The Haves and Have Nots in Business

Biases are big trouble in business and investment decision-making as they distort the ability to optimize data-driven outputs.? The sources of #bias are overwhelmingly large and are set into motion by our genetics and environment.? They are magnified by poor appreciation of statistics and reinforced by our cultural history.? Even the language we use ingrains biases that affect decision-making.?

One pernicious example rooted in our cultural history is the prominence of the word “have” in the English language.? Many years ago, Eric Fromm, the noted psychotherapist, wrote a terrific book touching on this subject entitled To Have or to Be?.?In it, he chronicled how the English language has evolved to increasingly use the word have instead of forms of the verb to be.?He also walked through the orientational changes that occur when we objectify things instead of experiencing them.?

To get a quick feel for the difference that possessives make, consider having a spouse as opposed to being married.? The former starts a conversation about the benefits and challenges of marriage and perhaps a categorization of your spouse.? In contrast, the latter is suggestive of the mutual journey you have embarked upon.

Possessive language using the word have connects with the idea of self.? We often define this self by what we have: educational degrees, track records, accomplishments, knowledge, cars, wine collections.? Eastern philosophies such as #Buddhism focus more on the forces of cause and effect that form who we are and the rippling downstream implications of the decisions we make.? Buddhism, in fact, largely rejects the idea of the self.? The more aware we become of our interdependencies and influences, the softer the boundaries between us all and our accomplishments become.? In the extreme, we are all one.? The result is a focus on the journey and how that journey shapes the world around us.

Someone who has knowledge evokes the image of a brain packed with facts figures, attributes which seem measurable, testable, something for which awards and promotions could be granted.? An opinion is a valued possession by someone who has knowledge because it is the representation of that knowledge in presentational form.?Rarely will you see a politician concede a point when confronted about an opinion they have.?To do so they might lose status, or worse, an election.? Frequently people feel threatened when the opinion someone else has seems to be winning the day over one they have.? The perception is a loss would affect other haves: status or perhaps a promotion.? These seem like good reasons to make the best argument for your opinion possible.

In the #investment world, having a good track record is a notable achievement.?If you happen to have one, chances are you want to protect it, much like an opinion.? But imagine you buy a stock at $10 that you think has a high probability of going to $20.?The trade starts in the wrong direction, with the stock falling to $9.50.? And then the company makes a disappointing announcement that changes your view of what it is worth to $8.00.? But at $9.50, it is so close to your purchase price it seems that just in random trading, it could briefly get back above $10. You could sell for a small profit without damaging your record with a loss.? But instead, it goes to $9, then $8.50.? And then to $8.00.? You now have a 20% loss on your hands.?

Of course, the stock has merely traded to the $8.00 price your re-analysis said it should.? But instead of an inconsequential loss, there is now a bigger one, all in the name of preserving a track record.? This happens in practice all the time in many different forms.? The culprit is having something one tries to protect to the determinant of good decision-making.? In the being mode, this would never arise as you would be focused on optimally trading stocks instead of your track record.? If your analysis changed from a stock being worth $20 to $8 and it was at $9.50, not only would you sell it immediately, you might short it.? And in doing so you would have made a profit in two trades rather than a loss in one.

These examples are important in the #business context because having an opinion causes process friction as a person wrestles with the implications of it being wrong.? Having a track record causes process friction because actions that are not intellectually consistent are considered.? This is also the case with all of the other “haves” where we pit something that we have contrived to define ourselves against having the sole aim of optimizing output.?

In an organizational framework, one way to improve output is to create a process that removes as many “haves” as possible.? This is prominent in team sports, where the optimal action for a teammate may be to pass rather than score, even if scoring would cement a record.?Teams that play as teams rather than as a collection of individuals perform better.?

At our firm, we have deconstructed most investment analyses such that they are handled by a wide range of people with different forms of expertise.? The data that is generated is then separately integrated by more than one person, and the outputs are blended to reach our final perspective on the probabilistic value of assets.? The same is true in how we approach operating the companies we form.? While there are many maximizations we aim to solve for, much our structure was laid out to combat the many biases we know we have.

Deerfield Management Cure. Karen Heidelberger Seema Kumar Nicole Layton

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