What’s not “Just that Simple“, what are you on about?
A reasonable question and not one that is easily answered. It’s taken me the order of two years to begin to understand that my internal struggle and discomfort was about trying to reconcile Espoused Theory and Theory in Use in the organizational context. To put it in simpler terms, to reconcile the gap between what I (the organization) say I (we) do versus what I (we) actually do, particularly in the context of managing risk – all aspects of risk and not just financial risk.
This context has been part of my workspace for over a decade and a half, one that has included the creation of organizational management systems (operational risk management, business continuity, compliance, assurance, etc.) for substantial organizations and then attempting (sometimes with little apparent success) to facilitate and mobilize their adoption. In fact, my observation is that operational risk management systems only function for a short period of time before they fall into a state of disrepair, no longer fit-for-purpose.
And when I compare notes with my colleagues, I find that I am not alone, others relate similar experiences and make similar observations.
The questions I began to ask over 5 years ago now were:
- What’s going on?
- What are we doing wrong – if anything?
- What is it that we do not understand – that we need to understand?
And I still have not told you what I am on about and that is because:
It’s just not as simple as many of us thought – there’s more going on than meets the eye!
To explain to you what I am on about requires more than decomposition of assumption and fact to their core, but rather stories that shed light, maybe even new light on the phenomenon, which is what I will attempt to do, starting with this the article, the first of three I hope to publish over the next few months entitled (until I change them):
- It’s Just Not That Simple!
- Resiliency – An Impossible Dream?
- Is All Lost – Nothing We Can Do?
It is not my intention to deliver waterproof or airtight argument, but to explore some ideas that reflect thoughts and ideas that I have been mulling over for some time now, thoughts and ideas that I have struggled to articulate, let alone commit to print; hence the absence of articles for over 12 months.
To begin the journey, in this the first article, I want to explore some aspects of the complexity (it’s just not that simple) of the environment in which many organization’s operate, where:
- 90-95% of people’s decision-making is unconscious;
- Social Mood biases, predisposes the occurrence of social events (financial crises, etc.);
- Taylor’s (1) scientific management principles underpin the organization’s management philosophy.
Let’s start the story with Donald Rumsfeld’s (2) Unknown Unknowns.
On 6 June 2002, the then United States Secretary of Defence, Donald Rumsfeld was asked the question:
Regarding terrorism and weapons of mass destruction, you said something to the effect that the real situation is worse than the facts show. I wonder if you could tell us what is worse than generally understood?
Rumsfeld’s now somewhat infamous reply was:
Now what is the message there? The message is that there are no “knowns”. There are things we know that we know. There are known unknowns. That is to say there are things that we now know we don’t know. But there are also unknown unknowns. These are things that we do not know we don’t know.
So when we do the best we can and we pull all this information together, and we say well that’s basically what we see as the situation, that is really only the known knowns and the known unknowns. And each year we discover a few more of those unknown unknowns.
He went on to say:
It sounds like a riddle. It isn’t a riddle. It’s a very serious, important matter. There’s another way to phrase that and that is that the absence of evidence is not evidence of absence. It is saying the same thing in a different way.
Simply because you do not have evidence that something exists does not mean that you have evidence that it doesn’t exist.
And yet almost always, we make our threat assessments, and we look at the world, we end up basing it on the first two pieces of the puzzle, rather than all three.
Whilst Rumsfeld’s response was self-serving to his agenda and beliefs, nevertheless he stated a truth that underpins the very essence of the complexity in which organizations are immersed.
Simply because you do not have evidence that something exists does not mean that you have evidence that it doesn’t exist.
Nassim Taleb (3) relates the story that before the discovery of Australia, people in the old world were convinced that all swans were white. To them, it was an unassailable truth, confirmed without exception every time they saw a swan – it was white!
Yet, as those of us living in Australasia know, black swans do exist – in abundance. The people of Taleb’s old world had no reason to even consider the possibility of a black swan and frivolous as the example may be, it nevertheless illustrates the limitations of observations and experience, the fragility of our knowledge and beliefs; one single observation destroying a centuries old belief – all swans are white!
Uncertainty and not certainty, is the reality and complexity of the unfolding story in which we are all actors – history running forward, not backward. As Taleb observes:
History does not reveal its mind to us, we need to guess what is inside of it!
How indeed, do we (humanity) guess what’s inside history as it rolls forward everyday making decisions concerning our future against a backdrop of uncertainty (known knowns, known unknowns and unknown unknowns), that consciously we are for the most part unaware of – God’s Brain takes care of it all for us.
Crossing a busy road for example or driving our car on motorways and through chaotic suburban round-about’s to the local supermarket; the challenges and complexities of each are many and yet we do it effortlessly with very little conscious intervention. And if there is a time of conscious awareness and intervention it is often to blast the horn or or to shout abuse to appease our frustration at the apparent thoughtlessness or mindless stupidity of others.
The consensus of neuroscientist opinion is that 90-95% of mental and emotional activity occurs outside of our conscious awareness. If this is so, then maybe the universal assumption upon which many of society’s institutional and organizational tenets are based is incorrect, that:
Human behaviour is the product of knowledge and conscious intention.
Maybe the way we interpret and seek to influence human behaviour needs be re-evaluated in the light of our increasing understanding of the the way God’s Brain actually works. God’s Brain does not like, for example, ambiguity (fuzziness) or uncertainty, both causing discomfort and it will actively seek ways to soothe (brainsoothe) itself, seeking and sometimes creating explanations or invoking beliefs. Beliefs are very important to God’s Brain because they provide a framework for soothing activities by:
- Charting the unknown and the future;
- Answering questions;
- Providing formulae for resolving issues;
- Providing strategies on how to approach an issue, etc.
Belief (assumed truth) and not doubt is the brain’s default, and beliefs appear to produce for the brain comfort in the same way that ritual does for the body. They anchor our understanding of the world around us and once formed they are difficult to change; we tend to persevere with them through thick and thin.
Further, whilst beliefs may be initiated in the conscious mind, once they are congruent and understood (categorized) , the unconscious mind takes them over and organizes them in a heuristic manner, making them almost instantaneously accessible without reference to the conscious mind. Speed is the essence of the unconscious mind, not accuracy and it often applies its superb heuristic capabilities inappropriately, to situations where heuristics is not what is required.
What has the way God’s Brain works got to with certainty and uncertainty?
Everything as it turns out because of it’s preference for comfort (familiarity and safety) rather than discomfort (risk and unfamiliarity) and the reality that the majority of our decisions are made utilizing the heuristic capabilities of our unconscious minds. Loss aversion in risk decision-making, for instance, suddenly makes sense because brain discomfort resultant from the uncertainty or ambiguity associated with the perceived benefits of a risk/benefit tradeoff, is avoided; discomfort is minimized.
Maybe Loss Aversion is not so much about stoic maintenance of the status quo as many of us often suppose, but more about the level of discomfort of the brain engendered by risk, unfamiliarity, uncertainty and ambiguity.
However, this is only the beginning of the story because what some might consider to be the default setting (loss aversion) of God’s Brain is for the most part moderated by Beliefs. Let’s attempt to shed more light on what I am trying to say through an example – Bernie Madoff.
Bernie Madoff was the perpetrator of one of the largest, if not the largest Ponzi ever to hit Wall Street, stripping investors in the United States and Europe of over $65USD billion. The essence of a Ponzi scheme is the promise of large returns and that the funds received from new investors are used to payout earlier investors until the scheme collapses. The intricacies of Madoff’s scheme are not pertinent to this discussion, but the beliefs of the investors, feeder hedge funds and in particular those of the SEC (Securities & Exchange Commission) are, none of whom believed that Madoff’s investment scheme was fraudulent despite credible evidence to the contrary.
In the 1990s, Harry Markopolos (4) was a licensed broker and a self-confessed quant; he understood and loved numbers. He first became aware of Madoff’s scheme in 1999 when the Boston securities firm he was working for asked him to develop a similar scheme. His initial reaction to the Madoff scheme was that the numbers did not work, that the revenue streams Madoff was claiming (and paying) were impossible using the strategies he was purportedly using. In the ensuing 9 years prior to Madoff confessing to his two sons that his scheme was a Ponzi, Markopolos submitted in documented form his concerns to the SEC on 5 different occasions, only to have them largely ignored.
His 22 December, 2005, submission to the SEC included 30 issues that any reputable fraud investigator would consider to be red flags worthy of further investigation.
What was the basis of their (SEC’s) decision-making? Why did they to all intents and purposes ignore Markopolos’s submissions? Were they incompetent, biased, unwittingly slaves to the market they were supposed to be regulating, or what?
Incomprehensible as it may seem, they were all three and probably many more besides (turf wars, etc.): incompetent, biased and bond slaves to the market. There is little doubt in Markopolos’s mind that the SEC was both incompetent and biased, and that it had been corrupted by the industry it was supposed to be regulating.
But what were the beliefs of the SEC’s people?
Whilst it is impossible to know for sure, it is not difficult to envisage the brain discomfort associated with going after one of the doyen’s of Wall Street.
What if Markopolos is wrong – reputation’s would be wrecked and getting a job almost impossible? The security/comfort of doing nothing (loss aversion) plus the brain soothing justification for doing nothing – Markopolos is a just a bounty hunter – he’s in it for the money, was just too great and won the day.
On the other hand, some professional investors (Feeders of Funds) when confronted with the incongruence and indeed the impossibility of Madoff’s strategies, were unable to conceive that his scheme might be fraudulent. Taking their perspective, it is not difficult to see why.
“Bernie Madoff was a doyen of the Wall Street securities community and well respected for his philanthropic gifts (his family foundation had donated over $19 million to a range of charities and causes) and to change this entrenched belief would involve major discomfort to the brain. And perchance there were concerns, these were soothed away by the reality of on-going revenue landing in their bank accounts.”
The attribution made (often in error) is that its okay because, for example “promised monies are still landing our account”; a classic soothing mechanism used by God’s Brain to alleviate discomfort.
In the final analysis, the brilliance of Madoff’s Ponzi was the certainty of revenue stream that he promised; it’s lack of volatility (certainty) beguiled the most sophisticated of people and organizations leaving them devastated and bankrupt. And yet they, the investors, should have known that this lack of volatility was “too good to be true”, God’s Brain effectively soothing any discomfort that may have been experienced.
Underpinning everything was the reality that the investors “wanted” to believe in Bernie Madoff and that God’s Brain was simply doing what it does best – supporting and abetting these beliefs, for the most part in a totally unconscious manner.
Professor John Casti (5) makes a compelling (at least in my view) case that the Social Mood of a group or society (how it feels about the future) biases the character and the likelihood of the social events that actually occur. Further, that the social events that do occur have no impact on the social mood and that there is no feedback from social events to mood; the central hypothesis of Socionomics as defined by Robert Prechter (6) being that Herding Instinct predisposes, impacts, or biases Social Mood (Beliefs & Feelings), which in turn predisposes, impacts or biases Social Behaviours & Collective Events.
Casti classifies Social Mood broadly as: Rising (Hope), Peaking (Hubris), Declining (Fear) and Bottoming (Despair). In the context of Family & Lifestyle, for example, he argues that when Hope prevails marriage & family is on the social agenda whereas when Fear prevails, divorce & single life come to the fore.
Social Event Causality, the idea of an external trigger being the cause of a financial crisis, for example is, in Casti’s view, an illusion. Classical economic theory is predicated upon the concept of stable and steady growth and that crises are caused (social event causality) by errors of policy or external shocks such as rapid rises in the price of oil for example.
But what if crises come from within, generated by investors who in times of stability and prevailing social moods of Hope and Hubris take on more risk, borrow too much and overpay for assets on the basis that rising values will cover their interest costs? And when the value of their assets declines as the prevailing social mood alters (i.e. people reframe their perspectives, values, etc.), investors have no option but to liquidate and in the process precipitate a crash in the economy.
Classically, we think of Certainty and Uncertainty in the framework of Social Event Causality, to the point of assigning probabilities (often incorrectly) to the likelihood of event occurrence. But what if Social Mood biases or predisposes actions that lead to the occurrence of social events as described above, that the occurrence of social events is not independent of the prevailing Social Mood? Such complexity has major ramifications on the calculation of probablity.
The conceptual model depicted below (figure 1) is an attempt to illustrate how Social Mood might influence the dynamics of an organization.
Figure 1: Conceptual model of the influence of Social Mood on organizational behaviour.
Prevailing Social Mood – Fear
When the Social Mood is one of Fear, leaders seek certainty over performance, productivity and outcomes and to do this they often adopt a very transactional leadership style: short-term and data oriented, focus on the bottom line, maximization of efficiency, operate only within current systems often in a hands-on manner. The management style expected by leadership when Fear is the prevailing Social Mood is one of regulation and control, heads down, hands on and no surprises. The subjective norm for workers in such an environment is compliance, there is no room for thinking and/or acting “outside of the box” – just do what we tell you is the expected norm.
Prevailing Social Mood – Hope
On the other hand, when the Social Mood is one of Hope, leaders are more relaxed about embracing uncertainty; they focus more on the organizational mission and strategy, on releasing the organization’s human capital to explore and exploit opportunity, to align internal structures and systems with values and goals, etc. Management is more prepared to entertain “self-organizing” activities by their workers when Hope is the prevailing Social Mood. Workers for their part appreciate this subjective norm, one that gives them room to think and to explore in a safe environment with no fear of recrimination or blame.
Of necessity, this discussion on the impact of Social Mood on organizational dynamics is brief to the point of extreme terseness, but sufficient I hope to highlight the paradox that when organizations’ need increased efficiency and performance, they seek to do this by enforcing known policy (benchmarks that are by definition historical and representative of former times) and existing systems, rather than by exploring the new context and the opportunities implicit in the “now”. They seek to project the success of the past into the future using the policies and systems that underpinned past success.
Why do organization’s react to Fear and Hope in this way?
Some of the reasons for this behaviour, but not all, are founded in the beliefs of most leaders and in particular their acceptance (adopted and inculcated into their belief framework) of Taylor’s (1) scientific management model and its underpinning assumptions.
Taylorism & Neo-Taylorism
The essential principles of Taylor’s model as he outlined it in the early 1900s were:
- Allocation of resources;
- Economic incentives & rewards
- Monitoring and measurement of performance;
- Lines of authority in organizational structures.
Underpinned with the deterministic philosophy that the future of people, things and systems can be controlled and that performance is therefore predictable, Taylor’s system was undoubtedly responsible for increasing the industrial output of the United States in the context of the time, i.e. high influx of immigrant workers and a resultant mix of languages and cultures.
Amongst the many issues that arise consequent upon adoption of Taylor’s principles are the notions:
- Management has the good ideas and the worker’s role is to carry them out – the “bionic” person;
- Belief in the possibility of “optimal” processes – “one way”.
I want to examine these notions in a very superficial manner using another conceptual model, which borrows from and has its origins in the ideas and work of Nelson Repenning and John Sterman (7) at the Massachusetts Institute of Technology. Whilst the focus of Repenning & Sterman’s work was Process Improvement, I want to examine Productivity in the Social Mood context of Fear and in particular the potential outcomes of management beliefs and choice.
Before explaining the different aspects of the conceptual productivity model, I must emphasize that the primary intent of the model is to promote understanding; it has no other purpose.
Underpinning it is the notion that Actual Productivity is the product of Proficiency & Direct Production Activities. Further, that in most organizations there is a Productivity Gap between Desired Productivity and the Actual Productivity realized (figure 2). Further, Proficiency (tangible & non-tangible assets, human capital, skill, competence, etc.) is dynamic and not static, constantly eroding and requiring ongoing investment to retain and to enhance it. The challenge for any organization is its Productivity Gap (gap between Desired Productivity & Actual Productivity), i.e. management has to decide on its focus, which in its simplest form is how to split available resources between Direct Production Activities (A) and Proficiency Retention & Enhancement Activities (B).
Figure 2: Conceptual Productivity Model. (Enhancement of Repenning & Sterman’s (7) concepts)
If we overlay the model with a prevailing Social Mood, Fear for example, what dynamics might we observe?
Remember that the Social Mood of Fear is exemplified in the seeking of efficiency, short termism, regulation and control, i.e. there is a focus on squeezing slack out of the system (C). The greater the focus on Direct Production Activities (A) and Squeezing Slack Out of the System (C), the less focus – less time available for Proficiency Retention & Enhancement Activities (B); i.e. maintenance is deferred, training is deferred, capital works are deferred, new projects are deferred, etc. All activities deemed non-essential to the focus on Direct Production Activities and Squeezing Slack Out of the System (making it more efficient and closing the Productivity Gap) are deferred. In their pursuit of this, often management will impose rigid controls on workers and insist upon conformance, which they monitor through compliance.
Usually sooner, rather than later, this rigidity of process and the increasing pressure of “more for less” results in defects and rework, often the direct outcome of a reduction in Proficiency Development & Maintenance Activities (e.g. inadequate training, deferred maintenance or investment in equipment, etc.) forcing management to include in its focus Defect Rectification – Rework Activities (D), which in turn has direct impact on Actual Productivity, reducing it, whilst at the same time increasing the size of the Productivity Gap.
Typically, when confronted with increasing defects and requirement for rework, an organization employing Taylor’s scientific management principles will seek to reinforce control of the production process. But without investment to increase Proficiency a “tipping Point” is rapidly reached where workers can no longer take up the slack in the system, because there is none. At this point, workers frequently start looking for – focussing on ways to “short-cut” Proficiency Retention activities (E & F); for example by deferring maintenance, short-circuiting or ignoring health & safety procedures and adopting a pragmatic – get the work done – rather than a conscientious – by the manual – approach to work-place practice. By definition, time not spent on Proficiency Retention is time that can be spent on Direct Production Activities (A) or Rectification/Rework Production Activities (D).
More often than not management is blissfully unaware of the subtle changes that have taken place in the work practices employed in their organization, primarily because their compliance processes and audits affirm in their minds that “all is well”, that their management strategies were and are appropriate to the context.
Perhaps the most serious outcome of passing the “Tipping Point” is the unseen creation of a hidden Unknown Unknowns risk profile, that the very strategies and practices that management believes are creating Certainty of Outcome, are in effect engendering greater Uncertainty.
In passing, I have to mention my ongoing amazement at the belief of many senior executives who think that simply by cutting operational budgets that they are actively encouraging smarter work practices, by forcing (in their minds) their workforce to explore smarter ways of working whilst still maintaining or increasing productivity. They appear to not understand or perhaps choose not to understand because then they would be accountable, that “working smarter” and the adaptation and innovation that is implicit in “working smarter”, is not an output of compliance and control nor of sustained management pressure to close a Productivity-Gap at the expense of necessary Proficiency Retention and Enhancement activities.
Taylorism whilst appropriate to the context in which it was developed, is inappropriate in many of today’s organizational contexts, especially that of the “Knowledge-Worker” where the incentive structures promoted by Taylor do not align with the key drivers of “Knowledge-Worker” performance: autonomy, purpose and mastery, c.f. Daniel Pink (8). Further, Taylorism as it evolves under a prevailing Social Mood of Fear, directly impacts organizational resiliency; any reduction in Capability also reducing Resiliency. But that is for another story, the next one.
The reality that 90-95% of decisions are made by the unconscious and not the conscious mind might be considered by some to be an issue of concern, but it is more the power of Beliefs and God’s Brain use of them that we need to understand, and in particular their impact on how we perceive complexity and uncertainty. There is little doubt in my mind that God’s Brain craves the comfort of the certainty that goes with being in control and that it does all that it can to soothe the discomfort (fear) it experiences when confronted with uncertainty and ambiguity.
Further, if as John Casti (5) contends, Social Mood biases or predisposes the occurrence of future social events such as financial crises, then the complexities of Social Mood should be consciously (not unconsciously) factored into management decision-making , into the assessment of risk and uncertainty both in organizations and major projects.
The rubber meets the road so to speak when the deliberations of God’s Brain, moderated by the prevailing Social Mood interact with organizational and project contexts to create complexity complete, on occasions, with unknown unknown consequences that management is blissfully unaware of. When this happens, almost without exception, management’s belief will be that they are in control because there is no evidence to contrary. Painful as it might be for some, Donald Rumsfeld’s (1) advice does need to be heeded.
Simply because you do not have evidence that something exists does not mean that you have evidence that it doesn’t exist.
Management systems based upon Taylor’s principles of themselves cannot create certainty, although that is the belief of many; a belief usually predicated upon the assumption that human behaviour is the product of knowledge and conscious intention.
And, the efficacy of such a management system is not just a function of the system itself as the system is not independent of Social Mood or the comfort/discomfort (as the case may be) God’s Brain experiences when assessing the congruency of its interpretation of the prevailing Social Mood and the current organizational context, with its people’s beliefs.
It’s just not that simple.
What of the questions I posed in the Prologue; have I found the answer – the understanding that I was seeking?
The short answer is Yes.
I now hold the view that the perspective of the majority of people is that managing risk is a natural every day activity, one that for the most part their brains perform unconsciously behind the scenes for them. In their mind, formal organizational and project risk management systems are superfluous because they are neither required nor used when making decisions, the overwhelming majority of which they make without recourse to conscious evaluation.
God’s Brain does it for them.
In my risk workshops and seminars I now ask participants if their organizations have risk registers and dashboards. Most say they have noting that they are not used for real-time decision-making but for reporting and conformance to regulator requirements and auditor expectations.
For me, the emergent challenge is not how to make risk management work but rather how to align – achieve congruency between the objects, tenets and values of organizations and the beliefs of their people.
Do this and risk will be managed appropriately and consistently i.e. risk management becomes a reality because it is embedded in organizational culture.
1/ Taylor, Frederick W., (1911). The Principles of Scientific Management.
2/ Donald Rumsfeld, (2002). NATO Press Conference, June 6, 2002. Retrieved 24 August, 2009 from http://www.nato.int/docu/speech/2002/s020606g.htm
3/ Nassim Nicholas Taleb, (2007). The Black Swan. The Impact of the Highly Improbable. Allen Lane.
4/ Markopolos, Harry, (2010). No One Would Listen: A True Financial Thriller. John Wiley & Sons.
5/ Casti, John L., (2010). Mood Matters. From Rising Skirt Lengths to the Collapse of World Powers. Copernicus Books.
6/ Socionomics – Theory of how the beliefs a population holds about the future biases the types of collective social events that are more or less likely to occur. The Wave Principle of Human Behaviour and the New Science of Socionomics. Robert R. Prechter, Jnr; (1999).
7/ Repenning, Nelson P. & Sterman, John D. (2001).Nobody Ever Gets Credit for Fixing Problems that Never Happened: Creating and Sustaining Process Improvement. California Management Review 43 (4): 64-88.
8/ Pink, Daniel H., (2009). Drive – The Surprising Truth About What Motivates Us. Riverhead Books.
Dr John Bircham
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