The Placebo Effect of Management Information
You'll Not Find Warnings in Management Information
It was the year 1999, almost a decade since investment prices started to rise faster than their historical average. In fact, the U.S. equity markets grew at their fastest pace ever. Tycoon Warren Buffett gave some clear-sighted warnings. He said that the stock market wouldn't perform anything like it did during the nineties and continued:
The Rearview Mirror Rather Than the Windshield
“Investors in stocks these days are expecting far too much. Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits, but simply to the fact that it seems a mistake to be out of stocks. [. . . ] Investors project out into the future what they’ve been seeing. That’s their unshakable habit: looking into the rearview mirror instead of through the windshield.” (Mr. Buffett on the Stock Market, Fortune, 1999).
Then, the bubble bursted and a global recession was reality. Our management information had given us a false sense of security and made us non-receptive to the warning signs that were there.
Doctor Doom: Ridiculed But Right
Similarly, it was a shock to most of us when financial services firm Lehman Brothers filed for Chapter 11 bankruptcy protection in 2008. The filing remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets. It was unthinkable that such a big organization could fail. The few experts who told us early on that the financial market would collapse into a double dip got nicknames like Doctor Doom and were mocked and ignored. Now we know better.
Executives Are Just Like Investors
And it's not just investors. We, executives, do the same. We use historical data to check our progress towards our targets too. Real-time data at best.
Historical data is well-suited to provide context and background. However, we need to update management information constantly to keep it accurate, because trends keep evolving. And not in a predictable straight line.
To perceive what might be next, we have to use different types of data and distinct argumentative reasoning.
Explore the Relevance of Seemingly Irrelevant Information
Weak signals refer to information that acts as warning signs. A weak signal is ambiguous when we first notice it. Over time, extra information becomes available and salient: the signals grows stronger in our minds. Because of their nature, we can't build a management information system on weak signals.
Instead, we have to scout for weak signals outside the company's usual field of vision. This means that we actively look for unfamiliar information that feels slightly off kilter. Information we usually ignore or discard, because we think that it's not relevant. But this time, we ask ourselves: "How could this be or become relevant?" The relevance question forces us to look behind the implicit assumptions that experience has instilled in our minds.
Adjust Your Map of the Environment
Executives usually keep taps on the environment with the help of a mental map of relevant indicators. Some explain change in terms of changing stakeholder relationships and positions. Others use a trend overview (politics, economics, legal, technological), or systems like Porter's 5 forces. No matter the shape of your mental model, you need to adjust it to include weak signals and possible emerging relevance.
I have been using this map to keep track of changes in the environment and I'm happy with it. Maybe you'd like to try it out?
The Foresight Map is an easy tool to quickly plot the various developments in a birds-eye view. It connects trends that are usually considered on their own, as well as showing both forward looking and management information. Feel free to try it out!