Decision Making

Decision making is an area of interest I frequently return to. Last week I explained how I like to work to a new starter at the firm, and thought it would be a good opportunity to share more broadly.

Building a robust process that supports decision making has been crucial throughout my trading career, but I now find it helpful more generally in many areas of my life.

I outline my approach below. To me, it is both simple and comes naturally. However, I wonder how common such an approach is, given how often confusion arises.

Before I go through the individual steps, perhaps the most important aspect to emphasize is the difference between the steps in yellow, which focus on what we should do, and those in blue which concern how we should go about it. This helps form a clear division between before and after a decision has been made.

Steps in the process

Ideas

This stage is free and unconstrained – the objective is creativity

  • Do not dismiss anything
  • Be open to other people’s ideas
  • Do not worry too much about practicality or attractiveness

 

Suggestions

Suggestions are ideas that are liked, or at least plausible – the objective is initial due diligence

  • Intelligent pushback
  • Alternative suggestions (and perhaps even completely new ideas)
  • Plausibility analysis

(Note “suggestions” is plural i.e. still at the stage of multiple possibilities.)

 

Proposal
The objective here is sufficient detail needed to make a decision.

  • Narrowed to a primary suggestion, or perhaps an examination of a small number of options.
  • Key area is to highlight major issues/red flags
  • No problem suggesting going back a stage for some more ideas and suggestions rather than moving ahead.

 

Decision

A clear moment and where the project transitions to a very different stage.

 

Implementation
Objective here is work out how to do something and actually do it

  • Most people are far more comfortable at this stage

 

To illustrate the process, here is a trading example:

(1) Ideas

Let’s just list a few basic investment ideas:

Buy S+P

Sell S+P

Buy European equities

Buy EM equities

Sell US bonds

(2) Suggestions

We like the idea of long equity exposure
We narrow down to S+P and DAX as the prime candidates

(3) Proposal

After detailed analysis, the proposal from the analysis team is
“to buy $50m of S+P as soon as practical.”

(4) Decision

After review, the proposal is refined, and we decide to buy $75m of S+P exposure

(5) Implementation

At this stage, the process of ideas, suggestion, proposal, and decision can be repeated, this time for implementation. Thus, a decision could be to use S+P mini futures and execute within the first hour of the opening of the US cash market the next trading day.

 

 

What goes wrong?

Over the years, I observe that many people in a work environment show a preference for either the pre-decision “ideas and suggestions” zone or the post decision “implementation” zone, rarely both. Each style can be very useful, but I’ve learnt it’s important to be aware of the differences, to play to people’s strength and to avoid confusion.

Those who prefer implementation:

  • Premature decision making

It’s very easy to start the process with a decision already made, skipping the supporting steps, with any subsequent analysis purely a rationalisation to present to others and ourselves, in other words confirmation bias.

  • Rush to implementation

In the framework above, it is clear an idea is not a decision and also a suggestion is not a decision. In reality, what can sometimes happen is when I suggest an idea, people around me think I have made a decision and move straight to how we would implement. This is especially confusing when it turns out that those same people never thought it was a good idea! People often explain that previous bosses have strong opinions and just expect to get it done. In this respect, I have learnt to be very explicit to avoid causing confusion.

Those who prefer the ideas and suggestions stages:

  • Lack of details

Preferring the positivity and creativity of the early stages, people often don’t value the details or due diligence required to actually make a decision. Red flags or major issues are critical to consider pre-decision, as once the decision is made, momentum makes it hard to go back again.

  • Inability to drill down to a concrete proposal

We can always find another idea or another suggestion.
However there comes a stage of pragmatism in all decision making, when some suggestions need to be discarded, and others more deeply investigated to form a proposal.
This is also the stage where implementation considerations are important; but people who prefer “ideas and suggestions” may not pay sufficient attention to these and so it’s crucial to widen the team.

 

“Plan”

Note that I did not use the word “plan” above. This is because it is commonly used to describe a proposal and also relates to implementation. In fact, these stages share common materials; the details from the proposal will often cover some of the implementation. The crucial difference is one is before decision and the other is after.

Again, people used to working on implementation, can take the details involved in the proposal as indication that a decision has been make. The temptation to move the project along, rather that focus on any issues that may indicate a major mistake.

 


Conclusion

To make good decisions, it’s clear you need both types of people!

Having a team which excels at implementation is a wonderful thing, similarly having people around you that get energised by thinking about new ideas. But even more important perhaps, is making sure that you spend sufficient time and energy on both aspects and find a way to integrate the contributions of everyone.

Thinking about where you sit in the process above, being aware what kind of preferences you have, could be helpful to your career, making you much more effective within teams at work.

Career Tips

I was asked recently to speak at an undergraduate event. Part of it was to give some career advice in the form of 3 tips. Here is what I came up with:

Many people after leaving university find adjusting to the world of work difficult and become very unhappy. Focusing on a lack of “meaning” in their job while searching for a “mentor” to guide them, they can quickly come to resent their firm and co-workers.

It does not have to be this way.

The most important thing to realise is that the workplace is not going to feel like an extension of education – it is completely and fundamentally different. For at least the first two decades of your life, focusing on your knowledge and your skills is the key and the whole environment around you is geared to helping you develop. However, the ability of a student to successfully transition into a happy and productive career has remarkably little to do with the knowledge and skills they start with.

What really matters is how well they can change their mindset.

Here are 3 things to focus on:

  1. It’s not about you any more

This is the piece of advice students generally find the most upsetting. A big change in mindset is required to succeed in a work environment compared to the one needed for education.

In education, the student is the product. The ultimate aim for a student, with the help of teachers, is to gain the skills and knowledge required to pass exams. This does not mean that students have complete free rein to do what they want. There will be various restrictions on behaviour, such as a requirement to go to lectures, prepare for tutorials, do reading, problem sets and essays – however these are all designed with the success of the student in mind. The best attitude for the student is to be focused on themselves and their own needs.

In the workplace, the business is the product. The ultimate aim for a new employee is to become useful. Many graduates find this transition to the workplace a shock. Senior members of staff may not think that a key part of their role is to educate you and make you more productive or happy. In a few years’ time, you will also be more senior too and it will be obvious to you that this is not a priority either. You will want to be productive at work, impress your boss, get promoted, get a bonus etc.

Adjusting to this new reality, the best attitude is to be focused, not on yourself, but on the needs of the people around you and of the firm – Be useful! You will then find good things will start to happen to you. Given reciprocity (see “Influence: The Psychology of Persuasion” by Robert Cialdini), people you help will also help you. Senior people will start to spend time helping you learn and improve. You will have signalled to the firm that you have the right mentality to succeed and so will be promoted more quickly, paid more and given more training.

Having a real job is extremely helpful in preparing you for work and choosing a career path. I spent my Gap year working full time as an economist, but working at McDonalds may have perhaps been even better. You need to understand what it is like to be the other side of the counter.

  1. Be flexible.

In education, a targeted focus and narrow determination are extremely helpful for excelling with high results. The world of academia is fragmented and siloed, with status derived from expertise in ever more specialised areas.

The world of work is very different. A modern and successful career will come with many parallel and some orthogonal leaps into new areas, combined with an ability to master a broad range of cross-disciplinary problems.

I could easily have become a consultant or economist and I think I would have really enjoyed it and been successful. In banking and hedge funds, my career could have gone in lots of different directions. The only way to take opportunities is by being open minded.

  1. Work with people you would like to become.

This piece of advice was given to me as an undergraduate, and it has repeatedly proven itself true as my career developed.

Don’t think that you can join an Investment bank for the money and not become like them. Either you will change to fit in, or you will not and you will hate it and leave.

You must judge it from meeting real employees, not from impressions from TV shows. Being a lawyer is not the way it is on Suits just as being a Hedge Fund manager is not like Billions (well mostly anyway). That is why internships are so useful.

Conclusion

The world of work is can be a stimulating and fulfilling experience. For that to happen you need to be able to have the right mindset to take advantage of the opportunities on offer.

Feedback

As a member of many teams over the years, both leading and contributing, I have learned a lot about feedback. How it is dealt with is a core aspect, not only of work culture, but also in all our relationships. In this post, I will deal with the kind of feedback which is meant to have a purpose, that of improving performance, often thought of as coaching.

Coaching is at its most useful when it is an active exchange of mutual learning. On the one hand, I find I learn so much trying to explain concepts to others, whilst on the other hand I very much enjoy the experience of being coached myself. Effective coaching is rarely dominated by telling people what to do.

Encouraging self-reflection and evaluation within a context of mutual respect and desire for improvement are critical to achieve progress. You cannot presume that someone wants a coaching relationship with you, and they may perceive attempts to coach them as unwarranted criticism.

I think it is helpful to break feedback down into 3 types: praise, encouragement of self-reflection and evaluation, which can be either objective or subjective. It is also important to make a distinction based upon the type of relationships or power dynamics involved.

This leads to a grid, similar to the one used in “How to Write”.

Type 1 – Praise

Very often when people say they want feedback, they only want praise and it quickly becomes a vacuous form of feedback. We have all heard the disparaging stories of “millennials” who are conditioned to expect it. Indeed, I have come across this problem with juniors but I feel anyone adjusting to the world of work, especially straight from university, may find the real-world environment a challenge. I probably did myself.

People who have had a career in a more protected environment, or who have low self-esteem, may also need frequent reassurance that their work is valuable. We see that praise is the only form of feedback that Donald Trump can tolerate. Whereas seasoned and successful professionals tend not to seek praise as much. They know that when validation of their work comes, it is well deserved but their self-esteem is strong enough not to require it.

Like most people I enjoy being praised, but If I am highly praised for something I do not consider particularly worthy, then it has very little meaning to me. My greater desire is to learn and improve, so I actively seek other types of feedback. However, I do believe that praise is underrated as a feedback tool and it can be a very effective form of teaching, positively reinforcing good behaviours if used selectively. This is the way that I like to use it and to receive it.

As parents, praise is totally natural, we proudly clap our children at the slightest provocation. Children are naturally experimenting with behaviours and desperate to learn through new experiences, so selective reinforcement is very powerful. Genuine strong praise for a child who has tried hard at something is mutually rewarding and comes very naturally.

Overall, my approach is to try to use praise genuinely, but it is not as easy as it sounds. At work, I often start with praise but mix in other forms of feedback. This often carries the risk that the recipient may not hear the praise at all, and in fact perceive the whole conversation as pure negative criticism, especially given our power relationship. Furthermore, where the need for praise is too strong, then validation becomes an obstacle to learning in itself. If they receive a lot of praise, then why change behaviour?

A general principle is that people tend to give out the type of feedback they like to receive themselves. If I am managing a person who only wants praise, I struggle to manage them and these relationships have not worked for either of us

Type 2 Encourage self-evaluation

This is simply asking someone their thoughts on what they did or how they feel something went.
This is a type of feedback that may not register as feedback to many people, it does not involve any praise or criticism, no evaluation or active coaching.
The idea is to encourage reflection and to start a conversation from which you both can learn.

This style of feedback comes naturally to me and is most enjoyable if the other person wants to participate. Receiving this type of feedback from investors, it led to the most enjoyable and engaging conversations and I think I learned the most.

Remember the most common source of this form of feedback is yourself!

Type 3a Evaluation – Objective

This is a very important type of feedback if you can get it.

In modern sport, virtually every facet of the game is reduced to statistics which can be measured and help form the development of training drills to enable a player to improve. Purposeful practice requires a solid feedback mechanism.

Learning without a reliable feedback mechanism makes objective evaluation much harder. Learning to trade for example. A market making environment lends itself to objective evaluation as the number of transactions is likely to be high and the speed and accuracy of pricing can be easily observed. But it is one of the reasons that learning to trade by taking risk in markets is difficult, as in the short term the element of luck is large enough to create noise in the consequences of your decisions.

If evaluation is clearly objective and applied transparently to all staff, then it is likely to be accepted. But the attractions of this type of feedback are also its drawback. It is appealing to generate objectives which are measurable, but not necessarily relevant to the goals of the organisation. Think of the Blairite obsession with targets in health and education, which created distortions in incentives.

Type 3b Evaluation – Subjective

Subjective evaluation is the most overused form of feedback, and most people seem to think this is what feedback is. If you look at the forms that HR demand you fill out for conversations with your staff, you will see the word evaluation everywhere. This is often combined with a requirement to assign scores or rankings to various aspects of the employee, creating the illusion of objectivity but they are actually the opinions of the manager.

Subjective evaluation may have a place. If your intent is to make a complaint then this can take the form of a negative evaluation, for example if you want to complain to a hotel you can give a low rating on TripAdvisor. But there is wide variation in the quality of such comments. In large firms however, negative evaluations are used almost exclusively as part of the process of firing employees.

When I ran a large fund, I had hundreds of investors, old and new, continually evaluating me. If I agreed with the evaluation, it was likely it became an experience of being berated rather than a learning point. If I did not agree with the criticism, I still had to take it.

In close work environments, the giving and receiving of such feedback can be a minefield. It can be hard to receive emotionally, especially when the receiver doesn’t accept the view or worse the right or competence of the person to evaluate them. Unsolicited feedback is pure criticism – no one likes to be criticised. This is why, in practice, most work evaluations turn into exercises of giving praise, even when it is not genuinely deserved.

The relationship matters

What is striking about the workplace is how little useful feedback is given and/or taken.

If you are the in a position of authority, care must be taken not to blindly hand out feedback that could be construed as pure criticism. Remember anything you say has a magnified impact, given the nature of your relationship. Consider layering in the various forms of feedback I mention, remember the idea is to help your employee, not to add unnecessary strain or distance.

If an employee receives feedback that they don’t like, it can often be seen as confrontational or rude, and instead of trying to work out what was the purpose of such feedback the employee is more likely to grumble about them behind their back. A very poor outcome for both parties.

If you are a person who wants to improve, you need to actively seek out feedback from people you respect, this is key to improving performance. Avoiding criticism is an ingrained social habit, so bear in mind you need to be prepared for an honest evaluation. Keeping any defensive reaction in check is important as if you react defensively, you are likely not to hear honest feedback again. You should thank the person for the feedback and do your best to understand it. If you think it is completely wrong, then you still have an important learning point, that someone you respect perceives it to be true.

Conclusion

How to manage feedback is one of the most important aspects of work culture and defines whether your organisation is going to merely stagnate or rather learn and develop.

As a giver of feedback, it is important to recognise what kind of feedback the person wants and will be able to process.

As the receiver of feedback, you have the main power. You can be defensive and only accept praise, or you can actively solicit opinions which you can incorporate into your learning process.

Decision making – idea generation

“when you have eliminated the impossible, whatever remains, however improbable, must be the truth” – Sherlock Holmes “Sign of the Four”

I am a Sherlock fan but I am afraid this statement is nonsense and reflects a common error in how we make decisions. The statement above is incorrect because what is left after eliminating the impossible is not only the improbable ideas you have, but also all the ideas you did not come up with. It is more likely that the answer is something you did not think of because you limited your possibilities too early in the process.

I saw a good friend of mine this week who has been very worried for the past two weeks about a business problem. He had put a lot of time and energy into preparing a space to display artwork, but now it seems the lease might fall through due to issues beyond his control. He appeared stuck in a loop, thinking he had no control of this situation. I suggested we use an approach that I use all the time when looking at investment ideas.

  1. Write down all the things that could happen.
    This is an exhaustive list of all the possibilities you can think of. Include items which you think are “impossible” but are in fact just ones you dismiss because they seem too hard. I lead the way by insisting on putting an idea down he has previously told me is ridiculous. With that as the benchmark for how bad an idea can be and one that still makes the list, he came up with a dozen ideas in less than 10 minutes.
  1. Go back to each one and write 2 or 3 sentences about why this outcome would be good.
    Do not evaluate them, do not mention any potential obstacles or negatives. I refused to listen to them and cut him off every time he starts. I kept telling him that we would get to the negatives next and then he could explain to me why this idea was stupid. I call this stage “suspension of disbelief”. Once he released his imagination, he became very animated about many of the ideas. Including the ones he did not want to even put on the list because they were “impossible”.
  1. I lied. We are not going to look at the negatives now. Make Action points!
    Instead, go back over each of the items and work out what the action point is (AP) to take it forward. This is the information gathering phase. After you have done each of these, write down what you have discovered and let’s talk again and start to evaluate the ideas.

If you go back to my first 2 posts you can see the same basic idea.
To be creative you need to separate the idea generation phase from the analytical evaluation phase.
I hope to use this blog over time to share some of my investigations of ideas which even I may think hard to justify. But to come up with really good ideas, you have to be willing to entertain a lot of really bad ones.

“It is a capital mistake to theorize before you have all the evidence. It biases the judgement.” Sherlock Holmes “A Study in Scarlet”.

Well said Sherlock.

Creativity

The advice I always give to my analyst team is to send their work BEFORE they had completely finished it, especially before they have polished it. I want to see the spreadsheets, their workings and their ideas before they had settled on an answer.

The advantages of sharing early

  • I get to see all the underlying data.
    Given time they will clean it up and only present the “relevant” data. Seeing all the data and associated thoughts, I may assign different importance to information they have discounted or draw different conclusions
  • I get to see a variety of possible ideas and views
    If they are given time to polish it, then only one view will be presented
  • We can have a vigorous, enjoyable and creative conversation.
    At this stage, other people’s input and ideas are useful as the answer is not fully known.

If I get the final product later

  • The final version will be well argued and compelling
    After all, my team are smart! It will be full of supporting data and information. The best analysts may also present some counter-arguments but no-one seems to represent the messiness of reality or admits they have no idea what is going on.
  • They will be proud of the work they have done.
    This means they will be protective, taking comments as criticism and most likely personal criticism. This leads to a conversation which will likely be professional, non-creative and pretty dull.

How I like to work

In the context of my previous piece on writing, I like work where there is an active response but no evaluation or criticism from allies and peers (middle-centre box in the grid); not a piece that has been written for evaluation by the boss (top-right box). I understand that this may not be standard, in fact it is the cultural opposite to how Ray Dalio describes Bridgewater in his “Principles”. This perhaps shows that many different approaches can be successful but it is important to know which one works for you and make sure you stick to it.

In this blog, I will try to follow my own advice. The posts may not be analytically perfect, well-footnoted or accurately referenced. The views presented will be ones that are liable to refinement and even complete reversal as more information and better analysis is included.

I hope this does not turn out like Charles Foster Kane’s Declaration of Principles.