Leaders in a Crowd: Do not look for the average

Settling for an average is like searching for that elusive balance, which is never there.

Imagine that in this volatile world if we look for the average, we would be drowning in a river whose average could be anything but what will count is the actual depth and whether that is lower than the heights we possess.

It is the absence of balance that moves the world. If every demand was met with a supply, there would not have been any innovation. It is that additional spurt for something new, something that is not currently present, that makes an innovator start with new assumptions. It could be new design that does not exist or a new element of application that need not be there in the existing product.

Think of the financial world and you will see this unfold in a myriad of ways. The financial world is never in equilibrium, the monetary supply is trying to meet some balance of demand but that seems to be permanently in disarray.

Think of the Central bankers in search of instruments that would make the dual mandate work, inflation targets met and unemployment rate low. They either achieve the first but not the second or achieve the second but not the first.

Corporations run by leaders who are not going after finding the balance are more likely to succeed. These leaders run a bias for action that is not satiated by the desire to provide balance and harmony to what this world is made up of.

The recent paper by Itzhak Ben-David, John Graham, Campbell Harvey, Managers are mis-calibrated, brings out some of the nuances of this bias.

The paper says, “Financial theory suggests that at times of high uncertainty (measured by the implied volatility of the S&P 500, the VIX index), executives should have wider confidence bounds (i.e. the lower bound should be lower and the upper bound should be higher). In contrast, we document asymmetric reaction of the upper and lower bounds.”

In fact it is in this uncertainty that leaders make a beeline for decisions that are mostly out of bounds with what the conventional wisdom would suggest. Let me give some examples.

Think of acquisitions and there are mostly examples of how high the valuations could be when the target gets finally acquired. The opposite example is rare, very low valuations leading to an acquisition target, which gets fructified at that low level. Finding an investment option in this world which would appear abundantly clear in terms of its veracity would mean that the market has stopped to function. If the market is a market then it is obvious that all information is already priced.

This is where leadership steps in and this is not about a biased judgment which is closer to lottery picking. It is about being aware and being unemotional to awareness.

The best of the lot is sitting in the sidelines and silently waiting for the opportunity to emerge. The opportunity comes in the guise of an event that few could even see. That is where the leader will make a killing.

Being biased is never the hallmark of a trained technician or an analyst. This is where the leaders will be different. They must be keen to understand where the analysis is deviating from the conclusions. This is where the outcomes can be changed, not by the understanding of the analysis, but the tweaking of the assumptions.

If a project is to be completed in three years, some would make changes in the assumptions that would make it in two years; if the price of a product is analyzed to be X by the market, the leader will make it Y and know what assumptions to be tweaked to make it a success.

The bias for results rather than seeking for the balance that analysis provide is where the leaders will differ from the managers. The skewed data that says that 3% of all respondents actually liked the product would not mean that the product has failed; the leader will probe deeper to find why 97% did not like the idea of the product.

Looking for clues that ordinary analysis fails to deliver is where the lack of balance comes from. Leaders are not acceptors of convenient analysis. They will challenge a rightful analysis by the worst of reasons.

This is the reason that a wild volatility does not spark wider confidence intervals in a leader’s inner and outer bounds. The leader will keep narrowing his bounds as he is making a biased entry in his calculations given that he is tweaking his boundary conditions.

Making the boundary conditions change is where the leader scores over analysts. The leaders of today from investors to entrepreneurs are constantly working to change the assumptions that the market is making, whether in price or in demand or in supply or in the product attribute itself.

Sum total of all wisdom is the market, but individual wisdom could still rise above the rest, especially when the first step is made to challenge the wisdom or the assumptions behind it.

Leaders make insufficient adjustments than what conventional wisdom would call for. That is why you will find the best product with the highest price sometimes and the worst product with the lowest price. You will rarely find the best or the worst with the average price.