The Illusion of the Irrelevance of the Long Term

In the early 80′s a riddle did the rounds which had everyone stumped for a few days until the solution followed shortly afterwards. Considering this was before you could forward something to a group in Outlook, ideas used to propagate themselves very quickly in those days. The riddle went like this:

3 MEN GO INTO A MOTEL. THE MAN BEHIND THE DESK SAID THE ROOM IS $30,
SO EACH MAN PAID $10 AND WENT TO THE ROOM. A WHILE LATER THE MAN BEHIND THE DESK REALIZED THE ROOM WAS ONLY $25, SO HE SENT THE BELLBOY TO THE 3 GUYS’ ROOM WITH $5. ON THE WAY, THE BELLBOY COULDN’T FIGURE OUT HOW TO SPLIT $5 EVENLY BETWEEN 3 MEN, SO HE GAVE EACH MAN A $1 AND KEPT THE OTHER $2 FOR HIMSELF. THIS MEANT THAT THE 3 MEN EACH PAID $9 FOR THE ROOM, WHICH IS A TOTAL OF $ 27. ADD THE $2 THAT THE BELLBOY KEPT = $29. WHERE IS THE OTHER DOLLAR?

The answer – which I must confess eluded me for ages – is that there is no $30. Each man pays $9 for the room which equals $27, plus the $2 equals $29. Simple. But the illusion is a powerful one.

In the same way, the powerful illusion is that every decision we make is important and that we never get the chance – like a share trader who makes dozens of trades a day, or the poker player who plays dozens of hands an evening – to get to the medium term. But we do.

No poker player gets to play any exact hand more than once. But you still make the decision that is right according to the Long Term every time, and that way you make a profit. No trader gets to invest in the exact same share with the exact same future prospects for the exact same price twice. But by investing with the best long term expectation in a series of inherently independent situations you give yourself the best chance of making the best Long Term return.

I understand that some decisions feel so big that we’ll never ever reach any kind of long term and so the best policy seems to be to play it safe. Putting your children through school; setting up your own business; buying your own home; getting married; going back into training; getting divorced; being completely honest with your team… the list is endless. And that’s the point.

While we look at the present and the future from one position at the point of making a decision… it all looks very different in the rear view mirror. Eventually the numinous truth of the illusion catches up with us and we realise that each monumental mountain was really only a molehill – only one of many problems that we had to overcome; just part of a continuum which eventually became a Long Run.

And those of us who explored the opportunities and took the risks in a calculated way will, eventually, have received what we expected (or Expected) and deserved. And those of us who eschewed them and feigned satisfaction with the safer option experience a pain much greater than the pain of setback or Short Term failure… in the Long Run they experience the agony of regret.

And the most amazing thing about it all? The most amazing thing is that we know this. That’s why when we have to make a difficult decision we feel torn… we feel torn between the person we are now and the person we know deep down that we’ll become in time. And that is the struggle that takes place inside us all whenever we make a decision. Long Term vs Short Term: the us we are tonight and the us we’ll be tomorrow.

Great Decision Making

By the time you read this post, it will likely be out of date. As I write these words, the world is bracing itself for a Greek euro exit – according to The Independent. They may well have another election. They may not. The simple fact is that – right now – no one actually knows. We’re looking at events without the benefit of hindsight which you – the reader – looking back, obviously enjoy.

Hindsight is a wonderful thing. That’s been said before. But interestingly, no matter how much one values hindsight consciously, it’s so easy to undervalue its effect on us at a subconscious level and assume that the way that something turned out was the way it was always destined so to do.

Imagine a magician shuffles a deck of cards, places all 52 of them onto a pool table and asks you to bounce the white ball around the cushions until it comes to rest near one. You have a free choice as to which you think is nearest. The magician thinks for a moment and announces that it is the nine of hearts. Absolutely incredible. How on earth does he do it? He turns them all over to reveal 52 nines of hearts. Of course. Easy. That is the only way such a remarkable trick could be performed. And so obvious looking back because – you remember now – that he omitted to show them to you before performing the illusion.

You project yourself into the body of the person you were ten minutes ago with the knowledge you have now and cannot believe that you didn’t guess something so self-evident. But the fact is that before you found out the secret you were oblivious to the crucial information, it was anything but obvious.

Before the launch of the space shuttle Challenger – according to the Rogers Commission – NASA were aware of the design flaws of Morton Thiokol’s O-Ring but failed to address it properly. Remiss of them, of course. But obviously they didn’t know that it would lead to an explosion. It was imperfect – as probably was everything else involved with the extraordinary endeavour of propelling man into space. The commission looked back at events as we look back on the magic trick and cannot understand how someone could have made such a mistake because they cannot imagine what it must have been like to have operated without the information that they subconsciously simply take for granted.

As regular readers of this column will know, I make a living talking to companies about all aspects of risk and decision making using poker as my metaphor. At the end of a lot of such sessions, I’ll often host a poker game for participants and usually deal a table myself. I work with some of the UK’s best managers. They make demanding decisions everyday, with limited information and uncertain futures. But everyone reacts the same when – after having folded a ten and a three in the first two cards – the next three cards are ten, ten, three, thus potentially throwing away a full house. “Why are you bothered?” I say as they berate their bad luck “Because I would have won the hand” they cry. “But you did the right thing with the information you had available to you” I protest.

Again, consciously they understand the facts but subconsciously they chastise themselves for doing something so apparently stupid! It’s bizarre when you stop and think about it. It seems to be the most natural thing in the world to judge a decision not by its intrinsic quality but by the outcome – known only after the event.

Of course the opposite of this is something very challenging to our twenty first century sensibilities: that – away from the hypothetical baize of the poker table – there is such a thing as an intrinsically good decision irrespective of the outcome. That seems so counterintuitive as almost to make no sense. How can the right decision be one which in actuality ends in failure? Is it possible to judge people independently of short term, noisy and irrelevant results? I would say that it is but that it is so difficult and demanding as to be way beyond the desire – or ken – of most people in management today.

About six weeks ago, the sports section of a UK newspaper debates the suitability of Kenny Dalglish to continue to manage Liverpool in light of their appalling run of results around that time. It is generally by all contributors agreed that Kenny is in trouble but that their place in the FA cup final is protecting him: victory in that would probably save him, defeat would likely consign him to history. But win or lose that 90 minute game he is still the same man with the same essential talents. The question fundamentally is whether – for all his skills and shortcomings – he should continue in the post. Not what result he gets on that particular day? Surely?

The journalists concerned apparently believe that that result – above all others – will reveal to us how good a manager Kenny really is. As though the result of a few balls bouncing one way or the other give us greater insight than, for example, going to the training ground to see Dalglish talking to his players or (hypothetically) questioning him for a morning on his tactical responses to opposition formations.

This is tantamount to judging the playability of ten-three in poker by the result of that particular hand. It is openly allowing short term results to decide the answers to much deeper, more challenging concerns and exposing us to the biases of hindsight when judging events and the quality of our decisions given what we knew without its benefits.

It’s a utopian cry to get away from being a results-based world, I know. But in a world which moves as fast as this one does; where in a couple of days literally everything can change, it is essential. By the time you read this you will know the outcome of the decisions you’re making as I write it. But a long time before that, you should be able to say how intrinsically good they actually are. Can you?

Posted 01:57pm by Caspar and filed in Decision Making