The hedgehog, the fox & the illusion of predictability

Way back in the early 2000s, during a (adventurous, as it now seems in retrospect ) foray into the insurance industry, a group of ‘non-domain’ managers like me were huddled inside a cosy hotel for an intense 10-week orientation schedule - the idea being, to ‘insurance-ize’ our style of management thinking. Our course comprised of a series of scientifically designed exercises, both individual as well as of the group kind, in pre-defined patterns, simulating hypothetical situations that we were thrown into in order to be observed, marked, ranked and course-corrected as necessary. In all, it was a fascinating experience for each of us as we went about the rigor, discovering new skills of analytics, combat and leadership in ourselves from a rich pool of resources accumulated from decades of professional research. At the end of ten weeks, we ‘ graduated’, each one of us receiving a ‘rank’ in terms of our performance at the camp and a dossier that informed us about our personalities & our leadership styles. We were then assigned branches to lead that suited our individual assessment summaries. Our team of coaches bid us an emotional goodbye as we ventured into the big bad world outside, to lead large teams of sales managers and insurance advisors, sharing a common vision of insuring the under-insured India.

Three months later, a curious pattern emerged. At the end of our first quarter in the new industry, when the performance of each us was captured on a sheet of paper, it had almost ZERO co-relation to our camp scores. The reclusive 45 year old Sikh guy who came last in most of the ‘tests’, and who was assigned two low profile branches of Cuttack in Orissa ( a relatively low priority choice for most of us) was clocking the best numbers for the company, while the suave high flying star from Chandigarh who had graduated near the top of class and was asked to lead Mumbai ( the financial capital of India) , was struggling to stay afloat and had to be put on a PIP ( Performance improvement plan) during his second quarter . In short, each of us learnt by the hard way of experience , that human performance, more than being a mere function of competencies, is actually a variable that depends upon circumstances where (or when) it is mapped. Like for example, in an Army officers’ training program, if you remove one out of eight officers in the group, the personality scores of the other seven would also alter because of the variation in the inter-dependency of the mix . Likewise, how a certain soldier fares in an actual scene of battle, is mostly unrelated to how he behaved during his training school. No wonder we read so much about fallen heroes and underdog champions.

And yet, what surprised us the most, is that the organisation kept repeating the same training program for new branch managers in subsequent batches . And the learned coaches kept measuring the incumbents on the basis of the pre-set modules, and even predicting future performances by that, knowing fully well that the validation numbers from previous batches have proved them wrong. This was a classic real life illustration of the Muller-Lyer illusion , where one knows that the two lines are of the same length and yet he sees them as different. Subjective confidence of this kind arises from a feeling that reflects upon pre-existing beliefs and constructs shatter-proof stories in the mind that undervalue the huge role of uncertainty , and attempts to create coherence in future scenarios, where none exists.

In Nobel Laureate Daniel Kahneman’s best seller “Thinking fast and slow”, he devotes an entire chapter to what he calls “ Illusion of Validity and Illusion of skill”, where he borrows an analogy from yet another gem of a book (Burton Malkiel’s “ A Random walk down Wall Street”), and explores the paradox of stock trading. He explains, in any given slot of time, a certain stock is being sold by a few thousand traders who think that the stock price is ‘high enough and just right’ to offload. He further says, that the same stock, within the SAME block of time, is also being bought by a few thousand traders who have somehow concluded that the stock price is ‘ low enough and just right’ to BUY ! Miraculously, both these sets of people, buyers and sellers, have access to the SAME information about the SAME stock. And yet they arrive at different conclusions. This randomness in buying and selling is more prominent in amateurs than in seasoned traders, as was observed by Terry Odean , a finance professor of Berkeley, who demonstrated that the shares that amateur traders sold, went ahead to do considerably BETTER than ones they bought, in the medium to long run. And on the other side of the spectrum sit financial institutions and professional investors, who take advantage of the folly of the individual investors and make a pot of money in the short run, by doing the opposite ( meaning - they cash in on what the amateurs lose). However, when measured over a period of time, there is no symmetry to the gains and losses of even the professionals. Especially the professionals, if I may add . Mutual funds for example , which employ highly qualified men and women to achieve best possible results for their clients, when studied over the decades, have demonstrated that for a large majority of fund managers, picking stocks is no more a science than rolling dice, instead of a thoughtful analytical task. Typically, as writes Kahneman, two out of three mutual funds underperform when compared to the market in any given year, with a year-to-year correlation being very low, suggesting that the success or failure of mutual funds on any given year, is more a function of luck than that of skill.

And yet, it is funny how we keep falling back on pre-programmed simulations and analysis of experts when we want to pick winners by way of prediction – in people or in stock, knowing fully well the role of chance in the whole picture. Like Naseer Nicholas Taleb explains in his path breaking “ The Black Swan”, “ Our tendency to construct and believe coherent narratives of the past, makes it difficult for us to accept the limits of our forecasting ability”. When explored, hindsight always makes sense and seems like a rounded story. However, the fact is, hindsight is a picture of the resultant of events that were random when they occurred. We humans love to view the march of the world as a story of design, whereas it is actually a story of default, and of randomness. Like I often ask my friends - Say, even if you mug all the newspapers of the past ten years, will you be able to predict the next ten days ?

[And so I was (in vain) trying to convince a sceptical colleague of mine at the airport lounge this morning – If everything indeed followed deliberate human will, how does he explain the sudden and heart-breaking demise of my childhood celeb crush, Sridevi ( an iconic Indian movie star), by randomly drowning in her hotel room bathtub last week, in the midst of attending a happy family function at Dubai , definitely with a few hundred unexecuted future plans in her heart before it stopped beating. I would like to challenge a bunch of top astrologers, numerologists and fortune tellers from India on whether they could have predicted that she would abruptly die at the halted age of 54].

As Philip Tetlock ( a psychologist at the University of Pennsylvania) discovered over a research conducted on a group of people ( experts and amateurs alike), around political and economic trends. And what came across was amazingly paradoxical. The experts actually ended up being way off the mark when it came to predicting, as compared to the novices, suggesting that those with the most knowledge, are the least reliable when it came to predictions, probably as a fall out of their over confidence in their domain, something that serves no purpose in this fortuitous, unpredictable and random universe. That, coupled with the arrogance that comes with being experts in the first place ( or management gurus from premier schools), becomes a heady cocktail that often leads to doom because they are so besotted by their own brilliance that they hate to consider if they might be wrong, or convince them to admit their past errors.

Hence Enron. Hence Lehman Brothers. Hence 2008. And so on.

In conclusion, to return to the title of this post, borrowing the analogy from Isaiah Berlin’s essay on Tolstoy, ‘The Hedgehog and the Fox’ – Hedgehogs are creatures who know ‘one big thing’, and their entire theory of the world revolves around that thing, building coherent narratives to fit into it. They are confident in their forecasts and they lose patience when someone doesn’t see things their way. They are always precise and opinionated, & are never in doubt. Something like a prototype of people invited to TV debates ( especially a certain Indian channel which keeps asking us what ‘ The nation wants to know’) – a bunch of hedgehogs sitting on two sides of a subject, and a third impatient hedgehog playing moderator, each holding on aggressively to his / her monochromatic view about an event that might have multiple dimensions to it.

A Fox, on the other hand, is not such a black and white thinker. It doesn’t believe in coherent stories conjured from past events that have already happened. It recognizes that reality is a sigma of intersection of several events that are unpredictable and beyond obvious eyesight. A fox takes time to conclude – to hail a new champion, or write off a new fall guy. It watches. It waits.

As I scribble this random post in my flight on my way back from an annual sales meeting in Australia , I can’t but help reflect how much my thinking and my opinions ( around people and events) have been revised over the past five years as I have consciously tried to take off my hedgehog hat and don my Fox hat. Some established heroes fell from grace. Other ignored underdogs swam right to the top. 

And as I say this, I am still not sure if I am right. That probably is a sign that I am finally growing old. As one matures, he or she stops seeing the world as binary. Or permanent. And that is fine.