Biases

Beware of Key-Person Dependency Risk

September 7, 2018 By Nagesh Belludi

Key-Person Dependency Risk is the threat posed by an organization or a team’s over-reliance on one or a few individuals.

The key-person has sole custody of some critical institutional knowledge, creativity, reputation, or experience that makes him indispensable to the organization’s business continuity and its future performance. If he/she should leave, the organization suffers the loss of that valued standing and expertise.

Small businesses and start-ups are especially exposed to key-person dependency risk. Tesla, for example, faces a colossal key-man risk—its fate is linked closely to the actions of founder-CEO Elon Musk, who has come under scrutiny lately.

Much of Berkshire Hathaway’s performance over the decades has been based on CEO Warren Buffett’s reputation and his ability to wring remarkable deals from companies in duress. There’s a great deal of prestige in selling one’s business to Buffett. He is irreplaceable; given his remarkable long-term record of accomplishment, it is important that much of what he has built over the years remains intact once he is gone. Buffett has built a strong culture that is likely to endure.

Key Employees are Not Only Assets, but also Large Contingent Liabilities

The most famous “key man” of all time was Apple’s Steve Jobs. Not only was he closely linked to his company’s identity, but he also played a singular role in building Apple into the global consumer-technology powerhouse that it is. Jobs had steered Apple’s culture in a desired direction and groomed his handpicked management team to sustain Apple’s inventive culture after he was gone. Tim Cook, the operations genius who became Apple’s CEO after Jobs died in 2011, has led the company to new heights.

The basic solution to key-person dependency risk is to identify and document critical knowledge of the organization. (Capturing tacit knowledge is not easy when it resides “in the key-person’s head.”) Organizations must also focus on cross-training and succession planning to identify and enable others to develop and perform the same tasks as the key-person.

Idea for Impact: No employee should be indispensable. A well-managed company is never dependent upon the performance of one or a few individuals. As well, no employee should be allowed to hoard knowledge, relationships, or resources to achieve job security.

How Far You’ve Come

August 2, 2018 By Nagesh Belludi Leave a Comment

While browsing through advertising genius David Ogilvy’s The Unpublished David Ogilvy, I stumbled across a mention to a 1964 letter of introduction that Ogilvy received from a gifted job-applicant.

Ogilvy calls this “the best job application letter I have ever received.” The first paragraph announces,

My father was in charge of the men’s lavatory at the Ritz Hotel. My mother was a chambermaid at the same hotel. I was educated at the London School of Economics.

Ray Taylor, that aspirant, became an Ogilvy & Mather copywriter.

It reminded me of a quotation from the American priest Henry Ward Beecher: “We should not judge people by their peak of excellence; but by the distance they have traveled from the point where they started.”

Idea for Impact: Appreciate how far you’ve (and others have) come.

The Historian’s Fallacy: People of the Past Had No Knowledge of the Future

June 7, 2018 By Nagesh Belludi Leave a Comment

The practice of picking a thesis and then setting out to establish it is a widespread intellectual pursuit. But biographers and historians sometimes portray their subjects as if the historical participants could recognize what lay ahead of them.

Assuming that people of the past pondered over the events of their day from the same perspective as we do in the present is committing The Historian’s Fallacy.

The notion of the historian’s fallacy was first presented by the British literary critic Matthew Arnold (1822–88) in The Study of Poetry (1880.) In questioning how historical backgrounds were portrayed in the development of literary styles, Arnold called attention to the frequent logical error of using hindsight to assign a sense of causality and foresight of significant historical events to the people who lived through them. In reality, those historical participants may not have had wide-ranging perspective that we assume in interpreting the context, conventions and limitations of their time. Arnold wrote,

The course of development of a nation’s language, thought, and poetry, is profoundly interesting; and by regarding a poet’s work as a stage in this course of development we may easily bring ourselves to make it of more importance as poetry than in itself it really is, we may come to use a language of quite exaggerated praise in criticising it; in short, to overrate it. So arises in our poetic judgments the fallacy caused by the estimate which we may call historic. … Our personal affinities, likings and circumstances, have great power to sway our estimate of this or that poet’s work, and to make us attach more importance to it as poetry than in itself it really possesses, because to us it is, or has been, of high importance.

The American historian David Hackett Fischer, who coined the phrase “historian’s fallacy,” cited the claim that the United States should have anticipated Japan’s surprise attack on Pearl Harbor because of the many warning signs that an attack was in the cards. Fischer argues those signs seem obvious only in hindsight—to the World War II military leaders, many of those signs suggested possible attacks on many positions other than Pearl Harbor.

A good historian strives for objectivity by ignoring his own knowledge of consequent events and employing only what the historic individuals would have known in the context of their own time.

A related fallacy is Presentism—a manner of historical analysis wherein the past is interpreted by means of present-day attitudes. Presentism often fosters moral self-righteousness. Employing present-day moral standards to reflect on the Founding Fathers’ ownership of slaves, David Hume’s racism, or Gandhi’s opposition to modernity and technology should not be tainted by our stance of temporal condescension.

Risk Homeostasis and Peltzman Effect: Why Risk Mitigation and Safety Measures Become Ineffective

May 17, 2018 By Nagesh Belludi Leave a Comment

Risk Homeostasis and Peltzman Effect are two concepts relating to how humans react to risks.

Risk Homeostasis is the notion that our personal psychological frameworks comprise a target level of risk towards which we direct our efforts.

We measure risk on our own “risk thermostat.” Because the risk in our environment changes continuously, we are incessantly forced away from our target risk level, but revert toward it by counteracting those external influences.

If the perceived risk of a situation exceeds our target level, we undertake defensive actions to reduce the risk. And if the perceived risk is lower than our target level, we attempt to increase our risk back to our target level by exposing ourselves to dangerous actions.

Consequently, people take more risks when they’re forced to act more carefully. For instance, requiring motorcycle bikers to wear helmets may make them take more risks—to maintain their level of thrill, not to get into accidents.

Peltzman Effect is the notion that people respond to increased safety by adding new risks. The namesake, economist Sam Peltzman, argued in 1975 that when automobile safety rules were introduced, at least some of the benefits of the new safety rules were counterbalanced by changes in the behavior of drivers. Peltzman posited that making seatbelts mandatory for cars resulted in reducing the number of occupant fatalities, but increased pedestrian casualties and collision-related property damages.

Peltzman made a case that even though seatbelts reduced the risk of being severely injured in an accident, drivers compensated by driving aggressively and carelessly—driving closer to the car ahead of them, for instance—so as to save time or maintain their level of thrill, even at the risk of causing damage beyond themselves and their cars.

Risk Homeostasis and Peltzman Effect remain controversial theories. Despite their apparent relevance, the prevailing evidence remains inadequate and inconclusive about how people behave less cautiously when they feel more protected and vice versa.

Further, Risk Homeostasis and Peltzman Effect challenge the foundations of safety and injury-prevention policies. They assert that the only effective safety measures are those that alter individuals’ desired risk level. Anything that barely modifies the environment or regulates individuals’ behavior without affecting their target risk levels is useless.

What Your Messy Desk Says About You

March 13, 2018 By Nagesh Belludi Leave a Comment

Appearances are Important

Your office and desk must seem organized. A messy office or a cluttered desk can not only impede your space and cramp your style, but also affect how your peers and superiors perceive you.

Clutter can drag you down, sap your energy, and reduce your efficiency. However, if clutter is your style, you should have every right to work the way you like to work.

A messy desk isn’t a professional flaw, but clutter may reflect of your competence. Untidiness can give an impression that your job may be too much for you to handle, or that you can’t get your thoughts and information organized.

How to Conquer Your Paperwork Crisis

As opposed to sorting through everything in your drawers, desktop, and filing systems, consider removing the whole lot somewhere else and only allowing the important things back.

Stephanie Winston, author of The Organized Executive, famously wrote that each clutter represents a decision not made. In this bestselling book, she recommends the “TRAF” system, a precursor to the “Inbox Zero” discipline that I’ve previously discussed on this blog. TRAF is an acronym for the four decisions you must make on each piece of paper that arrives at your desk. You can Toss it away, Refer or delegate it to someone else, Act on it, or File it if it absolutely deserves to be achieved. Don’t keep anything merely for reasons of habit or for sentimental reasons.
Don’t start tomorrow with today’s mess. Spending ten minutes at the end of your workday gearing your desk up for the next day can help you stay organized.

After you’ve taken steps to reorganize your office, sustain your system. Look for ways to further streamline and fine-tune your organization framework.

Idea for Impact: Don’t Let Clutter Spin Out of Control and Affect Other’s Perceptions

Taking too much time to organize can be just as ineffective—don’t end up spending so much time organizing that you don’t have the time to do anything else. (This is one of the shortcomings of David Allen’s Getting This Done system.) Learn to put things away as soon as you’re done working on them.

Being organized not only means less time wasted looking for things, but also rewards you with a greater sense of control and a favorable professional image.

Lessons from Peter Drucker: Quit What You Suck At

March 1, 2018 By Nagesh Belludi 1 Comment

The essence of leadership is risk- and opportunity-assessment and resource allocation. It follows that one of the persistent responsibilities of leadership is to mull over each individual and organizational endeavor and investigate, “Do we produce results that are meaningful and profitable enough for us to justify investing our resources to this purpose?”

Jack Welch’s Strategy for General Electric: #1 or #2 Businesses Only

When Jack Welch became CEO of General Electric (GE) in 1981, he set out to make GE “the world’s most competitive enterprise.” However, the company was a hodgepodge of many businesses—some unrelated or irrelevant, several unprofitable, and a few at the brink of failure.

Management pioneer Peter Drucker famously advised Welch to ask of each constituent of the GE business portfolio he now presided over, “If you weren’t already this business, would you enter it today? And, if the answer is no, what are you going to do about it?”

Welch’s responded with his legendary dictum that every GE division be—or become—the leading or the runner-up business in its respective industry, or plan to exit it completely.

Welch argued that in many markets, the number three, four, five, or six players suffered the most during cyclical downturns. On the contrary, number one or number two businesses could protect their market share by way of aggressive pricing approaches or by developing new products. Welch’s approach portended the emergence of oligopolies in many industries.

The resultant strategic focus eventually led to an immense restructuring of GE. Welch sold or discontinued dozens of divisions—including computers and time-shares. Over the next decade, he cut nearly one in four jobs at GE, warranting the nickname “Neutron Jack.”

By year 2000, GE had reached dominance or near dominance in most of its business markets across the globe.

Peter Drucker on Strategic Reprioritization

Explaining this method of strategic reprioritization, Drucker wrote in Post-Capitalist Society (1993,)

To turn around any institution—whether a business, a labor union, a university, a hospital, or a government—requires always the same three steps:

Abandonment of the things that do not work, the things that have never worked; the things that have outlived their usefulness and their capacity to contribute;

Concentration on the things that do work, the things that produce results, the things that improve the organization’s capacity to perform; and

Analysis of the half successes, half failures. A turnaround requires abandoning whatever does not perform and doing more of whatever does perform.

Drucker further elaborated on abandonment as the keystone for strategic reprioritization in his Five Most Important Questions (2015,)

To abandon anything is always bitterly resisted. People in any organization are always attached to the obsolete—the things that should have worked but did not, the things that once were productive and no longer are. They are most attached to what in an earlier book I called “investments in managerial ego.” Yet abandonment comes first. Until that has been accomplished, little else gets done. The acrimonious and emotional debate over what to abandon holds everybody in its grip. Abandoning anything is thus difficult, but only for a fairly short spell. Rebirth can begin once the dead are buried; six months later, everybody wonders, “Why did it take us so long?”

Idea for Impact: Assess What Endeavors Must Be Intensified or Abandoned

Don’t do—or continue to do—something just because it’s been a tradition, custom, or habit. Strengthen, abandon, or stay on. Align your efforts with your mission, your values, and the results you want to achieve.

If you abandon something important mistakenly, you can quickly pick up where you left off.

Invest your precious resources where the returns are rich.

Figure out what’s vital and stay focused, even if you have to cut your losses (read about sunk costs.)

Warren Buffett’s Advice on How to Focus on Priorities and Subdue Distractions

December 8, 2017 By Nagesh Belludi Leave a Comment

If you persistently experience an overpowering sense of being besieged with tasks and responsibilities, perhaps a personal productivity transformation technique suggested by Warren Buffett may help.

Psychologist Angela Duckworth of the University of Pennsylvania shares a well-known anecdote about Buffett in her bestselling Grit: The Power of Passion and Perseverance:

The story goes like this: Buffett turns to his faithful pilot and says that he must have dreams greater than flying Buffett around to where he needs to go. The pilot confesses that, yes, he does. And then Buffett takes him through three steps.

First, you write down a list of twenty-five career goals.

Second, you do some soul-searching and circle the five highest-priority goals. Just five.

Third, you take a good hard look at the twenty goals you didn’t circle. These you avoid at all costs. They’re what distract you; they eat away time and energy, taking your eye from the goals that matter more.

As I’ve written before (see the world’s shortest course in time management, and detailed three-step course on time logging, time analysis, time budgeting,) the most effective time management practice involves eliminating the non-essentials—those numerous things you can and want to do—and focusing on the very few things you must do.

Idea for Impact: Success comes at a cost: the most time-effective folks I know are significantly better at dropping their second-rate objectives.

Choose Your Role Models Carefully

November 17, 2017 By Nagesh Belludi Leave a Comment

Heroes and role models are very useful—they embody a higher plateau of cognitive and emotional truth, knowledge, and accomplishment that you can aspire to.

But the modern world has a dangerous problem with hero-worship: pop artists, rappers, film stars, sportspersons, capitalists, and so on command attention and affection as never before. This 2013 Financial Times article noted, “Way back in 2008, the three most admired personalities in sport were probably Tiger Woods, Lance Armstrong and Oscar Pistorius. They were portrayed not just as great athletes but as great men, role models….” And all these three popular heroes fell from grace.

While admiring and drawing wisdom, meaning, and inspiration from heroes can be constructive, you must take “hero narratives” with a grain of salt. The Buddha warned us not to trust anybody or anything just because it seems logical or it resonates with our feelings. He advised that we test our hypotheses by the results they yield when put into practice and shield our minds against the risk of biases or other limitations of our ability to discern from our experiences wisely. According to the Kalama Sutta, an aphorism of the historical Buddha that has been preserved orally by his followers (translated from the Pali by the eminent American Buddhist monk and prolific author Thanissaro Bhikkhu,)

Now, Kalamas, don’t go by reports, by legends, by traditions, by scripture, by logical conjecture, by inference, by analogies, by agreement through pondering views, by probability, or by the thought, ‘This contemplative is our teacher.’ When you know for yourselves that, ‘These qualities are skillful; these qualities are blameless; these qualities are praised by the wise; these qualities, when adopted & carried out, lead to welfare & to happiness’—then you should enter & remain in them.

Idea for Impact: Don’t blindly place much faith in today’s experts and celebrities. Realize the truth yourself.

How to Guard Against Anything You May Inadvertently Overlook

October 23, 2017 By Nagesh Belludi Leave a Comment

The World is More Inundated with Uncertainties and Errors Than Ever Before

Checklists can help you learn about prospective oversights and mistakes, recognize them in context, and sharpen your decisions.

I am a big fan of Harvard surgeon and columnist Atul Gawande’s The Checklist Manifesto (2009.) His bestseller is an engaging reminder of how the world has become so complex.

The use of the humble checklist can help you manage the myriad of complexities that underlie most contemporary professional (and personal) undertakings—where what you must do is too complex to carry out reliably from memory alone. Checklists “provide a kind of a cognitive net. They catch mental flaws inherent in all of us—flaws of memory and attention and thoroughness.”

Gawande begins The Checklist Manifesto with an examination of the characteristics of errors from ignorance (mistakes you make because you don’t know enough—“much of the world and universe is—and will remain—outside our understanding and control”), and errors of ineptitude (mistakes you make because you don’t apply correctly what you know.) Most human and organizational failures involve the latter.

The philosophy is that you push the power of decision making out to the periphery and away from the center. You give people the room to adapt, based on their experience and expertise. All you ask is that they talk to one another and take responsibility. That is what works.

The surgery room, Gawande’s own profession, is the principal setting for many of the book’s illustrative examples of how the introduction of checklists dramatically reduced the rate of complications from surgery. He also provides handy stories from other realms of human endeavor—aviation, structural engineering, and Wall Street-investing.

Getting Things Right, Every Time

Checklists are particularly valuable in situations where the stakes are high enough, but your impulsive thought process could lead to suboptimal decisions.

The benefits of checklists also feature prominently in the thought-provoking Think Twice: Harnessing the Power of Counterintuition (2012.) The author, Credit Suisse Investment analyst and polymath Michael J. Mauboussin, argues that checklists are more effective in certain domains than in others:

A checklist’s applicability is largely a function of a domain’s stability. In stable environments, where cause and effect is pretty clear and things don’t change much, checklists are great. But in rapidly changing environments that are heavily circumstantial, creating a checklist is a lot more difficult. In those environments, checklists can help with certain aspects of the decision. For instance, an investor evaluating a stock may use a checklist to make sure that she builds her financial model properly.

A good checklist balances two opposing objectives. It should be general enough to allow for varying conditions, yet specific enough to guide action. Finding this balance means a checklist should not be too long; ideally, you should be able to fit it on one or two pages.

If you have yet to create a checklist, try it and see which issues surface. Concentrate on steps or procedures, and ask where decisions have gone off track before. And recognize that errors are often the result of neglecting a step, not from executing the other steps poorly.

In addition to creating checklists that are specific enough to guide action but general enough to handle changing circumstances, Mauboussin recommends keeping a journal to gather feedback from past decisions and performing “premortems” by envisioning that a imminent decision has already been proven wrong, and then identifying probable reasons for the failure.

No Matter How Proficient You May Be, Well-designed Checklists Can Immeasurably Improve the Outcomes

The notion of making and using checklists is so plainly obvious that it seems impracticable that they could have so vast an effect.

Investor Charlie Munger, the well-respected beacon of wisdom and multi-disciplinary thinking, has said, “No wise pilot, no matter how great his talent and experience, fails to use his checklist.” And, “I’m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.”

Idea for Impact: Checklists can prevent many things that could go wrong in the hands of human beings, given our many well-documented biases and foibles. Well-designed checklists not only make sure that all the can-be-relied upon elements are in place in complex decision-making, but also provide for flexibility and room for ad hoc judgment.

Gambler’s Fallacy is the Failure to Realize How Randomness Rules Our World

September 27, 2017 By Nagesh Belludi Leave a Comment

The Gambler’s Fallacy is the misleading belief that the probability of a specific occurrence in a random sequence is dependent on preceding events—that its probability will increase with each successive occasion on which it fails to occur.

Suppose that you roll a fair die 14 times and don’t get a six even once. According to the Gambler’s Fallacy, a six is “long overdue.” Thus, it must be a good wager for the 15th roll of the dice. This conjecture is irrational; the probability of a six is the same as for every other roll of the dice: that is, 1/6.

Chance Events Don’t Have Memories

In practical terms, the Gambler’s Fallacy is the hunch that if you play long enough, you will eventually win. For example, if you toss a fair coin and flip heads five times in a row, the Gambler’s Fallacy suggests that the next toss may well flip a tail because it is “due.” In actuality, the results of previous coin flips have no bearing on future coin flips. Therefore, it is poor reasoning to assume that the probability of flipping tails on the next coin-toss is better than one-half.

A classic example of the Gambler’s Fallacy is when parents who’ve had children of the same sex anticipate that their next child ought to be of the opposite sex. The French mathematician Pierre-Simon Laplace (1749–1827) was the first to document the Gambler’s Fallacy. In Philosophical Essay on Probabilities (1796,) Laplace identified an instance of expectant fathers trying to predict the probability of having sons. These men assumed that the ratio of boys to girls born must be fifty-fifty. If adjacent villages had high male birth rates in the recent past, they could predict more birth of girls in their own village.

There Isn’t a Lady Luck or an “Invisible Hand” in Charge of Your Game

The Gambler’s Fallacy is what makes gambling so addictive. Gamblers normally think that gambling is an intrinsically fair-minded system in which any losses they’ll incur will eventually be corrected by a winning streak.

In buying lottery tickets, as in gambling, perseverance will not pay. However, human nature is such that gamblers have an irrational hunch that if they keep playing, they will eventually win, even if the odds of winning a lottery are remote. However, the odds of winning the jackpot remain unchanged … every time people buy lottery tickets. Playing week after week doesn’t change their chances. What’s more, the odds remain the same even for people who have previously won the lottery.

Gambler’s Fallacy Coaxed People to Lose Millions in Monte Carlo in 1913

The Gambler’s Fallacy is also called the Monte Carlo Fallacy because of an extraordinary event that happened in the renowned Monte Carlo Casino in the Principality of Monaco.

On 18-August-1913, black fell 26 times in a row at a roulette table. Seeing that that the roulette ball had fallen on black for quite some time, gamblers kept pushing more money onto the table assuming that, after the sequence of blacks, a red was “due” at each subsequent spin of the roulette wheel. The sequence of blacks that occurred that night is an unusual statistical occurrence, but it is still among the possibilities, as is any other sequence of red or black. As you may guess, gamblers at that roulette table lost millions of francs that night.

Gambler’s Fallacy is The False Assumption That Probability is Affected by Past Events

The Gambler’s Fallacy is frequently in force in casual judgments, casinos, sporting events, and, alas, in everyday business and personal decision-making. This common fallacy is manifest by the belief that a random event is more likely to occur because it has not happened for a time (or a random event is less likely to occur because it recently happened.)

While growing up in India, I often heard farmers discuss rainwater observing that, if the season’s rainfall was below average, they worry about protecting their crops during imminent protracted rains because the rainfall needs to “catch-up to a seasonal average.”
In soccer / football, kickers and goalkeepers are frequently prone to the Gambler’s Fallacy during penalty shootouts. For instance, after a series of three kicks in the same direction, goalkeepers are more likely to dive in the opposite direction at the fourth kick.
In the episode “Stress Relief” of the fifth season of the American TV series The Office, when the character Jim Halpert learns that his fiancee Pam Beesley’s parents are divorcing, he quotes the common statistic that 50% of marriages wind up in divorce. Halpert then comments that, because his parents are not divorced, it is only reasonable that Pam’s parents are getting divorced.

The Gambler’s Fallacy is a Powerful and Seductive Illusion of Control Over Events That are Not Controllable

Don’t be misled by the Gambler’s Fallacy. Be aware of the certainty of statistical independence. The occurrence of one random event has no statistical bearing upon the occurrence of the other random event. In other words, the probability of the occurrence of a random event is never influenced by a previous, or series of previous, arbitrary events.

Idea for Impact: Be skeptical of most judgments about probabilities. Never rely exclusively on your intuitive sense in evaluating probable events. In general, relying exclusively on your gut feeling or your hunches in assessing probabilities is usually not a reason to trust the assessment, but to distrust it.

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Biases

Key Employees are Not Only Assets, but also Large Contingent Liabilities

Wondering what to read next?

Wondering what to read next?

Wondering what to read next?

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Appearances are Important

How to Conquer Your Paperwork Crisis

Idea for Impact: Don’t Let Clutter Spin Out of Control and Affect Other’s Perceptions

Wondering what to read next?

Jack Welch’s Strategy for General Electric: #1 or #2 Businesses Only

Peter Drucker on Strategic Reprioritization

Idea for Impact: Assess What Endeavors Must Be Intensified or Abandoned

Wondering what to read next?

Wondering what to read next?

Wondering what to read next?

The World is More Inundated with Uncertainties and Errors Than Ever Before

Getting Things Right, Every Time

No Matter How Proficient You May Be, Well-designed Checklists Can Immeasurably Improve the Outcomes

Wondering what to read next?

Chance Events Don’t Have Memories

There Isn’t a Lady Luck or an “Invisible Hand” in Charge of Your Game

Gambler’s Fallacy Coaxed People to Lose Millions in Monte Carlo in 1913

Gambler’s Fallacy is The False Assumption That Probability is Affected by Past Events

The Gambler’s Fallacy is a Powerful and Seductive Illusion of Control Over Events That are Not Controllable

Wondering what to read next?