Prof. Jan Bosch, 15 February 2021
Recently, the Netherlands experienced some inclement weather including snowfall and strong winds. Interestingly, the entire country shut down with trains not running, highways closed off and recommendations of staying at home. It led to a bit of hilarity in our Swedish household as we experience this kind of weather regularly during the winter months and we just go about our business without blinking an eye. However, Northern Europe had a few very mild winters recently and people started to expect those to become the new norm.
The pattern of assuming that the most recent data points can be used to accurately predict the future is a deeply human trait that we can see everywhere. A dry summer causes people to complain about global warming changing the climate. A successful quarter or two causes companies to assume that the next quarter will be as successful. Typically, we expect today to be like yesterday and tomorrow to be like today. The main conclusion has to be that human intuition simply sucks at applying statistical principles. It doesn’t mean that changes aren’t happening, but it does mean that we typically need a lot more data points before we can conclude anything definite beyond chance.
The primary defense against this is summarized in the proverb “hope for the best; prepare for the worst.” On the personal side, the Stoics practice a habit that I think can be incredibly helpful. Promoted by Seneca, the idea is that you daily imagine the worst thing that could happen to you and try to experience and live through it in your head. This helps you build up the mental fortitude for the situation where something bad does happen so that you don’t collapse under the weight of what life throws at you. And, of course, it also helps you feel grateful when bad things do not happen. A second habit of the Stoics is to, once per month, wear the most basic of clothes, eat the simplest food and sleep in the most rudimentary bed to experience what life would be like if you were to be down on your luck and lose everything. And to do all this, asking yourself that if this was the worst that could happen, is it really that bad?
In business, the key challenge very often is the focus on efficiency. It’s inefficient to put resources aside for cases outside a very narrow band for which companies optimize as these resources aren’t utilized sufficiently. So, companies often fail to proactively prepare for bad situations and need to scramble to respond whenever the market or society suddenly shifts. The ongoing pandemic is a great example of how many were caught off guard.
'Innovation is by its very nature inefficient'
However, the main victim of the focus on efficiency typically is innovation. Innovation is by its very nature inefficient. As a team, you develop hypotheses of what might help develop and grow the business, but the fact is that you’re most likely wrong and will only find out after having spent resources on testing and validating the hypothesis. The very nature of innovation is such that the majority of innovative ideas don’t pan out and it’s the few that do that have to pay for all the failed ones. Of course, principles such as those defined in the lean startup or our research aim to minimize the resources invested in each idea by creating multiple proof points that need to be met to invest more. But the fact remains that innovation is inefficient by the metrics of modern companies.
The main concern of assuming that tomorrow will be like yesterday and today is that you’re woefully unprepared for “black swan” events and become extremely fragile as a business. Some companies invest significant effort in scenario planning where multiple more likely and less likely scenarios of how the future might unfold are evaluated and responses are developed for each of these scenarios. The scenarios themselves will never occur as predicted, but they’ll inform and accelerate the response to what will happen and help in the case of unexpected events.
Human intuition is extremely poor at statistical analysis and companies tend to suffer from “recency bias.” This makes them fragile and brittle, causing them to break and fail in the face of unexpected situations. As the future is fundamentally unpredictable, we need to protect ourselves from ourselves by balancing efficiency and preparedness, conducting scenario planning to have clear playbooks to use and investing in innovation. As Alan Kay famously said, the best way to predict the future is to create it. No matter how inefficient and resource consuming it may be. Remember: prepare for the worst while hoping for the best!