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When to Trust Your Gut

By Shlomo Maital

kahneman

Daniel Kahneman

Daniel Kahneman, a psychologist, won the Nobel Prize for Economics in 2002, for his pioneering contribution to how people make decisions under uncertainty.

In 2009 Kahneman debated Gary Klein, a senior scientist at MacroCognition,  about a crucial question: When should people trust their intuition, and when should they suspect it? The debate was published in the American Psychologist. Here is a brief summary, thanks to McKinsey Quarterly and their interview of the two following the original article:

   McKinsey Quarterly:  In your recent American Psychology article, you asked a question that should be interesting to just about all executives: “Under what conditions are the intuitions of professionals worthy of trust?” What’s your answer? When can executives trust their guts?”

         Gary Klein: It depends on what you mean by “trust.” If you mean, “My gut feeling is telling me this; therefore I can act on it and I don’t have to worry,” we say you should never trust your gut. You need to take your gut feeling as an important data point, but then you have to consciously and deliberately evaluate it, to see if it makes sense in this context. You need strategies that help rule things out. That’s the opposite of saying, “This is what my gut is telling me; let me gather information to confirm it.”

     Daniel Kahneman: There are some conditions where you have to trust your intuition. When you are under time pressure for a decision, you need to follow intuition. My general view, though, would be that you should not take your intuitions at face value. Overconfidence is a powerful source of illusions, primarily determined by the quality and coherence of the story that you can construct, not by its validity. If people can construct a simple and coherent story, they will feel confident regardless of how well grounded it is in reality.

McKinsey Quarterly: Is intuition more reliable under certain conditions?

   Gary Klein: We identified two.  First, there needs to be a certain structure to a situation, a certain predictability that allows you to have a basis for the intuition. If a situation is very, very turbulent, we say it has low validity, and there’s no basis for intuition. For example, you shouldn’t trust the judgments of stock brokers picking indivi dual stocks. The second factor is whether decision makers have a chance to get feedback on their judgments, so that they can strengthen them and gain expertise. If those criteria aren’t met, then intuitions aren’t going to be trustworthy.

   Daniel Kahneman: This is an area of difference between Gary and me. I would be wary of experts’ intuition, except when they deal with something that they have dealt with a lot in the past. Surgeons, for example, do many operations of a given kind, and they learn what problems they’re going to encounter. But when problems are unique, or fairly unique, then I would be less trusting of intuition than Gary is. One of the problems with expertise is that people have it in some domains and not in others. So experts don’t know exactly where the boundaries of their expertise are.

   McKinsey Quarterly: Yet senior executives want to make good decisions. Do you have any final words of wisdom for them in that quest?

     Daniel Kahneman: My single piece of advice would be to improve the quality of meetings—that seems pretty strategic to improving the quality of decision making. People spend a lot of time in meetings. You want meetings to be short. People should have a lot of information, and you want to decorrelate errors.

   Gary Klein: What concerns me is the tendency to marginalize people who disagree with you at meetings. There’s too much intolerance for challenge. As a leader, you can say the right things—for instance, everybody should share their opinions. But people are too smart to do that, because it’s risky. So when people raise an idea that doesn’t make sense to you as a leader, rather than ask what’s wrong with them, you should be curious about why they’re taking the position. Curiosity is a counterforce for contempt when people are making unpopular statements.    

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“Drowning in Debt”

By Shlomo Maital

debt drown

   A new report from McKinsey Global Research, “Global Debt: Challenges and Opportunities”, sounds the alarm, from a rather unlikely source – a consulting company that makes its living on optimism and activism.

   Here is what McKinsey says, worth heeding!

   ”The world is deep in a flood tide of debt. Do we care and what do we do about it?

….More than 8 years since the 2008 global financial crisis started the world seems to be drowning in debt. Global economic growth remains anemic..some economists attribute it to the high level of debt (govt., businesses, households have been devoting significant resources to debt servicing instead of productive activities).   …Global debt has been growing faster than the economy… as of mid 2015 it stood at 294 % of global gross domestic product, up 25 percee end of 2007 and 48 percentage points since the end of 2000. In many countries debt has increased to levels not normally seen during peacetime in advanced economies.”

     The world has painted itself into a corner.   Advanced economies desperately need major investments in infrastructure and human capital. Instead they are either a) slashing public spending, to try to control the high level of debt, or b) recycling huge debts, borrowing new money just to pay off old money, because slow growth has put the brakes on tax revenues and increased deficits.

       I see little sign of creative thinking to solve the problem.   Central Bankers recently meet at Jackson’s Hole, Wyoming, took off their ties and formal dress…. And heard Janet Yellen, head of the US Fed, speak about how she plans, maybe, perhaps, to raise interest rates a bit this year. In Europe the central bank continues to push negative interest rates, after everyone knows for sure that you cannot get out of the painted corner solely by adding to the already huge mountain of money.

     Does anyone have a creative idea? Our central bankers are completely out to lunch… literally.

Global Trade: More Information Than Goods

 By Shlomo Maital

information

McKinsey Global Research points out a remarkable fact about global trade: “Soaring flows of data and information now generate more economic value than the global goods trade.”   According to McKinsey:

    “….   although the global goods trade has flattened and cross-border capital flows have declined sharply since 2008, globalization is not heading into reverse. Rather, it is entering a new phase defined by soaring flows of data and information.   Remarkably, digital flows—which were practically nonexistent just 15 years ago—now exert a larger impact on GDP growth than the centuries-old trade in goods, according to a new McKinsey Global Institute (MGI) report, Digital globalization: The new era of global flows.”

So, what does this key fact mean for innovators and entrepreneurs?

   Here are a few important implications:

  • “Individuals are using global digital platforms to learn, find work, showcase their talent, and build personal networks. Some 900 million people have international connections on social media, and 360 million take part in cross-border e-commerce. Digital platforms for both traditional employment and freelance assignments are beginning to create a more global labor market.”
  • “….not all countries are making the most of this potential. The latest MGI Connectedness Index—which ranks 139 countries on inflows and outflows of goods, services, finance, people, and data—finds large gaps between a handful of leading countries and the rest of the world. Singapore tops the latest rankings, followed by the Netherlands, the United States, and Germany. China has grown more connected, reaching number seven, but advanced economies in general remain more connected than developing countries. In fact, each type of flow is concentrated among a small set of highly connected countries.”
  • “…over a decade, all types of flows acting together have raised world GDP by 10.1 percent over what would have resulted in a world without any cross-border flows. This value amounted to some $7.8 trillion in 2014 alone, and data flows account for $2.8 trillion of this impact. Both inflows and outflows matter for growth, as they expose economies to ideas, research, technologies, talent, and best practices from around the world.”

     Bottom line?   Innovator, wherever you are, if you have an Internet connection (true, 4 billion people, or over half the world, do not), you have access to the New World of trade in information data and knowledge.   Perhaps trade in goods is lagging, owing to the Great Recession, but globalization of knowledge is alive and well.

McKinsey: Testing for Innovation

By Shlomo Maital

 McKinsey innovate

     McKinsey Global Research April 2015 has circulated a lovely article on Innovation: “The eight essentials of innovation” by Marc de Jong, Nathan Marston, and Erik Roth. It includes a short self-test for you and your organization. Their key point: (often repeated in this space): “Since innovation is a complex, company-wide endeavor, it requires a set of crosscutting [and at times paradoxical] practices and processes to structure, organize, and encourage it.”

     Here are the eight questions you should ask:

  • ASPIRE   Do you regard innovation-led growth as critical and do you have cascaded targets that reflect this? Yes/No
  • CHOOSE   Do you invest in a coherent time- and risk-balanced portfolio of intiatives with sufficient resources to win?       Yes/No
  • DISCOVER         Do you have differentiated business, market and technology insights that translate into winning value propositions? Yes/No
  • EVOLVE         Do you create new business models that provide defensible and scalable profit sources? Yes/No
  • ACCELERATE       Do you beat the competition by developing and launching innovations quickly and effectively? Yes/No
  • SCALE   Do you launch innovations at the right scale in the relevant markets and segments? Yes/No
  • EXTEND         Do you win by creating and capitalizing on external networks?
  • MOBILIZE       Are your people motivated, rewarded, and organized to innovate repeatedly?

 

     Score yourself and your organization.   Six out of 8 or above? You’re an innovator.   Five and below – you need to make some urgent changes.

 

 

Chinese Innovation: On the Rise

By Shlomo Maital

China patents

An insightful new report by McKinsey Global “China’s Innovation Imperative” sheds important light on China’s massive effort to become more innovative.

   Here are some of the report’s key insights:

   * “to realize consensus growth forecasts—5.5 to 6.5 percent a year—during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation”.   In other words up to half of China’s GDP growth must come from innovation. This is no easy task.

* “…about 40 percent of the increase in total factor productivity could come from innovations in higher-level manufacturing and services enabled by the Internet. Other innovations could come from catch-up activities that bring Chinese enterprises up to global best practices as well as breakthroughs yet to emerge. China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.”

* “China has become a strong innovator in areas such as consumer electronics and construction equipment. Yet in others—creating new drugs or designing automobile engines, for example—the country still isn’t globally competitive. That’s true even though every year it spends more than $200 billion on research (second only to the United States), turns out close to 30,000 PhDs in science and engineering, and leads the world in patent applications (more than 820,000 in 2013).”

* “…we identified four innovation archetypes: customer focused, efficiency driven, engineering based, and science based. We then compared the actual global revenues of individual industries with what we would expect them to generate given China’s share of global GDP (12 percent in 2013). As the exhibit shows, Chinese companies that rely on customer-focused and efficiency-driven innovation—in industries such as household appliances, Internet software and services, solar panels, and construction machinery—perform relatively well.”

     In general, China has strengths in process innovation, as it proves each time it takes production blueprints from a foreign firm and quickly produces the product. China also appears strong in incremental innovation.   Perhaps a new focus should be placed on radical innovation – game changing new ways to create value and to do business.

   The mantra of China’s 13th 5-year-plan is “China dreams”.   Dream big, China.

John Maeda: Unconventional Design Thinking

By Shlomo Maital

Maeda

     John Maeda has had a remarkable career, in computer science at MIT, and MIT Media Lab, then as head of the famed Rhode Island School of Design, now as a partner in Kleiner Perkins. He is also a famed video artist Here are his views on design, as told to McKinsey’s Hugo Sarrazin.

     Design was once largely about making products attractive. Today it’s a way of thinking, a creative process that spans entire organizations, driven by the desire to better understand and meet consumer needs. Good design is good business. This came from T.J. Watson Jr., in a 1966 memo to all of IBM.   Moore’s law (computing power doubles every 18 months) is dwindling…   so now we have to buy [things] because of how they make us feel.

     Whenever someone has come to me asking for the ‘silver bullet’ (for great design), I say, “There’s only a silver ray…and you have to know where to point it, you might get lucky”.

     I was talking to a CEO startup —   I offered my opinion, “Just because you can do it doesn’t mean you should do it. If you think about design adding value, a lot of what people don’t understand is that sometimes the best design consultants will tell you NOT to design it.

     [Consulting for e-Bay companies]…   I observed that the designers were all spread out. …So I connected all of them together, some 380 of them, into one community that could see each other. And the CEO could see them. ..the CEO said, “oh, so design itsn’t about this pixels thing, it’s about systems thinking!”   He totally got it.   [Sarrazin: It’s getting the right people together, creating the sense of community. It’s also reframing what it is!].    

     Maeda: Reframing: Exactly!

  

How (and Why) You Should Prepare for a World of Very Slow Economic Growth

By Shlomo Maital

Slow growth ahead

 It is becoming more and more clear that in the next 50 years, the world economy (and probably, the economy in which you live and work) will grow more slowly than in the past.   What was perceived as a temporary correction, due to the global financial crash of 2008, is now becoming chronic.

   Why?

   A study by McKinsey Global Research, “Global Growth: Can Productivity Save the Day in an Aging World”  (available from McKinsey’s website)  notes that “GDP growth was exceptionally brisk over the past 50 years, fueled by rapid growth in the number of workers and in their productivity.”  But now, employment growth, which averaged 1.7 per cent yearly between 1964 and 2014, is set to drop to just 0.3 per cent a year. 

   And productivity growth is slowing too.  “Even if productivity were to grow at the (rapid) 1.8 per cent annual rate of the past 50 years, GDP growth would decline by 40 per cent in the next 50 years – slower than the past five years of recovery from recession”.   But productivity growth has declined and does not look like it will recover much.  China’s economy is slowing. Europe and America grow slowly.  Japan has slow growth.  Looks like it’s chronic.

   What can be done?    “Catching up to best practice”, says McKinsey. In other words, if we all benchmarked the world and defined and captured ‘best practice’, productivity growth could nearly make up for the declining growth in workers. 

   Here are McKinsey’s 10 key “enablers of growth”.  Can each of us look at this list closely, and figure out,  what is my role?  How can I become really skilled, expert, at one or more of these enablers?  If McKinsey is right,  and if you can, you will be in great demand – and create value for the world. 

   Here is the list.  Which of thee suits you?  What must you do, in order to become a true enabler?

  • Remove barriers to competition in service sectors. 2. Focus on public and regulated sector efficiency. 3. Invest in physical and digital infrastructure. 4.       Foster R&D demand and investment. 5. Exploit data to identify transformational improvement opportunities. 6. Improve eduation and skill matching and labor market flexibility. 7. Open up economies to cross-border economic flows. 8. Boost labor force participation among women, young people, and older people. 9.       Harness the power of new actors through digital platforms and open data. 10. Craft regulatory environment, incentivizing productivity and innovation.

 

   

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
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