Risk and Uncertainty in Leadership: 4-Dimensional Thinking
When practicing leadership in an unpredictable and un-post-dictable world, it's better to be vaguely right than precisely wrong.
Last week in Risk and Uncertainty in Leadership: 3-Dimensional Thinking, we made a big fuss over how bad people are at making predictions (outside of the “hard” sciences). Even if you agree that our crystal balls are murky and the future is opaque, at least hindsight is 20/20, right?
Right?!
One-Way Functions and the Vagueries of History
Consider two scenarios, adapted from Nassim Nicholas Taleb’s The Black Swan: The Impact of the Highly Improbable.
Scenario A: the puddle
You walk into your kitchen and discover a large puddle of water on the counter. What the hell happened? How did the water get there? Try to reconstruct the chain of events that could’ve led to such a strange outcome.
Scenario B: the ice sculpture
You walk into your kitchen and discover an intricate ice sculpture on the counter. Imagine how the sculpture will melt over the next couple of hours while you doomscroll on your phone. Try to predict the shape of the resulting puddle.
Reverse-engineering the puddle (Scenario A) was much more difficult than predicting the puddle (Scenario B), wasn’t it? There is only one eventual outcome for Scenario B. In contrast, there are so many possibilities that could’ve resulted in Scenario A:
Someone (or a pet) spilled water on the counter.
The water came from vapor condensation on the cold counter, like morning dew on a blade of grass.
Someone spilled ice cubes on the counter, which melted into the puddle.
The water fell from the ceiling from a severe leak on the upper floor.
Someone is playing a prank on you.
An ice sculpture of a woman playing with fire melted into the puddle.
You can’t un-fry an egg
An asymmetric process – one that’s easier to carry out in one direction than the opposite – is called a “one-way function.” After you blend two paints to get a third color, it’s very difficult to un-mix the combined paint to reconstitute the original colors. Once you encrypt the password to your bank account and send it over the internet, it’s very difficult for the bad guys to decrypt it and steal all your money.
In leadership, fragile and anti-fragile things (See Anti-Fragility and Asymmetry: Leadership's Best-Kept Secret) are like one-way functions. When you see an employee stealing, you can’t un-see them as a thief (reputations are fragile). You have to work very hard to mine Cerebrium (crystallized secrets) from the Secret Grottos, but divulging a secret is both trivial and a one-way street. When you discover your husband “drilling down into the weeds” with his secretary, your trust shatters into a thousand splinters and becomes extremely difficult to repair.
Fluttering butterflies and farting cows
You’ve probably heard of the butterfly effect, popularly described as “a butterfly flapping its wings in India can cause a tornado in Texas” or something like that. This is an example of a (very complicated) one-way function that is predictable in the forward direction. It’s impossible to work backward from the Texas tornado to figure out which fluttering butterfly was ultimately responsible. What about the contribution of farting cows in Brazil? What about the drill instructors shouting at recruits in Australia? This is like Scenario A (backward, difficult) vs. Scenario B (forward, easy), but pumped up on steroids!
History is full of one-way functions. Wars, scientific advances, and market crashes are High Impact × Low Probability × Low Predictability historic events (Black Swans) that are chaotic to live through but obvious in hindsight. Historians contribute to this retrospective distortion by weaving cogent, compelling narratives about how one thing led to another, and the result was inevitable. They are master storytellers in the forward direction.
But are those stories true?
History is Written by Winners Survivorship Bias
If you’re reading our blog, you probably have other overachiever habits like reading self-help books and Forbes/HBR/Fortune articles from the genre that we nickname “Success Literature.” The basic idea is to look at the most successful people/organizations in a given space, then report the commonalities between them. Good to Great found that all good→great companies began their transformation under a “Level 5” leader. Research from The Blue Zones (where people live unusually long lives) discovered that these people exercise more, stress less, and eat a plant-based diet. The Millionaire Next Door found that wealthy Americans were prodigious accumulators of financial assets, avoided ostentatious displays of social status, and were courageous risk-takers.
When you look a little closer, however, these Success Literature examples fall apart.
Good → Great → Ghastly
Out of the 11 “great” companies from Good to Great, two (Circuit City and Fannie Mae) imploded within a few years of the book’s publication. The same hard-selling culture that put Wells Fargo on the good→great list caused a massive scandal about ten years after the book was published. Walgreens is currently going through its own reckoning.
In the 2021 Berkshire Hathaway Annual Meeting (starting at 15:00), Warren Buffett presented a list of the 20 largest companies in the world by market cap. Familiar names like Apple, Microsoft, Amazon, Facebook (now Meta), Google (now Alphabet), and Tesla topped the list. Then at 18:48, Buffett switched over to a list of the 20 largest companies from 30 years prior, in 1989. Almost two-thirds (13/20) of the companies on that list were Japanese companies! Buffett’s point was that businesses rise and fall unpredictably over long time horizons, and there’s no telling what the list would look like 30 years hence in 2050s. It’s difficult to imagine life without iPhones, Windows, 2-day Prime shipping, social networks, or using “Google” as a verb. But then again, it was impossible to imagine life with those things back in 1989!
When Good to Great was published in 2001, the author characterized “Level 5” leaders as having a paradoxical mix of humility and resolve. If the book were published today, the author would have to change that definition. Steve Jobs, Mark Zuckerberg, Bill Gates, and Elon Musk are not famous for their humility. In fact, they might be more infamous for the opposite.
Blue zones → Gray zones
The Success Literature on longevity has aged like milk. Half of the blue zones (Okinawa and Costa Rica) have not held up to scrutiny and the rest are shaky at best. The author admitted that he included the Loma Linda blue zone because his editor wanted to include a U.S. location and he “never bothered to de-list it.”
Hyperinflation makes everyone a millionaire next door!
What if, like a titular Millionaire Next Door, you became a prodigious accumulator of the Venezuelan bolívar in the 2010s, Zimbabwe dollar in the early 2000s, or German Papiermark in the 1920s? What if you amassed lucrative real estate holdings in Moscow before the Bolshevik revolution, in Tehran before the 1978-1979 revolution, or in Lebanon before the 1975-1990 civil war? What if the Millionaire Next Door were published in an earlier era (instead of 1996) and included the brutal bear market of 1973-74, the economic malaise of the early 1980s, or the Great Depression? Many of those millionaires next door would’ve just been Average Joes next door.
The Millionaire Next Door studied courageous risk-takers who happened to be in the right place and the right time to land in the authors’ sample. There were many courageous risk-takers whose prodigious accumulation of assets in the wrong place or wrong time landed them in the Silent Graveyard, and thus those other courageous risk-takers never made it into the book. The sample of millionaires is small because everything must go right. A single thing gone wrong would’ve sent a courageous, risk-taking, would-be millionaire to the much larger Graveyard instead.
Survivorship bias and one-way functions
Like history professors and biographers, authors of Success Literature typically narrate a person’s or organization’s success in the forward direction (Scenario B). They show you an intricate ice sculpture and walk you through the step-by-step process of how it melts into a puddle of glorious success.
This approach is dangerous because every High Impact × Low Probability × Low Predictability Black Swan event is chaotic in the moment. They only become predictable in hindsight. By the time we arrive at the scene, there’s a puddle of glorious success and we must figure out how the successful person got from zero to hero (Scenario A). Going backwards from the puddle to the root cause(s) is difficult even in simple scenarios. It’s downright impossible in extreme cases, e.g. working backward from the tornado of success to a fluttering butterfly from decades earlier in a successful person’s career.
Not only do historians and Success Literature authors give Scenario A (puddle) the Scenario B treatment (ice sculpture), they also struggle with survivorship bias (← this link contains numerous examples in business, finance, history, military operations, and even one about cats falling from tall buildings).
Fortunately, we have a one-way function to use against spurious narratives in Success Literature and historical accounts. Near the end of Risk and Uncertainty in Leadership: 3-Dimensional Thinking, we covered Karl Popper’s idea of “falsification” (i.e. debunking/disproving/disconfirmation). Just like you can invalidate 1,000 days of believing “Joel is a nice guy” by witnessing him gleefully kicking a puppy into oncoming traffic, you can challenge the conclusions of Good to Great, Blue Zones, and The Millionaire Next Door by studying the Level 5 leaders who steered their organizations into the ground, the children of centenarians who died young1, or the courageous risk-taking entrepreneurs who went bankrupt (as risk-takers tend to do).
Don’t throw your Success Literature into the trash yet, keep reading…
How to be Vaguely Right Instead of Precisely Wrong
In the 3-D thinking article, we said that humans can’t predict the future. In this 4-D thinking article, we’re saying that humans can’t even post-dict the past! Hindsight may be 20/20, but only about a few things that we can easily see. We’re trapped in a tiny bubble of clarity while the omnidirectional Fog of Uncertainty swirls menacingly around us.
Fear not, dear reader! Our goal is not to merely add problems to your plate (the news and social media does a marvelous job of that). We’ve robbed you of comfortably false certainty, but we’ll back-fill the void with some consolation prizes. Be warned: our remedies won’t be svelte and beautiful like an Apple iDevice. They’re the mental equivalent of crude, brick-like tools hacked together in someone’s garage, with wires sticking out and grease smears on the sides.
In an unpredictable and un-post-dictable world, the ugly brick of “vaguely right” may be better than the elegant iPhone of “precisely wrong.”
Invert, always invert!
The arrow of time encourages us to think in the forward direction, whether we’re looking at the past, present, or future. We think forward into the future when we predict, but what happens when we post-dict the past? Even then, we rewind to the beginning of the story and narrate forward! Clearly, we’re biased toward Scenario B (ice sculpture → puddle) over Scenario A (ice sculpture, possibly? ← puddle).
Our brains crave reason first, truth second.
If you want a plausible reason, think forward and narrate a chain of causality. Cherry-pick the anecdotes that support your narrative and discard the rest. Let confirmation bias carve a path through the Fog of Uncertainty. Most people will believe you, even if your story is completely bogus.
If you want the truth, you must force yourself to think backward2. Then you apply Popperian falsification to whittle away the untruths until you’re left with as few candidates as manageable. This is the disconfirmatory approach – the opposite of confirmation bias.
Let’s step away from the abstractions and apply this to a real example.
Crash course in abductive reasoning
We’re going to revisit Scenario A, where you entered the kitchen to find a mysterious puddle of water on the counter. To think backward, assemble a list of hypotheses and start disconfirming them:
Human spilled water: Plausible, needs testing.
Non-human spilled water: You don’t have a cat. Your dog is too
fatwell-fed to leap onto a waist-high counter. Implausible.Condensation: The air in the room feels comfortable, not excessively humid. Plus, the water concentrated into a puddle even though the counter is level. You check underneath the counter to disconfirm the presence of a refrigeration device that would cool a small patch of the counter. Implausible.
Ice cubes left out: Plausible, needs testing.
Leak from upper floor: You look up to disconfirm the presence of bulges, cracks, or discoloration on the ceiling. Implausible.
Someone’s prank: Plausible, needs testing.
Ice sculpture left out: What’s more likely, someone with immense talent spent hours creating a work of art, then just neglected it until it melted away? Or someone retrieved ice cubes from the nearby freezer and neglected those? Implausible relative to the ice cubes hypothesis.
Thinking backward involves abductive reasoning, where you search for the simplest and most likely conclusion without verifying it3. That’s what we did in Scenario A, narrowing the field to the three most likely explanations. If you wanted to continue your investigation, you could ask your roommate/partner/offspring about the puddle.
Notice how Scenario B (ice sculpture → puddle) seemed a lot more plausible when we showed you a striking image of the ice sculpture and narrated the forward process of its melting into a puddle. But when you think backward, Scenario B becomes an unlikely candidate relative to the simpler alternatives.
You’ve probably practiced abductive reasoning before, even if you didn’t know the name. In leadership, few situations are as simple (and as trivial) as probing the provenance of a puddle. Thinking backward isn’t a magic bullet; it’s a difficult and sometimes tedious process for avoiding the comfortable trap of false certainty. When you practice abductive reasoning, be ready to abandon your “most plausible explanation” at a moment’s notice – especially when new disconfirmatory information comes to light.
Keep reading Success Literature and history, but be skeptical
We bashed on Good to Great, The Blue Zones, and The Millionaire Next Door, so we must hate the entire genre of Success Literature, right?
No!
These books were important during our early careers. Before we knew any better, we blindly followed the lessons from self-help books to build better habits, better behaviors, better physiques, and better finances. Success stories serve as a blazing beacon in a dark and uncertain world, giving us a direction to sail toward instead of drifting aimlessly. Our lives are undoubtedly better because we were (and continue to be) voracious readers of Success Literature and history.
Now for the bad news. Consider that Success Literature is subject to a double dose of survivorship bias. Not only do authors and biographers study successful people/organizations while ignoring unsuccessful ones, readers are more likely to discover “successful” (popular) books while never encountering the “unsuccessful” works by brilliant-but-obscure authors! The “successful” books that make it to the New York Times bestseller list are written beautifully. They contain flowing prose and gripping narratives that make perfect sense – exactly like Scenario B (ice sculpture → puddle) where the narrative is persuasive but may not be true. Would a book about Scenario A – one that hits closer to the truth while being murky, confusing, poorly-written, and devoid of clear answers and happy endings – ever make it onto the NYT bestseller list?
No!
(P.S. thank you for reading Adventures in Leadership Land even though we’re murky, confusing, poorly-written, and devoid of clear answers and happy endings)
In short: Success Literature isn’t necessarily wrong, it’s just not as right as they’re advertised to be. Here’s how to calibrate your skepticism when reading Success Literature:
Treat the successful survivors’ attributes as possible prerequisites, not formulas for success.
Don’t just study what successful survivors did. Examine what they didn’t do (i.e. what they avoided). In the hilarious book What I Learned Losing a Million Dollars, the author discovered that successful financiers all gave different (and often contradictory advice) about getting rich. But they didn’t explain how they stayed rich. Despite their motley methods of earning money, they all excelled at not losing money by exiting the market when their earning strategies weren’t working!
If reading a biography, pay attention to the short-term vignettes but ignore the long-term character arc. Biographers like to draw causative links between someone’s upbringing and their eventual success, just like a Scenario B narrative (ice sculpture → puddle).
The more complex of a topic covered by a book, the more skeptical you should be. Getting 6-pack abs by summertime? Relatively simple. Living a long and healthy life? Extremely complex, and you should calibrate your skepticism accordingly. Not being a bosshole? Relatively simple. Turning an organization with 25,000 employees into a global powerhouse? Extremely complex, and your skepticism should be proportionately high.
Wittgenstein’s ladder is a metaphor about learning and using simpler ideas a stepping-stones. Starting with simpler Success Literature (they usually promise you magic bullets and have titles like “how to achieve X in Y easy steps”) is generally fine as long as you outgrow them. Once you climb Wittgenstein’s ladder and ascend to a higher level of thinking, you must discard that ladder.
To remain skeptical, spend your mornings studying in the Institute of Conventional Wisdom and your afternoons in the Contrarian Caves. Visit the Silent Graveyard weekly to pay respects to the Level 5 leaders who couldn’t save their organizations, the Blue Zone denizens who died young, and the courageous risk-takers who went to bankruptcy court instead of the millionaire mansion. The Graveyard offers valuable lessons on what you should avoid – something Success Literature rarely deigns to do.
Don’t run with scissors philosophical razors
We’re trapped between our blindness to predicting the future and our distorted lens for post-dicting the past. To avoid analysis paralysis, you can use philosophical razors as tiebreakers. Here are the two we use the most often:
Occam’s razor: the simpler explanations (with the fewest assumptions) are more likely to be correct. For the puddle in Scenario A to have come from an ice sculpture, someone with a rare talent for ice-sculpting must’ve been neglectful enough to leave their handiwork on the counter. The alternate explanation of someone taking ice cubes out of the nearby refrigerator is much simpler, and more likely to be correct.
Hanlon’s razor: don’t attribute to malice what could be adequately explained by incompetence. This helps prevent overreactions to honest mistakes.
Many of the other philosophical razors are useless for the day-to-day practice of leadership (unless you’re trying to distract philosophy professors to keep them out of the way). Some of the philosophical razors are very useful in science, but dangerous when applied to leadership. For example:
Hitchens’ razor (“that which can be asserted without evidence can be dismissed without evidence”) will suppress most warning signs of a looming crisis. You’d dismiss unsubstantiated rumors that a married C-level employee has been enjoying the company of a scantily-clad young lady during business trips. By the time you have hard evidence, your entire organization will be scandally-clad. Don’t let Hitchens’ razor turn your vigilant employees into Cassandras – the mythological woman cursed with the ability to make accurate prophecies that no one believed.
Alder’s razor (“if something cannot be settled by experiment or observation, then it is not worthy of debate”) is especially dangerous in Leadership Land because the Taboo Tunnels and Liar’s Lair will obfuscate the truth. You can ask people what they want, but sometimes they don’t know or can’t articulate what they want. They might lie to you, lie to themselves, downplay/embellish the truth, or withhold crucial information (lies of omission). The inventor of this razor nicknamed it “Newton’s flaming laser sword” because of how dangerous it is.
Misusing the razors can lead to errors in judgment, such as the McNamara fallacy (named after the former U.S. Secretary of Defense who – supposedly – believed that what can’t be measured doesn’t exist).
The interaction between time and fragile/anti-fragile
High Impact × Low Probability × Low Predictability Black Swans events are unpredictable beforehand, but obvious in hindsight (“I should’ve known!” or “I knew it all along!”). Black Swan events are the ones that truly matter in life and leadership precisely because we didn’t see them coming. If we knew 9/11 was imminent, we would’ve armored all cockpit doors and grounded all flights. If we knew that Company McCorporateface, Inc. management was committing fraud, the board would’ve fired them long ago. If you knew which business trip with an attractive coworker would be the one that led to an affair and eventual divorce, you would’ve at least refrained from drinking alcohol.
So what can we do about our inability to predict the future and post-dict the past?
Recall that fragile things have more to lose than to gain. Anti-fragile things have more to gain than to lose. Now add time into the mix. Over time, fragile things tend to age like milk. Over time, anti-fragile things tend to age like fine wine.
All fragile things will eventually come to an end. If we could live forever, the probability of career failure becomes 100%. The key to avoiding career failure is not to prevent the Sword of Damocles from ever falling; you only need to make sure the Sword falls no more than once every career (~40-60 years).
Anti-fragile things improve with time. Technology and ideas tend to improve over time, as do your knowledge, skills, and abilities. The key to career success is to maximize your time in areas where you have more upside than downside.
Let’s combine this together with concepts from the previous nine articles for our final subsection…
The barbell strategy for risk and uncertainty
Recall that the Fog of Uncertainty hides both unpleasant surprises (risks) and pleasant ones (serendipity). Our approach to risk and uncertainty thus covers both negative Black Swan events (fragile) and positive Black Swans (anti-fragile).
Nassim Nicholas Taleb’s book Antifragile: Things that Gain from Disorder inspired our approach to risk and uncertainty in leadership. In that book, he proposed what he called the “barbell strategy.” Named after the bar with weights on both ends used in Olympic weightlifting, the barbell strategy eschews a middle-of-the-road approach where you take medium risks. Instead, you’re conservative on one end of the barbell, and aggressive on the other end. Let’s apply the barbell strategy to the concept of risk and uncertainty.
First, load one side of the barbell with career failure prevention strategies:
Avoid wipe-out risks by not buying tickets to the anti-lottery. In Preventing Career Failure (Explained with 2nd-Grade Math), we covered three types of risks: subtractors, divisors, and multiply ×0 wipe-out risks. The wipe-out risks, where you multiply your success ×0, are typically Black Swan events that send you to the Career Swamp. You can avoid these types of risks in your personal life, but probably not in your professional life. Many leaders must play Russian Roulette as part of the job description – the only thing you can do is to buy as few tickets to the anti-lottery as possible and get out ASAP.
Make yourself robust against loss. The surest way to never be struck by the Sword of Damocles is to take zero risks. That’s also the surest way to make zero impact on the world. Leadership requires sitting under the Sword of Damocles, but no one ever said you can’t wear a helmet. Buy good insurance. Silo your risks. If you can withstand widespread calamities better than your competitors, you’ll find yourself relatively better off even after suffering losses on an absolute basis.
Next, you load the other side of the barbell with anti-fragile opportunities that can bring you toward career success.
Position yourself for mild success. Some people get 40 years of experience, others get one year of experience 40 times. Anti-fragile leaders come from the first category. Small doses of manageable adversity keeps you in your learning zone, while the absence of adversity keeps you in your comfort zone. Remaining in your comfort zone fragilizes you – it makes you complacent and more likely to be blindsided by negative Black Swan events.
Buy tickets to the proto-genius lottery of wild success. Scientific discovery. Tech start-ups. Inventions that lead to patents or trade secrets. Mining the Secret Grottos for Cerebrium. If you hit the jackpot, superstardom is your prize. Remember: in any lottery, for every (highly-visible) winner there are legions of invisible wannabes. If you don’t want to be a barista while auditioning to be the next Scarlett Johansson or Ryan Reynolds, remember the barbell strategy. Your leadership day job is one end of the barbell; your Hollywood aspirations go on the other end.
This is the strategy we follow for minimizing our exposure to risks and maximizing our exposure to serendipity. One end of the barbell contains our day jobs, where we’re paranoid about career failure. On the opposite extreme, Adventures in Leadership Land serves as our vehicle for buying tickets to the proto-genius lottery. If we lift this barbell correctly, we can expect to continue promoting in our organizations until we rise to our levels of respective incompetence and achieve mild success. If we’re extremely lucky, Adventures in Leadership Land will bring us wild success – but we’re not expecting it; even if we were good writers, we’d need incredible luck.
That’s the closest thing we have to a formula for preventing career failure/achieving career success. Will you follow the formula? What will you put on the ends of your barbell?
This is the tenth and final post in the Leadership Land Consistency Experiment, Phase I. We’ll be back next week with a reader check-in to evaluate the results of the experiment and drop a few straggling thoughts.
Does Blue Zone longevity come from good genes? You’d have to wait a generation or two to check if the descendants of Blue Zone inhabitants grow into modern-day Methuselahs.
This isn’t to say that backward thinking is better than forward thinking. You need both. The problem is that most people only do it in one direction: forward.
Fun fact: abductive reasoning was popularized by Charles Sanders Peirce, whose concept of “fallibilism” was a spiritual predecessor to Popper’s falsifiability. Peirce came up with fallibilism when Karl Popper was still in diapers.