Taking the right risks, improving decision-making, and ignoring your own ignorance

We investors are in the risk business. We can’t outperform markets consistently without embracing risk. The trick is to know which risks to take, which to avoid, and how much risk to adopt once we’ve decided we want to.

In our business, as long as you’re right more than you’re wrong, you’re winning. Investing demands a tolerance for failure. Instead of opting to “fail conventionally,” hiding behind popular wisdom and strength in numbers, the best investors champion unconventional — even pioneering — ideas.

Investing takes a certain mentality: a distant, calculating, unromantic coldness that welcomes challenge, and does not bristle. That’s why Warren Buffet says he values temperament over intellect in an investor.

At AIMCo, we want to continually improve how we make decisions. After all, decision making is the engine, the essence, of our being.

In Isaiah Berlin’s famous essay on decisioning, he drew an important distinction between foxes, who know many things, and hedgehogs, who know one big thing.

Daniel Kahneman explored a similar idea in his work, Thinking, Fast and Slow. He distinguished intuitive “System 1 thinking” from more deliberate “System 2 thinking.” The latter relies on data and analysis and is patient, logical, and rational. That’s how a fox thinks.

Hedgehogs, by contrast, rely on instinct and intuition. They trust their guts and act quickly. Many successful entrepreneurs know one big thing: think of Larry Page and Sergey Brin, who co-founded Google, or Sara Blakely of Spanx, or Henry Ford.

Most unsuccessful entrepreneurs also thought they knew one big thing, but turned out to be wrong. Hedgehogs are seldom in doubt — and not always right.

Experience or wisdom may be less valuable than we believe. The human mind searches constantly for efficiency-seeking heuristics and shortcuts. Fashioning order from life’s cacophony helps us function as children but constrains our imagination as adults.

Most neuroscientists follow the paradigm that our minds are prediction-manufacturing machines. System 1 thinking — our “hedgehogness,” if you will —becomes stronger as we age. Our resistance to challenge, commitment to our convictions, and the proclivity to rely on bias become more entrenched. That is, unless we make a practice of challenging our own assumptions, narratives and “priors.”

Our “priors” may in fact close our minds and lead to a petrification of thought. Kahneman said it well:

Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our own ignorance.

System 2 fox-like thinking therefore requires extra effort as we become more sure of our “been-theres” and “done-thats.” In investing, a rigorous, data-driven process reduces opportunities for cognitive bias and weeds them out via constructive challenge.

There are other ways, too, to tamp down cognitive bias. For example, a work culture where employees feel free to speak up and where their diverse ideas are welcome, will offer more opportunities to police cognitive bias and avoid poor decisions. The value of a truly inclusive culture is powerful to us.

Embracing psychological safety promotes higher productivity, excellence in decision making, and much improved risk management. It also demands inclusivity. I believe that a diverse employee population is a huge competitive advantage.

At AIMCo, only about a third of our employees are white men and our executive committee has more women than men. This isn’t performative stuff. It’s real, moral, and strategic.

We will continue to welcome diversity from a wide range of traits as we make decisions — we will be informed by data, we will welcome innovative thinking, and we will be comfortable with calculated risk. ?

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