TGBA #13: Challenge your assumptions

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A Streetcar Named Assumptions

I was on a streetcar in Vienna and observed a fascinating drama take place. I saw a group of women in hijabs get on with shopping carts. One was standing with her cart. At one point the streetcar turned and the woman’s cart fell over and some oranges rolled out. A fellow passenger helped pick up the oranges. And I saw a man, tattooed, disheveled and with a sour look on his face, heading over to the woman in the hijab. I was preparing for the worst and getting ready to intervene.

Instead, the man showed the woman how to secure her cart to the railing so that she didn’t have to hold it. My wife and I watched this episode unfold and reflected on it.?

I had thought that the man was going to be difficult with the woman. Why? Because I made an assumption － based on his demeanor, how he was dressed, etc. Most likely, the other passengers on the streetcar were making similar assumptions. But I couldn’t have been more wrong.

We all make these kinds of assumptions. Usually, they are harmless to us and others. But, occasionally they can come to bite us if we are not careful.

For example, some years ago, at the firm I work at that time, we tried to win the CEO of a public company as a client. After numerous unsuccessful meetings, one of my investment counselors realized that it was the wife of the CEO that made the personal decisions, while the husband focused on work decisions. She then built a relationship with the CEO’s wife that led to a long-standing and successful relationship with a billionaire client. All by challenging our initial assumptions.

Improving Judgments

So, how do we improve our judgment? In his Harvard Business Review article, Sir Andrew Likierman says that judgment is the ability to combine personal qualities with relevant knowledge and experience to form opinions and make decisions. Good judgment is essential for making sound decisions. It is the ability to make sense of ambiguous situations and to form opinions and make decisions in the absence of clear-cut, relevant data or an obvious path. He argues that there are six key elements that contribute to good judgment:

• Learning: Good judgment comes from learning from experience, both your own and the experience of others.
• Trust: Good judgment requires trust in your own ability to make sound decisions, as well as trust in the judgment of others.
• Experience: Good judgment is built on experience － yours and others. The more experience you have, the better you will be at making sound decisions.
• Detachment: Good judgment requires detachment from the situation. This means being able to step back and see the situation objectively, without being influenced by your emotions or personal biases.
• Options: Good judgment requires considering a wide range of options. This means being open to new ideas and being willing to challenge the status quo.
• Delivery: Good judgment requires being able to implement your decisions. This means having the skills and resources to make your decisions a reality.

One approach to maximize the likelihood that good judgment is exercised is to use Edward De Bono’s Six Thinking Hats approach. By dividing and focusing on six ‘hats’ or different styles of thinking — logic, emotion, caution, optimism, creativity, and control — an individual or a team can systematically look at a problem to maximize the likelihood that all viewpoints and styles are covered.?

Another approach is to move from the inside view to the outside view of the problem. For instance, we can estimate that we can get a new product to market in 12 months based on our discussions with our engineering, finance, and marketing teams. That is an inside view. Or we can look at similar initiatives across the industry and see that the average time to market for a new product is 24 months. This is the outside, and more objective, view. One that is less susceptible to emotion and biases and more informed by data of similar, although not identical, experiences.

Michael Mauboussin gave an example of an analyst who was forecasting a stock growing at 25% a year for the next 10 years. Based on the analyst’s models, an inside view, this looked reasonable. Mauboussin asked the analyst how many companies historically had achieved these types of growth rates. This outside view provided a different answer — none! What is the source of the data? What evidence are the conclusions based on? How many other, independent parties, would reach the same conclusions based on the same data?

There are always multiple options or perspectives to any problem or situation and good judgment requires both a broad brush to evaluate choices and a fine brush to decide a course of action and execute.

Advisors need to help their clients form the right judgments: about market developments, about their means, about the trade-offs that will need to be made. Only in this way can clients achieve their financial objectives and peace of mind.?

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