Beware of the Bell Curve Fallacy

I recently finished reading one of the most popular business books of the past couple of years titled "The Black Swan: The Impact of the Highly Improbable" by Nassim Nicholas Taleb.  Although I found the style and tone to be a bit tedious, the book did provide enough thought-provoking nuggets to keep me engrossed to the end.

Taleb’s basic argument is that humans are most comfortable viewing the world through the tidy bell-curve predictability of a fictional place he calls "Mediocristan," while in reality our world is shaped by the wild power law swings of "Extremistan."  He concludes that this tendency to march forward with the assumption that tomorrow’s events will fall neatly into the parameters of past experience often leads us to take on more risk than we realize.

The success of the book was undoubtedly bolstered by the improbable occurrences that unfolded in the financial markets during 2008-09.   In the wake of such events it’s easy to agree with Taleb’s assertion that the world’s top economists are mostly “idiot savants” whose highfalutin mathematics are no better at predicting market movements than a magic eight ball, but I was looking for something more than that.  After investing several hours in the book, I sought some practical insight that was relevant to my work.

As a result, what I was most drawn to was Taleb’s commentary on ‘epistemic arrogance’ or the hubris concerning the limits of our knowledge and ‘confirmation bias’, which is the tendency for people to confirm their own preconceptions or hypotheses.  Anyone who’s been around the corporate block a time or two has seen these elements of human nature at work.  They can cause even the most astute business leader to unknowingly ignore competitive threats, or miscalculate new market opportunities and resist operational change when it’s needed most.

So what are we to do?  Well, for starters I would suggest that we all exercise a little humility every now and again and acknowledge our inherent inability to know everything about everything.  I understand this is becoming more difficult in a world that’s teeming with data points, but it is essential for complex organizations to function with cohesion and purpose. 

Today, many large organizations are inundated with more data than they are able to process in any consistently meaningful way – especially in the areas of pricing, competitive intelligence and promotional performance metrics.  As a result, business units, product groups and sales teams are often left to compile their own data from various sources and to manage it through a hodgepodge of tools and methodologies.  This siloed environment is a Petri dish for the epistemic arrogance and confirmation bias Taleb describes.

As out of control as it can all seem there are solutions available to organizations that possess the self-awareness, leadership and competitive drive necessary to pull it off.  These solutions, of which Vistaar is included, leverage a People, Process, Technology (P.P.T.) framework that fosters productive collaboration across the enterprise.  The basic idea behind this is that sharing accurate information that is most relevant to stakeholders across standardized processes promotes more consistent and informed decision-making.  In essence, “the whole is greater than the sum of its parts”, as having people across functional groups working systematically and collaboratively off of one version of the truth creates natural synergies and check points in the process.

Now I’m not asking you to believe that any one solution or framework will neutralize even half of our human shortcomings, but I can say with confidence because I’ve seen it first-hand, that organizations that acknowledge their presence and proactively work to mitigate their impact are less likely to suffer their ill effects.

What has been your experience?  What has your organization done to improve its process management and decision-making capabilities?  I’d love to hear your thoughts, as I know there are a lot of people who have some strong feelings on this subject.

Comments

[JP]

interesting. i have not read the book but i cannot help but think of the old Gilette strategy, "make yourself obsolete before your competition does". i think there are many examples of this strategy hedging against 'epistemic arrogance and confirmation bias'. in essence, this means that R&D is never done.