Most people are troubled by uncertainty. We want the world to make sense, be predictable and act according to clear rules of cause and effect. We like to believe that good efforts will be rewarded and the wicked will be punished.
In When Bad Things Happen to Good People, Abraham Kushner wrote that people want the world to be fair, just and predictable. They constantly search for connections, “striving desperately to make sense of all that happens.” It is a natural human longing. But as Kushner observed, our desire for certainty will never be satisfied. The universe has a few rough edges and every action cannot be traced to a specific cause.
The same holds in business. Managers want to believe the business world is predictable and that specific actions will lead to certain outcomes. Not surprisingly, much of what is written about business – by reporters, management gurus and business school professors alike – caters to the desire for certainty.
Many business articles and books claim that if managers just follow a particular set of steps or formula, they will achieve high performance. Some of the biggest best-sellers in recent years have proposed a blueprint to lasting success, a solution that offers a fail-safe way to dominate a market, or the path to make the competition irrelevant. Books often make dramatic and eye-catching promises as they clamour for attention.
But a closer look suggests that more than just exaggeration is going on. Many of these books are fundamentally mistaken and are based on some basic misconceptions about the nature of the business world – in short, they are founded on delusions. In this article, I will discuss three common delusions that are related to certainty.
The delusion of absolute performance
One of the most appealing claims found in business best-sellers is that the performance of an individual company depends on what it alone does, regardless of what any other company does. Success, some business gurus have said, is largely a matter of choice. Companies can choose to be great.
The message that my success depends only on me, not on anything around me, is an inspiring one. But it is simply not the case. Part of the problem is that we often think of images from laboratory research. Put a beaker on a stove and you’ll find that water boils at 100 degrees Celsius, a bit less at high altitude. Line up a hundred beakers on a hundred stoves and you’ll still find that water boils at 100 degrees Celsius. One beaker is not affected by any other. But that is not the way business works. In a competitive market economy, the performance of one company is always affected by the performance of other companies.
Take Nokia. In 2002, it enjoyed the leading market share in mobile phone handsets, with a 35 per cent share of the market. Profits and growth were high, and the share price stood at record levels. By 2004, Nokia’s revenues were flat at $36bn and its margins were squeezed, while market share declined to less than 30 per cent and its share price fell sharply. Had Nokia’s performance worsened? It appeared so. But by most objective measures, Nokia had improved – its handsets were more advanced, its supply chain management more efficient, its quality higher.
Nokia’s performance had to be understood in relative terms – by recognising the rise of competitors like SonyEricsson, Samsung, Motorola and BlackBerry, by considering the unpredictable nature of customer taste, and by taking into account an overall slowing of market growth. It is not correct to think of company performance in absolute terms – in a market economy, success is always a relative matter.
Companies compete for customers, for capital, for employees and while their success is not a zero sum game, neither is a company’s performance unaffected by others. A company can get better in many objective ways, such as quality, cost, throughput time or asset management, but if rivals improve at a faster rate, performance may still suffer.
The delusion of absolute performance diverts our attention from the fact that success in business means doing things better than rivals, not just doing things well. It is potentially very serious because it may cause us to take our eye off rivals, and to avoid decisions that, although risky, may be essential for survival in a particular context of industry and competitive dynamics. Believing that success follows predictably by following a simple set of steps misunderstands a key element of business success.
The delusion of inputs and outcomes
Our desire for certainty leads to a second delusion, which concerns actions within a company. We like to believe that good outcomes come from good actions, and that bad results mean someone blundered. This delusion is widespread. One recent book, which claimed to have conducted extensive research about more than 100 companies, suffered from just this error. It began by picking examples of unfavourable outcomes, then inferred that a mistake had been made. Companies were either accused of having done the wrong things, or having done the right things badly. Nowhere was there recognition of a third possibility, namely that managers made good decisions that happened to turn out badly.
Yet in a world of uncertainty, actions do not always lead predictably to outcomes. Again, consider Nokia. When its relative performance declined during 2000-2003, it was tempting to infer that someone had blundered. Business magazines were quick to lay blame. Executives were said to have erred by failing to adopt clamshell handsets and by resisting the trend to customising handsets with logos of network operators.
Yet, if we recognise the fundamental uncertainty surrounding these decisions, it is not clear that these decisions were in error. That some choices do not turn out well does not mean that they were necessarily mistaken. In the business world, as in most walks of human life, inputs and outcomes are imperfectly connected. Suffering from the delusion of inputs and outcomes can be serious because it suggests that unfavourable outcomes are, as a matter of certainty, the result of a mistake. It leads us to affix blame even when no errors were made.
The delusion of organisational physics
These delusions lead to a third one that is even more grandiose and sweeping in scope – that the business world somehow follows a predictable set of laws akin to physics. Some books have been explicit on this score, claiming to have isolated eternal, immutable laws that govern company performance. They promise that managers who follow the advice in the book will achieve success with a certainty matching scientific experiments and that business lends itself to the precision and predictability of physics.
Of course, this is a delusion, based on a misguided search for certainty. Why do managers continue to find this delusion so appealing? Writing in Fortune, Stanley Bing pointed out that managers are fascinated with science because it creates the illusion that the business world is governed by the coherent laws of the natural world, rather than by the unpredictable folly of human nature. (Yes, I know about Heisenberg’s Uncertainty Principle, but that holds at the level of subatomic particles. In the Newtonian world where you and I live, physics is the most precise, accurate and certain of the sciences.)
The delusion of organisational physics implies that the business world offers predictable results and conforms to precise laws. It fuels a belief that a given set of actions can work in all settings and ignores the need to adapt to different conditions: intensity of competition; rate of growth; size of competitors; market concentration; regulation; global dispersion of activities and much more. Claiming that one approach can work everywhere, at all times, for all companies, has a simplistic appeal, but does not do justice to the complexities of business. It is a delusion.
Why then are so many business books of questionable quality so popular? Not because they are based on solid evidence, but because they work well as stories. They inspire us and comfort us. They reassure us that our good efforts will lead to success. They provide a sense of certainty. But they do not accurately grasp the reality of the world around us.
As Stephen Jay Gould, the renowned evolutionary palaeontologist, once wrote: “We live in a basically unpredictable world, featuring histories dominated by contingency – that is, actual patterns that make good sense and become subject to interesting and sensible explanations once they unfold as they did, but that could have proceeded along innumerable alternative routes that would have yielded just as sensible a history, but that did not gain the good fortune of actual occurrence.”
Many managers are uncomfortable with contingency and are attracted to promises of certainty. We would like to believe the assurance of predictable results for our actions but in our desire to provide a coherent direction to events, we may see trends that do not exist or infer causes incorrectly. We may ignore facts because they do not fit into our story.
Mastering ourselves
Rather than trying to master uncertainty, managers would be better off mastering themselves by changing the way they approach questions, adopting a mindset of probabilistic thinking and replacing certainties with an appreciation for uncertainty. A good example here is Robert Rubin, who served as Treasury Secretary under President Clinton after many years at Goldman Sachs. His memoirs, In an Uncertain World: Tough Choices from Wall Street to Washington, are a study in decision making under uncertainty.
Many of Mr Rubin’s years at Goldman Sachs were spent in the field of risk arbitrage, which involves buying securities that are subject to a major event, such as a merger, divestiture or bankruptcy. It was highly complicated but potentially also highly profitable. Risk arbitrage did not lend itself to exact, formulaic calculations, but always involved uncertainty.
Mr Rubin approached arbitrage decisions as a sort of mental discipline, or “a process of weighing odds in a world without absolutes or provable certainties”. His approach was to consider alternatives, try to understand probabilities and then make the best judgment possible. He never imagined that success was certain, but rather tried to raise the chances of success.
Often Goldman Sachs came out ahead, but sometimes deals went sour – yet that did not mean the decision had been wrong. Rather than judge a decision solely on the outcome, it is more helpful in a world of uncertainty to examine the decision-making process itself. Had the right information been gathered or had some important data been overlooked? Were the assumptions reasonable or had they been flawed? Were calculations accurate or had there been errors? Had the full set of eventualities been identified and their impact estimated? Had Goldman Sachs’s overall risk portfolio been properly considered?
This sort of rigorous analysis, with outcomes separated from inputs, requires an extra mental step, where actions are judged on their merits. For Robert Rubin, this sort of thinking was natural. His view of the world was based on probabilities and uncertainty. He wrote: “Some people I’ve encountered in life seem more certain about everything than I am about anything. That kind of certainty isn’t just a personality trait I lack. It’s an attitude that seems to me to misunderstand the very nature of reality – its complexity and ambiguity – and thereby to provide a rather poor basis for working through decisions in a way that is likely to lead to the best results.”
The search for certainty in the business world is misguided because it leads us to overlook the essentially unpredictable nature of business. It can cause us to underappreciate the need for bold and risky actions, which are precisely the sorts of initiatives that are needed to set one apart from competitors.
We may wish to reduce uncertainty, but we can never master it and should not expect to do so. The physicist Richard Feynman once remarked: “I can live with doubt and uncertainty. I think it’s much more interesting to live not knowing than to have answers which might be wrong.” For managers, recognising the basic nature of uncertainty in the business world and working with it, rather than vainly trying to deny or solve it, is not only more interesting but likely to be more effective.
AUTHOR INFORMATION
Phil Rosenzweig is professor of strategy and management at IMD. He is the author of “The Halo Effect and Other Business Delusions”, to be published later this year by The Free Press.
