Read the book Military Misfortunes: The Anatomy of Failure in War by Eliot Cohen and John Gooch and walked away with the idea that their framework for looking at failures could be very useful for investment managers. This is not a new book but the ideas concerning failures are timeless. The comparison between war and investing is not far-fetched if you believe that what both face is a VUCA environment of volatility, uncertainty, complexity and ambiguity. Investment managers do not spend much time developing a culture of positive failure or one which is willing to discuss failure in the open in order to learn how to get better.
Cohen and Gooch start with the premise that disaster theory from other parts of life can be applied to military thinking. There are different types of failure from simple to complex, but failure can be focused on three major themes, failure to adapt, failure to learn, and failure to anticipate. The size of a failure is compounded when these failures are aggregated. Aggregate failure on a number of levels can lead to catastrophic failure.
The problem with analyzing failure is that most just do not want to do it. There is a politics of failure whereby we often want to attribute fault with an individual. There has to be someone who is responsible and can be blamed for why things go wrong. In investments, it is always the portfolio manager and not the organization that has been developed around the individual.
Cohen and Grooch use a matrix for analyzing failure based on the command level versus critical tasks like communication of warnings, the appropriate level of alert, and coordination across groups. Looking at the investment world, it is easy to see that a performance failure can be placed in a failure matrix. If a large risk goes wrong, you should ask the question of whether the warning was actually given about the risks, the warning was given the right level of focus, and whether all interested group were provided the appropriate information. To do this type of review needs open communication and a deep discussion of policy and procedures.
There can be a failure to learn because the critical tasks: resource allocation, coordination and communication, control and command, and doctrines and techniques are not focused in order to allow for learning to occur. You can have the right team in place but if the critical tasks are not undertaken you will not be able to learn from others to make a better organization. If learning does not go on, failure that could be avoided will occur.
There can be a failure to anticipate. Here the critical tasks are: intelligence collection and reporting, the net assessment of the information given, and the appropriate alert once information is obtained. There will be surprises, but the issue is whether an organization is prepared for them once they occur. In the investment work, there can be surprise shocks to markets, the critical organizational concern is whether the firm is able to anticipate these shocks and then have a plan in place to react to this surprise. The Fed will surprise, but is there a plan in place to anticipate or at least be able to react to a surprise. If the answer is that something will never occur, there will be failure.
There is also the failure to adapt where the critical tasks are: the resources for the means of adaptions, the identification of goals, and control or coordination of activities once adaptation is needed. In each of these cases, the command level will require different skills and response. for an investment organization the command structure can be traders, research portfolio managers and investment committees. each needs to respond to critical tasks.
No failure has to be fatal, but if critical tasks from strategy, tactics, to underlying assumptions are not reviewed regularly, there is a greater chance for the compounding of failure which can lead to greater catastrophic failure. The responsibility of failure is not in the hands of an individual, although they can be a major contributing factor, but in the hand so of the organization that does not allow for learning, anticipation, or adaptation.
Cohen and Grooch wrote a book on military failure, but the rules that will help battle a war are also appropriate for an investment strategy
.
Cohen and Gooch start with the premise that disaster theory from other parts of life can be applied to military thinking. There are different types of failure from simple to complex, but failure can be focused on three major themes, failure to adapt, failure to learn, and failure to anticipate. The size of a failure is compounded when these failures are aggregated. Aggregate failure on a number of levels can lead to catastrophic failure.
The problem with analyzing failure is that most just do not want to do it. There is a politics of failure whereby we often want to attribute fault with an individual. There has to be someone who is responsible and can be blamed for why things go wrong. In investments, it is always the portfolio manager and not the organization that has been developed around the individual.
Cohen and Grooch use a matrix for analyzing failure based on the command level versus critical tasks like communication of warnings, the appropriate level of alert, and coordination across groups. Looking at the investment world, it is easy to see that a performance failure can be placed in a failure matrix. If a large risk goes wrong, you should ask the question of whether the warning was actually given about the risks, the warning was given the right level of focus, and whether all interested group were provided the appropriate information. To do this type of review needs open communication and a deep discussion of policy and procedures.
There can be a failure to learn because the critical tasks: resource allocation, coordination and communication, control and command, and doctrines and techniques are not focused in order to allow for learning to occur. You can have the right team in place but if the critical tasks are not undertaken you will not be able to learn from others to make a better organization. If learning does not go on, failure that could be avoided will occur.
There can be a failure to anticipate. Here the critical tasks are: intelligence collection and reporting, the net assessment of the information given, and the appropriate alert once information is obtained. There will be surprises, but the issue is whether an organization is prepared for them once they occur. In the investment work, there can be surprise shocks to markets, the critical organizational concern is whether the firm is able to anticipate these shocks and then have a plan in place to react to this surprise. The Fed will surprise, but is there a plan in place to anticipate or at least be able to react to a surprise. If the answer is that something will never occur, there will be failure.
There is also the failure to adapt where the critical tasks are: the resources for the means of adaptions, the identification of goals, and control or coordination of activities once adaptation is needed. In each of these cases, the command level will require different skills and response. for an investment organization the command structure can be traders, research portfolio managers and investment committees. each needs to respond to critical tasks.
No failure has to be fatal, but if critical tasks from strategy, tactics, to underlying assumptions are not reviewed regularly, there is a greater chance for the compounding of failure which can lead to greater catastrophic failure. The responsibility of failure is not in the hands of an individual, although they can be a major contributing factor, but in the hand so of the organization that does not allow for learning, anticipation, or adaptation.
Cohen and Grooch wrote a book on military failure, but the rules that will help battle a war are also appropriate for an investment strategy
.
No comments:
Post a Comment