin’s concepts ‘literacy’, ‘numeracy’, and ‘ecolacy’.

For everyone to understand what is put forward, Hardin proposes to pass an argument through three filters, because:

In the universal role of laymen we all have to learn to filter the essential meaning out of the too verbose, too aggressively technical statements of the experts. Fortunately this is not as difficult a task as some experts would have us believe.

Questions we should ask ourselves to understand any argument are:

  • On ‘literacy’. What are the words that we are using? What do they mean? What do these words mean in reality, if we start working with these concepts?
  • On ‘numeracy’. What are the numbers? What do the numbers mean? What is the relative size of quantifiable factors? Are there scale effects? Can we attach words to the numbers in order to convey meaning?
  • On ‘ecolacy’. In ecological thinking (or systems thinking) we introduce time into the equation of the words and numbers used. If we pursue this action, tactic, or strategy, what will happen next? And what if keep repeating this? What are the effects over time? What could the perverse effects be?

Hardin stresses the importance of using all three filters:

The skills of Readin’, Writin’, and ‘Rithmetic need to be combined with an attitudinal checklist that asks if the best words have been used, if quantities have been duly considered, and if the consequences of time and repetition have been taken into account. The “bottom line” of an analysis needs to be subjected to filtration that is simultaneously literate, numerate, and ecolate. (..) We use the ecolate filter to ferret out at least the major interconnections. Every proposal of a plausible policy must be followed by the question “And then what?” Not until we have asked this question (and answered it to the best of our ability) are we ready to put a plan into action.

By way of summary: understand what confirmation bias is, acknowledge that any individual falls victim to it, and then apply the three thinking tools discussed in this blog. Now you are well underway to better decision making.

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Holiday Reading to Blow Your Mind (and expand your perspective)

If reading up on philosophy can make you a more creative and effective manager, why not start by reading some non-business books that focus on contemporary philosophy?

Harvard Business Review argues that philosophy, through an increased ability for self-reflection, makes you a better leader. Reading philosophy:

(…) can promote business success by helping leaders to identify their values and strategic goals, synthesize information to attain those goals, and implement strong action plans.

Bloomberg writes about how philosophy can make you a better manager because it helps you to develop empathy (i.e. put yourself in someone else’s shoes). There is a warning though:

[Philosophy] doesn’t lead to easy answers, but it does help lead to the right questions. And that’s the true value of philosophy in business life. It can lead (…) to valuable self-reflection. But perhaps more importantly, it can help us think more clearly about the practical issues we face every day.

The Economist writes that real thought-leadership can only be achieved through reading ‘a few great thinkers’:

Inward-bound courses would do wonders for “thought leadership”. There are good reasons why the business world is so preoccupied by that notion at the moment: the only way to prevent your products from being commoditised or your markets from being disrupted is to think further ahead than your competitors. But companies that pose as thought leaders are often “thought laggards”: risk analysts who recycle yesterday’s newspapers, and management consultants who champion yesterday’s successes just as they are about to go out of business. The only way to become a real thought leader is to ignore all this noise and listen to a few great thinkers. You will learn far more about leadership from reading Thucydides’ hymn to Pericles than you will from a thousand leadership experts. You will learn far more about doing business in China from reading Confucius than by listening to “culture consultants”. Peter Drucker remained top dog among management gurus for 50 years not because he attended more conferences but because he marinated his mind in great books: for example, he wrote about business alliances with reference to marriage alliances in Jane Austen.

As much as I would love to dig deep into Thucydides here, I’ll keep it contemporary for now. Therefore, for this year’s holiday reading list, I selected some contemporary philosophy books by authors in the sphere of the humanities (a psychiatrist, an economist, a historian, and a moral philosopher among others).

It struck me that every single one of these authors has a different take on the state of our world and culture. Some argue that we (humans) are going into the right direction and there is a lot of progress in different fields. Others argue just the opposite. I find this quite intriguing. In the picture above, I’ve tried to put the books from this year’s holiday reading list on a scale from ‘pessimistic’ to ‘optimistic’. In discussions, some have suggested that the ‘pessimists’ should really be labelled ‘realists’; and those realists actually show much more insight in what it means to be human. I tend to agree. On top of that, people also suggested that one scale might be an oversimplification of where the authors stand: that it should be possible to introduce a second (and even a third axis). They probably have a point there too. However, I decided to stick with the scale for now. Both as a provocation to you, the reader, and a reminder to myself that I still have to come up with a better understanding than the ‘pessimist – optimist’ (or ‘no progress – progress’) dichotomy.

My recommendations for this holiday are (roughly in the order I read them, so ‘optimists’ and ‘pessimists’ in no particular order):

War, What Is It Good For. Ian Morris. This Professor of Classics at Stanford University argues that war has actually made society more productive and safer. It’s a sweeping view of world history from pre-historic times to the present. He introduces beautiful concepts such as the lucky latitudes, stationary bandits, and caging. Add to that the role of fortifications, cities, chariots, bronze, and gunpowder in shaping our civilizations (and the mere geographical (!) position of Germany that would lead to its tragic role in two world wars), and you have a book that will change your view on the role that warfare has had in the history of the world. In a review for this book, a Professor of Biological Anthropology at Harvard writes: “This book is equally horrific and inspiring, detailed and sweeping, light-hearted and deadly serious. For those who think war has been a universal disaster it will change the way they think about the course of history.”

Why Grow Up? Susan Neiman. Susan Neiman, a Harvard educated moral philosopher, held positions at Yale and Princeton, and is now director of the Einstein Forum in Berlin. This short book struck me because of the simplicity of its idea: in our lives we should always strive to bridge the gap between what is and what could be. Being a grown up is all about trying to bridge that gap through your endeavors. Whilst knowing that you can never really bridge the gap, and, very important, at the same time being comfortable with the idea that you will never reach your destination. In the process of reading this short book (perfect length for the holidays!), you will get acquainted with what Rousseau, Kant and Hume had to say about growing up (and how Neiman disagrees with them). She stresses the virtues of travelling, reading fiction, and living and working in other cultures than the one you grew up in. Two snippets (of many) that I especially liked: “We are kept dazzled by a wealth of small decisions”, and “Kant thought the Stoic advice was made for gods, not humans.”

The Silence of Animalson Progress and Other Modern Myths. John Gray. This former Professor of Politics at Oxford, Harvard and Yale doesn’t beat around the bush when he writes about the concept of progress: “Among the many benefits of faith in progress the most important may be that it prevents too much self-knowledge.” In a chapter called Humanism and Flying Saucers, he argues (if the chapter title itself wasn’t self-explanatory): “If belief in human rationality was a scientific theory it would long since have been abandoned”, and “Cognitive dissonance is the normal human condition”. Gray was actually the reason why I put ‘pessimist’ as the label on the left of the scale in the picture above (and you might start to get an inkling why…). Gray uses fiction (cf. Neiman and Heijne) by Orwell, Dostoevsky, and Conrad to show what the actual human condition is like. It’s fitting that Heijne (see below) uses roughly the same authors to come to a comparable gloomy sketch of the status of the world. It’s a beautifully written short book, full of insights that’ll make you question your world view. Although I rate him as a ‘pessimist’, I had to laugh out loud often because of his dark yet witty prose. If there’s one book you should read right now, it is The Silence of Animals.

Our Culture, What’s Left of It. Theodore Dalrymple. I only recently read this 2005 collection of articles after remembering some quotes I read in an old NRC Handelsblad article on Dalrymple. If the hypothesis holds that it is true that understanding other people’s arguments will make you a better decision-maker, I thought I would try to read a more conservative thinker like Dalrymple. He was shaped by working with urban poor all over the world as a prison psychiatrist. This has led to unique insights in the workings of ‘life at the bottom’ (as he calls it in a different book). Something that struck me as particularly insightful (and echoing the work of moral philosopher Jonathan Haidt and Nassim Taleb’s thinking) was: “But critics of social institutions and traditions (…) should always be aware that civilization needs conservation at least as much as it needs change. No man is so brilliant that he can work everything out for himself, so that the wisdom of ages [Taleb calls this heuristics; see my comments on Taleb’s book Antifragile] has nothing useful to tell him.” This is a kaleidoscopic collection of articles on Shakespeare, art, lust, and the transgression of moral standards. The Times Literary Supplement stated: “An urgent, important, almost an essential book (…) elegantly written, conscientiously argues, provocative, and fiercely committed.”

Antifragile – How to Live in a World We Don’t Understand. Nassim Taleb. A must read. I keep coming back to this book. But it’s hard to describe why. A former derivatives trader and risk analyst, Nassim Taleb made himself into some sort of a philosopher-statistician-writer who has held positions at the London and Oxford Business Schools. You could characterize him by being a skeptic; skeptic towards the scientific method (and very much a proponent of heuristics, or rules-of-thumb; also see my remark under Gray’s book):

(…) the best way to mitigate interventionism is to ration the supply of information, as naturalistically as possible. This is hard to accept in the age of the internet. It has been very hard for me to explain that the more data you get, the less you know what’s going on, and the more iatrogenics [harm caused by the healer] you will cause. People are still under the illusion that science means more data.

 He rants against just about anything in modernity:

We are moving into a phase of modernity marked by the lobbyist, the very, very limited liability corporation, the MBA, sucker problems, secularization (or rather reinvention of new sacred values like flags to replace altars), the tax man, fear of the boss, spending the weekend in interesting places and the workweek in a putatively less interesting one, the separation of work and leisure (though the two would look identical to someone from a wiser era), the retirement plan, argumentative intellectuals who would disagree with this definition of modernity, literal thinking, inductive inference [Taleb is very skeptical towards predicting future outcomes by extrapolating the past], philosophy of science, smooth surfaces, and egocentric architects. Violence is transferred from individuals to states. So is financial indiscipline. At the center of all this is the denial of antifragility.

I will not explain what he means with antifragility here; you should find out for yourself by reading this wonderful book. You might be irritated by his ability to put just about everything in a different light in a polemic way. But that’s exactly why you will gain new insights and be able to look at more things from a different angle.

Onbehagen (Discontent). Bas Heijne. A Dutch essay. A sharp analysis on why populism is rising and why that is inevitable. Heijne, a Dutch essayist who studied English language and literature and writes an influential column in NRC Handelsblad, questions if the worldview that he grew up with (i.e. progress) is still valid. With the help of fiction (again, remarkably, Dostoevsky and Conrad) he comes to the conclusion that we should not overestimate human rationality. He writes (book available in Dutch only as far as I know):

Wanneer het humanisme te zeker van zichzelf wordt, wordt het onherroepelijk naïef – en ook hypocriet. De mens laat zich niet rationeel beheersen. Hoed je voor de overmoed van de rede, het idee dat de wereld zich een kant op laat sturen, dat beschaving een blijvende garantie is tegen menselijke agressie en vernietingsdrang. Beschaving en verlichting roepen het onheil over zichzelf af zodra ze blind worden voor tegenkrachten – van buitenaf maar ook van binnenuit.

World beyond Your Head. Matthew Crawford. On my “to read” list for this holiday. From what I read about this book in Heijne’s essay (see above), Crawford goes on a philosophical journey to unravel why our contemporary society is at odds with human nature. The short supply of attention these days is not the result of technology (which helped shape social media and anecdotal news feeds). It is rooted in the philosophical worldview on the self, on the individual. The Guardian writes: “Like the Enlightenment philosophers he rebukes, Crawford makes deductions that stretch commonsense logic to its maximum extent and may have readers performing intellectual somersaults over his reasoning. For those who persevere, the experience should be rich and rewarding.”

Progress. Johan Norberg. This book by Johan Norberg, an economic historian, made this list because of an article in The Economist earlier this year. On top of that, it showed up as one of the ‘books of the year’ in the same newspaper. Also, it seems that this is an upbeat book that sits all the way on the right hand side of my makeshift scale from ‘pessimism’ to ‘optimism’. If you want to learn about the arguments of both the deniers of, and believers in, progress, Norberg’s book seems to be the book to learn about the argument of the ‘optimists’. The Economist writes:

Mr Norberg agrees with Steven Pinker, a psychologist, that humankind is also experiencing a “moral Flynn Effect” [the Flynn effect is a gradual rise in average IQ-scores since the 1930s]. As people grow more adept to abstract thought, they find it easier to imagine themselves in other people’s shoes. And there is plenty of evidence that society has grown more tolerant. As recently as 1964, even the American Civil Liberties Union agreed that homosexuals should be barred from government jobs.

To summarize: whether you are an ‘optimist’ or a ‘pessimist’, you should read up on the arguments of both sides presented in this year’s holiday reading list. These books will present different sides of the argument and will surely help you be a more creative decision-maker. Happy holidays, and happy reading!

P.S. For those of you who worry I abandoned my project “What Every Manager Should Know About…” in relation to the EU-guideline on the disclosure on non-financial information, fear not: I will be back with post #3 in that series – on governance and corruption – in January.

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How to Beat Morality Bias in Decision Making

June 2016 was one of those months where groups took center stage over individuals. As Euro 2016 got underway, people no longer supported Man United or Man City, Lazio or Roma, Barça or Real. Instead, they support another group, their country. Then, June 23rd witnessed a clash of supporters and opponents of a Brexit. The lead-up to the referendum made me think: it seems nearly impossible to be persuaded by rational arguments of the other side. Why are we so groupish in our thinking? And, if you consider yourself to be part of a group, will you agree with all or most of the group’s standpoints and base your decisions on those? An Economist article reported that even ‘economists tend to fall into rival camps defined by distinct beliefs’.

In his landmark contribution to humanity’s understanding of itself (according to The New York Times), moral psychologist Jonathan Haidt has some interesting thoughts on why we are so groupish in the first place. Haidt (in his book The Righteous Mind) proposes that natural selection in humans not only took place on the individual level but also on group level:

Most of human nature was shaped by natural selection operating at the level of the individual. Most, but not all. We have a few group-related adaptations too (. . .). We humans have a dual nature – we are selfish primates who long to be a part of something larger and nobler than ourselves.

When everyone in a group began to share a common understanding of how things were supposed to be done, and then felt a flash of negativity when any individual violated those expectations, the first moral matrix was born.

Natural selection favored increasing levels of (. . .) “group-mindedness”—the ability to learn and conform to social norms, feel and share group-related emotions, and, ultimately, to create and obey social institutions, including religion.

This is a huge insight. Once you are caught in group thinking it becomes really hard to see the other side of the story. The story of people in other groups with other moral matrices:

Moral matrices bind people together and blind them to the coherence, or even existence, of other matrices. This makes it very difficult for people to consider the possibility that there might really be more than one form of moral truth, or more than one valid framework for judging people or running a society.

One of the phrases Haidt uses throughout the book is therefore: ‘Morality Binds and Blinds.’

“Yes, but …” I hear you protesting just reading this. Because we are rational human beings and our rational nature will overcome our biases. We are surely always trying to get to absolute truth? Haidt’s research leads him to disagree with the rationalists:

We do moral reasoning not to reconstruct the actual reasons why we ourselves came to a judgment; we reason to find the best possible reasons why somebody else ought to join us in our judgment.

You’ll misunderstand moral reasoning if you think about it as something people do by themselves in order to figure out the truth.

What, then, is the function of moral reasoning? Does it seem to have been shaped, tuned, and crafted (by natural selection) to help us find the truth, so that we can know the right way to behave and condemn those who behave wrongly? If you believe that, then you are a rationalist, like Plato, [and] Socrates (. . .). Or does moral reasoning seem to have been shaped, tuned, and crafted to help us pursue socially strategic goals, such as guarding our reputations and convincing other people to support us, or our team, in disputes? If you believe that, then you are a Glauconian. [Glaucon, Plato’s brother, famously claims that people are only virtuous because of fear of a bad reputation. His argument can be found in Plato’s Republic.]

Haidt makes a very convincing case that our thinking is mainly an after the fact activity to justify our quick intuitive moral judgment. And moral judgments are based on moral matrices of the group you are a member of.

My point here is not to counter the idea that we at least try to make rational decisions. But it is worthwhile to keep Haidt’s warning in mind (‘Morality Binds and Blinds’) the next time you enter a project, program or decision making process in which several groups with different backgrounds take part. Ask yourself if your thinking is really an objective weighing of pros and cons, or your thoughts fall prey to a morality bias.

A good counter measure to prevent yourself from falling into the trap of a morality bias – and maybe other biases too – is a rule the investor and Berkshire Hathaway Vice Chairman Charlie Munger uses:

I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another. And that is I say “I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people do who are supporting it. I think that only when I reach that stage am I qualified to speak.” Now you can say that’s too much of an iron discipline..it’s not too much of an iron discipline. It’s not even that hard to do.

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