This article first appeared in edition 07 of Accountancy Futures journal (August 2013).
This article first appeared in edition 07 of Accountancy Futures journal (August 2013).
In obliquity we learn about the structure of a problem by the process of solving it. Iteration and experience lead us to the best principles of analysis.
There is a story – perhaps apocryphal – of a professor of decision sciences at a prestigious business school who received an attractive offer from another highly rated institution. He sought the advice of a colleague. ‘You, of all people, are surely well equipped to make such a decision,’ said his friend. ‘Don’t be silly,’ replied the professor, ‘this is serious.’
The success of the physical sciences has encouraged us to believe there might be a science of decision-making. All kinds of problems in our business and our financial lives, in the political sphere and in the personal, could then be managed objectively. Such a scientific procedure would, if done carefully enough, lead every conscientious person to the same answer. As a result, both political and personal disputes could be resolved by the collection of evidence and the pursuit of rational discourse. The distinction of the great business leader, the measure of financial acumen, would rest only on the ability to arrive at the right answer faster and more reliably than other people.
There is not, and will not be, such a science. Our objectives are typically imprecise and multifaceted, and change as we work towards them, and properly so. Our decisions depend on the responses of others and on what we anticipate those responses will be. The world is complex, imperfectly known, and our knowledge of it is incomplete, and these things will remain true however much we learn and however much we analyse it.
We do not solve problems in the way the concept of decision science implies because we can’t. The achievement of the great statesman is not to reach the best decision fastest but to mediate effectively between competing views and values. The achievement of the successful business leader is not to foresee the future accurately but to continuously match the capabilities of the firm to the changing market environment. The test of financial acumen, understood well by men like Buffett and Soros – who, unlike their less gifted rivals, know what they do not know – is to navigate successfully through irresolvable uncertainties.
Mostly, we actually solve problems obliquely. Our approaches are iterative and adaptive. We make our choices from a limited range of options. Our knowledge of the relevant information, and of what information is relevant, is imperfect. Different people will form different judgments in the same situation, not just because they have different objectives but because they observe different options, select different information and assess that information differently: and even with hindsight it will often not be possible to say who was right and who was wrong. In a necessarily uncertain world, a good decision doesn’t necessarily lead to a good outcome, and a good outcome doesn’t necessarily imply a good decision or a capable decision-maker. The notion of a best solution may itself be misconceived.
The skill of problem solving frequently lies in the interpretation and reinterpretation of high-level objectives. The Japanese approach to Singapore from the landward side was both direct and oblique, but the attack was direct once you began from an unaccustomed perspective. The oblique, unaccustomed approach was how Brunelleschi built the presumed unbuildable dome of Santa Maria del Fiore and discovered how to represent perspective in a two-dimensional frame. Many great achievements are of this kind. Alexander Graham Bell’s invention of the telephone, like Akio Morita’s creation of the Sony Walkman and Steve Jobs’s reinterpretation of Morita’s idea in the iPod, was a solution to a problem people did not know they had.
It is hard to overstate the damage done in the recent past by people who thought they knew more about the world than they really did. The managers and financiers who destroyed great businesses in the unsuccessful pursuit of shareholder value. The architects and planners who believed that buildings could be designed from first principles, that vibrant cities could be drawn on a blank sheet of paper, and that expressways should be driven through the hearts of communities. The politicians who believed they could improve public services by the imposition of multiple targets. Acknowledging the complexity of the systems for which they were responsible and the multiple needs of the individuals who operated these systems would have avoided these errors.
Such acknowledgement might also have avoided the gravest cases of bad public decision-making of the past decade – the Iraq war and the credit expansion of 2003–7. Both these developments were predicated on a knowledge of the world that the decision-makers did not in reality possess. Republican ideologues believed that Iraqis shared the fundamental values and expectations of Americans. Bank executives believed that their risk control systems, which they mostly did not understand, enabled them to monitor transactions they also did not understand but believed to be hugely profitable.
Isaiah Berlin famously distinguished hedgehogs, who know one big thing, from foxes, who know many little things. George W Bush and his colleagues were hedgehogs. Their overriding world view dictated not only their actions but their interpretations. The bankers, blinded by greed and trapped by the greed of others, placed private and public reliance on superficial explanations of the profitability and utility of their activities. Neither group saw any reason to ask questions to which they did not wish to hear the answers, and they did not.
The occupants of the Bush White House, and the men who played senior roles in great banks, not only believed they knew more about the world than they did, but supposed they had more influence on the environment in which they operated than they did. They imagined they could reconstruct the Middle East on the basis of an American model of lightly regulated capitalism and liberal democracy. They supposed they were in control of large financial institutions, when in reality the floors beneath them were occupied by a rabble of self-interested individuals determined to evade any controls on their own activities.
We learn a great deal about the limits of pseudo rationality by understanding the greatest failure of modernist thought – the attempt to reform cities and buildings by re-engineering from first principles. ‘A house is a machine for living in,’ said the great modernist architect Le Corbusier. But a home is not. The alternative to rebuilding Paris to Le Corbusier’s crazed design – which would have razed most of its centre to make way for tower blocks – was not to rebuild Paris according to some other grand design, but rather to grasp that Paris would develop, as it has for centuries, through a process of constant adaptation. Most construction survives at most a few generations, but Notre Dame, two centuries in the building, remains magnificent 700 years later. The Eiffel Tower, intended as a temporary structure, has been the city’s most distinctive landmark for over a century. The Gare d’Orsay regains relevance in an entirely different function as the Musée d’Orsay. Paris grew by muddling through, Brasilia by design; Paris is a great city, Brasilia is not.
The direct approach to problem solving requires us to know the method of solution before we start. In obliquity we learn about the structure of a problem by the process of solving it. Iteration and experience lead us to the best principles of analysis. While it seems to make sense to plan everything before you start, mostly you can’t: objectives are not clearly enough defined, the nature of the problem keeps shifting, it is too complex, and you lack sufficient information. The direct approach is simply impossible. Good decision-making is pragmatic and eclectic. Oblique approaches rely on a toolkit of models and narratives rather than any simple or single account. To fit the world into a single model or narrative fails to acknowledge the universality of uncertainty and complexity.
The reputation of financial economics has never recovered from the blow of the virtual collapse of Long-Term Capital Management, and the involvement of two Nobel Prize winners, Robert C Merton and Myron Scholes. The fund built huge positions on the basis of estimated mispricings, relying on its models to control its exposures. When the Asian financial crisis blew up in 1997, the fund managers extended their positions. They believed their own models. Their failure was a precursor of the much larger failures that would follow a decade or so later.
At the banks, as in Iraq, the reality was that the evidence and models were used to confirm what was already asserted to be true rather than to challenge the validity of prior assumptions. And in both cases, a superficial appearance of considered rationality concealed the crude directness of what was really being done.
Obliquity doesn’t mean that we should stop thinking about objectives, fail to examine options or omit to seek information and understand as best we can the complex systems that we deal with. Far from it: we should start and continue. The alternative to a ‘rational’ process of defining objectives, evaluating options and modelling consequences is an approach that is oblique, but truly based on reason and evidence.
If you are clear about your high-level goals and knowledgeable enough about the systems their achievement depends on, then you can solve problems in a direct way. But goals are often vague, interactions unpredictable, complexity extensive, problem descriptions incomplete, the environment uncertain. That is where obliquity comes into play.
‘Only an arrogant man would believe he could plan a city, only an unimaginative man would want to,’ wrote Jane Jacobs, whose brilliant book The Death and Life of Great American Cities was central to the revolt against modernist town planning. The men who launched the Iraq war and the bankers who were responsible for the credit crunch were arrogant and unimaginative. Clever, and more imaginative, people sometimes find direct solutions, but that is because they understand the problems to which direct solutions may apply.
Obliquity is the best approach whenever complex systems evolve in an uncertain environment and whenever the effect of our actions depends on the ways in which others respond to them. There is a role for carrots and sticks, but to rely on carrots and sticks alone is effective only when we employ donkeys and we are sure exactly what we want the donkeys to do. Directness is appropriate when the environment is stable, and objectives are one-dimensional and transparent, and it is then possible to determine when and whether goals have been achieved. And only then.
John Kay chaired the UK government’s review of UK equity markets and long-term decision-making, which reported in July 2012. He is visiting professor of economics at the London School of Economics, and a fellow of St John’s College, Oxford. He is also a fellow of the British Academy and the Royal Society of Edinburgh, and a director of several public companies. He contributes a weekly column to the Financial Times, and is the author of many books, including The Truth About Markets (2003) and The Long and the Short of It: finance and investment for normally intelligent people who are not in the industry (2009). Obliquity is his latest book, published by Profile Books in March 2010.