The Power of Three: Part 2: Complex Mechanical/Adaptive Systems

In the Power of Three: Part I: Mental Models, I distinguished between complex systems and complicated systems. Both systems have many interacting parts, but a complex system is what remains after all irrelevant parts have been weeded out of a complicated system.

I now want to explore further the various types of complex systems. First there are two broad categories of complex systems. These are complex mechanical systems and complex adaptive systems.

Complex mechanical systems are systems whose many parts and their many interactions remain fixed or which have a very limited range of change. Most complex machines are complex mechanical systems and hence the name. But not all complex mechanical systems are machines. For example traditional command and control organizational structures that characterized armies and business until recently are complex mechanical systems. Complex mechanical systems can be understood by understanding how the individual parts work and how they interact with each other in producing a limited amount of behaviours. For example, consider an airplane. An airplane has many thousands of individual interacting parts; some of these parts are themselves made up of several hundred subparts. Nevertheless, a few interactions on some of the parts are transmitted to many other parts in a predetermined manner so as to allow a trained pilot to fly the plane. The trained pilot can rely on a dashboard, which reports the state of some critical parts, and ignore the state of all the other thousands of parts, to determine what to do next. The pilot can ignore the other thousands of parts because their behaviour is completely determined by the few critical parts whose state is displayed on the dashboard. If something goes wrong in a complex mechanical system, by which we mean that it does not behave as expected, the root cause can be determined, the defective part can be repaired or replaced and the system is ready to start functioning as expected once again.
To summarize then, if we understand the individual parts and the interactions of the individual then we can understand and therefore control the behaviour of the complex mechanical system as a whole.

Applying the principles of complex mechanical systems over and over again has created the most advance machines and most of the organizations structures that our society daily depends on.

Many business managers, and nearly all management consultants and business academics believe that organizations are complex mechanical systems. Hence their penchants for developing dashboards, scorecards (balanced or not), and root cause analysis and their ten rules for this and their sixty rules for that.

However we are reaching the limits of what we can next create with complex mechanical systems. Sure we can create a billion more variations of the millions of complex machines we have already created but that is what they will be: variations of what we already have. To create whole new ideas, products and services, not simple extrapolations of what we already have, we will have to look for a new mental model. That new mental model is derived form studying complex adaptive system. And organizations, which act as complex adaptive systems, will not need dashboards, scorecards, root cause analysis or the ten rules of this and the sixty-five rules of that to be well managed. Instead they will need the tools and rules that come from complex adaptive system. And these will usually be the Three Things, but more of this will be explored in a future posting.

The Power of Three: Part 1: Mental Models

In his book: the One Thing You Need to Know, Marcus Buckingham (link) presents his conclusion that even the most complex topic can be reduced to a core concept or insight. This One Thing is all that really matters and all else is either details or distractions. Now that is a very powerful idea. Instead of wasting time considering all that I need to know to successfully deal with a particular issue, be it leading, managing, investing, or whatever, I only have to discover the One Thing, and then apply that one thing. In this over complicated, information overloaded world, this simplification is truly a welcomed relief. And yet perhaps, to paraphrase Einstein, this is the case of having made the world not as simple as possible but crossed over into having made it simpler that its. Topics, at least those that are important, are unfortunately complex. Note I said complex not complicated. A complex topic has many necessary interacting parts; a complicated topic is one with many unnecessary parts. Most topics when first encountered appear to be complicated because we lack the knowledge to distinguish what is relevant and want is not. However, once this knowledge is gained, and all the unnecessary parts are removed, we are often left with a complex but uncomplicated topic.

In my experience, to deal with complex topics what is needed is not the One Thing, but the Three Things. Three clear and simple things, that is.

Why the three things? Well because, each one of these three things can then be broken down into three things and so now there are 9 things and if each of these is broken down into 3 things then there are 27 things and so on. In so doing, any topic from the most simple to the very complex can be reduced to a coherently structured lattice of parts and their interrelationships. Some of you may already be familiar with this approach. It is has been applied successfully to decision analysis and goes by the name of decision trees.

You cannot do this with the One Thing. Pursuing the One Thing approach leads to only One Thing at any level no matter how many times it is applied, and therefore cannot possibly capture the complexity of the thing. (See picture to the right). Some will say that I am missing the core point of the One Thing. They will say: you start with the One Thing and then you build out as many branches and sub branches as are required. This allows you to replicate the complexity of any topic, just like the Three Things. This is in-fact what Buckingham does in his book. He first identifies a core One Thing for each of the topics he is investigating and then attaches many branches to the core thing.

There is, however a very important difference between having a core thing with many branches and a lattice of sequential Three Things. The One Thing simply shifts all the complications one level down to the numerous branches and as with any complicated thing, makes it very difficult to understand and remember. The Three Things lattice provides a coherent simple structure of interconnected parts that is easy to remember, and easy to use. As Charlie Munger said, “If the facts don’t hang together on a latticework of theory, you don’t have them in usable form.”(Link)

At this point you may ask why Three? Why not Eight things? Well I know it is more than One and anything more that Five is very difficult to carry in one’s head. Three works for me.

Below I describe the first level of Three Things lattice for various topics:

Investing: to invest successfully you need to:
1. identify valuable companies (good management, wide moat)
2. buy valuable companies selling at a discount
3. sell when companies can no longer sustain their value.

Leadership: to lead others you need to:
1. gather and keep followers,
2. keep rivals in check,
3. adapt to change

Project Management: to deliver a project on budget and on time you need to
1. well define the scope,
2. specify the time line,
3. secure necessary resources

People Management: to successfully manage others you need to
1.. focus strengths
2. leverage strengths
3. catalyze strengths

Risk Management: to avoid losing value you need to
1. determine the risk (amount and odds)
2. take or leave the risk
3. control the risk if you take it

In future postings I will build the lattice for each of these.

Clear and Simple Thinking: Business Books

I am always fascinated by why hard nosed, no –nonsense business leaders fall for the nonsense that passes for sound business advice and formulae for business success. What’s more fascinating is that this supposed well researched advice which often is peddled by well respected super star business professors or consultants, is part of a of a long list of contradictory advice. One advice, based on a compendium of data (read anecdotes) tells you do this, while another based on another set of extensive data tells you do the opposite. What do you mean you make ask? Just go to www..Amazon.com, search for business books and a very long list of books awaits you. Next read a random sample of the book descriptions and you will see exactly what I mean.
How can this be? It reminds me of what Richard Feynman said about psychology. To paraphrase Feynman, the problem he said was, that unlike physics, psychology had too few hard facts and too many easy anecdotal associations masquerading as scientific explanations. Feynman is an excellent storyteller and he illustrates this by this story. A famous psychologist was lecturing on the criminal mind at a gathering of psychologists. After the lecture, the famous psychologist was asked why the criminals he had used in his case studies developed the criminal mind. It is easy he answered. His research showed without a doubt that the criminals had not been loved enough by their mothers. Someone in the audience then pointed out that some of the criminals the professor had studied actually came from very loving households. It obvious, the professor replied, in those cases, they were loved too much. Unlike physicists which are content to say we just don’t know, while energetically searching for answers, it seems that psychologists have a very strong need to have an explanation for everything and everything for an explanation. And that is what makes psychology less like astronomy and more like astrology.
So to with business management explanations. Now I am not the first to make this observation. It fact, it has been made much more extensively by Professor Philip M. Rosenzweig in his book: The Halo Effect: .and the Eight Other Business Delusions That Deceive Managers ( link)

The latest example of muddle thinking, which will surely confuse rather than illuminate, comes from Prof Roger Martin’s new book: The Opposable Mind. (although the book is not out yet, I have gather the following information form excerpts that have appeared in the Globe and Mail) Professor Martin has studied what successful business leaders do and concluded that they think differently then the rest of us. He has coined a new term for this different kind thinking. He calls this different kind of thinking Integrative Thinking. And by this he means the ability to simultaneously hold opposing ideas and models in their heads while they work out new solutions to seemingly intractable problems. He cities all sorts of situations where business leaders have supposedly triumphed because of their ability think intergratively.

There are at least two problems with this book. First what is integrative thinking anyway, but let’s leave aside this for the moment and see, even if such a way of new way thinking exists, what is the evidence that it actually works. Although Prof Martin, thinks he has provided substantial evidence throughout his book, he as actually provided none. As professors Rosenzweig and Feynman have pointed out, in order to conclude that integrative thinking actually was a success factor we would have to analyze not just the successes as Prof. Martin has done but also at the failures. By looking at only successes we will erroneously conclude that any attribute that was present is a success factor. For example, the vast majority of successful business leaders studied by Prof. Martin happen to be male. Using the same reasoning as Prof Martin, we could erroneously conclude that being a male is a success factor in working out new solutions to seemingly intractable problems But to support that conclusion we would have to look a failures and find out that the vast majority of the failures involved females not males. Since casual observation shows this not to be the case we can quickly conclude that being male is not a success factor. So before Professor Martin can conclude that interrogative thinking is a success factor let alone THE success factor, he needs to look at failures and show that the reason for the failure is the lack of integrative thinking. We are not asking more of Professor Martin than what we ask medical researches to do when they test for the efficacy of a medicine.

Now lets us return to the very concept of integrative thinking. Either, it is nothing new and simply says that some people, when confronted with two options each of which are not satisfactory, can (sometimes) find a third way that works. So if this is what Professor Martin is saying what is so insightful about that. It is like saying what works works! Or it is a very innovative approach. If it is an innovative approach then don’t look for it in this book because a simple and clear description of the approach, other than the obvious one mentioned in the above, is nowhere to be found.

Just add this book to the ever growing heap of feel good muddled thinking business books.

What is Risk Anyway?

There is so much confusion about what is risk and risk management even among professional risk managers that one has to wonder how much of this confusion contributes to the recurring risk management crises such as the current subprime mess.

I have often heard that risk management is everybody’s business, which means that it is in effect nobody’s business. Or I hear the risk of this and the risk of that and so on and so on which makes it sound as if everything is a risk, which effectively means that nothing is a risk. Science has achieved results, where other approaches have not, mainly because it took undifferentiated blobs (things or concepts) and separated out its components and developed an understanding of the properties of each of its components and their interrelationships. I think this approach could help remove much of the misunderstandings current running rampant within the risk management profession.

I recently read an article in which the CRO of one the world's largest financial intuitions was quoted as saying that business is about taking risk. Now that’s a fine example of muddle thinking, if there ever was one. Does that CRO really believe that everyday business managers wake up and say, “Which risk will I take on today?”

Business is about making money, period. Unfortunately, in this world, most of the time when we set out to make money so many things can go wrong that instead of making money we end up losing money. And risk is simply the potential to lose money. And so hopefully for the shareholders of that financial institution, what the CRO meant is that in taking actions to make money, business managers have to take on risk. So far so good, but not very insightful. Hopefully that CRO also meant to say that just as there are so many ways of making money there are so many levels of risk for any one of those ways. Put more simply, by taking action A you expect to make X, but you have the potential to lose Y. However, if you restructure action A you can still expect to make X and only potentially lose much less than Y. And that is what risk management is all about.
The current subprime mess and all its collateral losses runs in the trillions, once the share value losses suffered by the shareholders of financial institutions are added to CDO investor losses. Perhaps if CROs were more clear in their thinking the losses would have been much much smaller.