Tuesday, April 17th, 2012
freedom and expectation

In The Checklist Manifesto, Atul Gawande wrote, “We are besieged by simple problems.”  And “simple” does not mean unimportant, just relatively easy to deal with when a little rigor is applied.  Checklists fit the bill and can be remarkably effective at minimizing those problems.the research puzzle | This is the third posting in a series on checklists, which are indexed in this PDF.

But what about complex problems “where outcomes remain highly uncertain”?  After all, that’s what characterizes much of the business of investment organizations.

Gawande offers some examples of complexity for consideration.  The first is the construction of a skyscraper.  It’s not like the old days, when a “Master Builder” supervised everything from start to finish.  Now projects can involve sixteen different trades that have to be coordinated, and elaborate interconnecting checklists guide each set of experts along a carefully planned path.  If you’ve been in a construction trailer, you’ve seen the sheets hanging on the walls that show the progression.

According to Gawande, the major advance in the science of construction has been “the perfection of tracking and communication.”  That’s because there’s another dimension to the checklist structure that isn’t at first noticeable:  At certain points and under certain conditions, the parties need to get together to “talk things over as a team.”  That’s because the biggest failures in construction result from a lack of communication.

The two types of checklists — one precise, picky, and step-by-step; the other one structured to ensure that everyone sees the big picture and works together to solve problems — reveal a surprising philosophy “about power and what should happen to it when you’re confronted with complex, nonroutine problems.”  Rather than a traditional command-and-control approach to deal with those situations, power needs “to be pushed out of the center as far as possible.”

A stunning example of that is the amazing response to Hurricane Katrina by Wal-Mart.  While government entities were floundering and other private businesses were paralyzed, Wal-Mart accomplished feats that were unimaginable under the circumstances.  How?  “Conditions were too unpredictable and constantly changing.  They worked on making sure people talked.”

That’s probably a little easier in a firm where people were trained to do cheers together, rather than in the investment world where many think of themselves as independent actors first and foremost.  But while Wal-Mart had always tried to foster teamwork, there was no question that it had a heavy hand of control in its operations historically, which wouldn’t have worked in response to Katrina.


“No, the real lesson is that under conditions of true complexity — where the knowledge required exceeds that of any individual and unpredictability reigns — efforts to dictate every step from the center will fail.  People need room to act and adapt.  Yet they cannot succeed as isolated individuals either — that is anarchy.  Instead, they require a seemingly contradictory mix of freedom and expectation — expectation to coordinate, for example, and also to measure progress toward common goals.”

Freedom and expectation.

The words jumped out at me when I read the book.  Freedom is highly prized in the investment world, yet organizations can smother it with structure or let it run virtually uninhibited; there are mistakes on either end of the spectrum.  So, what is the key to “just right”?  Perhaps it is found in that other word:  Expectation.

The expectation for investment professionals?  That they “add value” by means of their technical proficiency.  Communication with others?  Helping the organization succeed?  No, everything is secondary to producing the numbers now, and while the incentive structure may include a nod to teamwork, it is an afterthought in the scheme of things.

As a result, a culture thought to be optimized to deliver performance produces weaker organizations rather than stronger ones.

The next posting offers more on the “cognitive net” of checklists and the making of investment decisions.