Reprinted from Britten Coyne Partners’ Strategic Risk Blog
The first is “Anomaly Detection: The Art of Noticing the Unexpected”. Dr. Gary Klein.
With our consulting work with clients at Britten Coyne Partners, and in our Strategic Risk Governance and Management courses at the Strategic Risk Institute, we emphasize being alert to the feeling of surprise, and writing down what caused it, as a powerful method for identifying emerging threats and avoiding failure.
Writing down surprises is critical, because, as Daniel Kahneman explained in Thinking Fast and Slow, our mind’s automatic System 1 reasoning will quickly attempt to fit the surprise into our existing mental models and beliefs. When this happens, they feeling of surprise and our memory of what triggered it will both disappear — unless we write it down, to enable conscious System 2 to think about what it could mean.
Klein notes that, “An anomaly is a violation of our expectancies that enables us to revise the way we understand a situation…Most deviations and outliers are uninteresting. At the cognitive level, anomalies matter primarily when they have the potential to alter the way we understand a situation. And that type of sensemaking is very different from the flagging of outliers found in statistical methods.”
This brings us to Bent Flyvbjerg’s new paper, “The Law of Regression to the Tail.”
Fyvbjerg makes a point we have frequently made over the years: While that introductory statistics course firmly implanted the normal (Gaussian or Bell Curve) distribution in our mind, it is actually a very poor description of the distribution of outcomes that are typically produced by the complex adaptive systems that surround us (e.g., product markets, industry dynamics, the economy, politics, war casualties, etc.). Instead of the Bell Curve, complex adaptive systems produce outcomes that are much better described by power laws.
As Flyvbjerg notes, these distributions “have no population mean, or the mean is ill defined due to infinite variance. In other words, mean and/or variance do not exist. Regression to the mean is a meaningless concept for such distributions, whereas what one might call ‘regression to the tail is meaningful and consequential.”
What people under the spell of the normal distribution fail to realize is “We live in the age of regression to the tail. Tail risks are becoming increasingly important and common because of a more interconnected and fragile global system of human interaction… The pandemic and the climate crisis are presently the two most significant manifestations of the law and age of regression to the tail.”
The third is Tim Harford’s new Financial Times column, “The Power of Negative Thinking”.
Harford reminds us that, in a world characterized by power laws and tail risks, that “we should all spend more time thinking about the prospect of failure and what we might do about it. It is a useful mental habit but it is neither easy nor enjoyable.”
This is a point also made by Gary Klein, who more than anyone has popularized the use of Pre-Mortem analysis, a method whose efficacy we have seen demonstrated time and again in our work with Britten Coyne Partners’ clients.
Best of all, it is often relatively quick and easy to apply. Assume it is some point in the future, and your initiative or strategy or start-up has failed. Ask the members of your team to anonymously write down their answers to three questions: (1) Why did we fail? (2) What warning signs did we miss? (3) What could we have done differently to avoid failure? Collect the answers, type them up, then collage, print, and distribute them back to the team. I have never seen a resulting discussion that did not produce a much better (and less risky) plan.
As Harford notes, “if we expect that things will go wrong, we design our projects to make learning and adapting part of the process. When we ignore the possibility of failure, when it comes it is likely to be expensive and hard to learn from.”
As we enter a period of unprecedented uncertainty, the likelihood of failure has exponentially increased.
The good news is that there are methods you can learn and apply that will improve your (and your organization’s) ability to anticipate emerging threats, appropriately assess them, and adapt to them in time to avoid strategic failure.
Tom Coyne and Neil Britten co-founded Britten Coyne Partners and the Strategic Risk Institute LLC, which provide consulting and education services that enable clients to successfully meet strategic risk governance and management challenges.