A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)
We are all familiar with the postmortem examination that follows a disaster, along with the accompanying blame game. Such “a posteriori” analysis inevitably suffers from hindsight bias; everyone suddenly thinks that the disaster was predictable and that different actions could have caused alternative outcomes. Richard H. Thaler, considered the father of behavioral economics, recently reminded us of an alternative approach; the ”The Premortem”. Thaler states that premortems help overcome natural organizational tendencies toward groupthink and overconfidence by introducing a devil’s advocate in the decision making process. This is the skeptic that pricks new projects or ventures to uncover unfounded assumptions or to dissect the specifics of processes and designs. While an unpopular function, the point of the exercise is thinking of reasons why a project could fail and guarding as much as possible against it. Thaler also suggests a subtler form of premortem that can help generate creativity and critical thinking. An example illustrates how this approach can work: Suppose a pension plan director communicates to her staff that she just learned that the plan will fail within 5 years. Why? Of course, some will think that contributions are too low or that the investment portfolio is not achieving the desired results. But real progress will be made by thinking of much more mundane explanations. Suppose someone suggests that the cause could be a lack of awareness among participants and lack of education about the importance of contributions. This type of thinking can tackle incorrect assumptions and processes that are thought to be working smoothly. In the end, it is an alternative path to increasing effectiveness and efficiency in our endeavors, something we should all be thinking about in what promises to be a challenging 2017.
by Myrna Rivera, CIMA®
Founder & Chief Executive Officer
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