de Brabandere & Ivy, Thinking in New Boxes

You can’t think without boxes, the authors claim, so don’t even try. Instead, they propose Thinking in New Boxes, which they describe as A New Paradigm for Business Creativity (Random House, 2013). This book won’t be published until September 10, so what I’m offering here is a sneak preview, compliments of NetGalley.

To make sense of the diversity, complexity, chaos, and uncertainty we constantly confront, we use mental models (such as working hypotheses, frameworks, and paradigms) or boxes within these models (such as concepts and stereotypes). But this latticework of mental models, to use Charlie Munger’s phrase, can be constraining; “we all become trapped by our boxes over time.” (p. 20) In order to look at the world from a fresh perspective and innovate, we need to think in new boxes.

The authors outline a five-step approach. First, doubt everything. Second, probe the possible. Third and fourth, diverge and converge. And finally, reevaluate relentlessly.

Of these five steps, only the third and fourth need some clarification. Divergence, as the authors understand the term, “calls upon you to create many new models, concepts, ideas, and ways of thinking. It entails a freeing up of the mind and spirit so that even what may seem like foolish or ill-advised boxes are not rejected—yet.” Convergence, by contrast, is a winnowing process “where your ideas transform from a long list into a more select group, and then eventually down to a still smaller number (or even just one idea) that can be implemented to achieve breakthrough results.” (pp. 33-34) As Linus Pauling famously wrote, “The way to get good ideas is to get lots of ideas and throw the bad ones away.” (p. 101)

In this post I want to spend a little time on the fifth, absolutely critical step—reevaluate relentlessly. As the authors write, “No idea is good forever. No matter how brilliant, how resilient, how imaginative, how timely and effective, every box you conceive will benefit from being modified, improved, and ultimately replaced.” Or, in the words of Oliver Wendell Holmes, Jr., that I particularly like: “To rest upon a formula is a slumber that, prolonged, means death.” (p. 161)

Reevaluation requires a prospective mindset. That is, “it requires you to become much better attuned to many of the various things that may change in the future over the midterm and the long haul, and be better able not only to detect the early signs of such change ahead of time, but also to act upon these signals promptly and effectively. And it requires you to realize that even when”—in fact, especially when—“everything is going well, you still need to be on the lookout.”

The authors continue: “The signs of change—and your ability to see and prepare for them—occur along a spectrum. At one end of the spectrum, you’re encountering vivid paradoxes … that are relatively easy to detect and, hopefully, respond to. At the other end of the spectrum, you’re scarcely able to see, or may be entirely blind to, the inevitability of change and the constant prospect of failure. … All along this spectrum are all manner of ‘weak signals’ that your own current biases and perceptions make it difficult to detect. … Sometimes you notice the weak signals yet say to yourself, ‘no big deal.’” (p. 168)

Throughout their book de Brabandere and Ivy focus on typical business examples. But their principles can easily be extended to one of the biggest businesses of them all, the financial markets. Financial products change, technology changes, players change, economic realities change, regimes change. The individual investor or trader who keeps doing the same thing over and over again, rationalizing his stuck-in-the-mud behavior by saying that basic principles don’t change and human nature doesn’t change, will never achieve the level of success of investors and traders who are willing to reevaluate their models relentlessly. Renaissance Technologies’ Medallion Fund is an extreme example of this willingness and has the returns to match. And please don’t bring up Warren Buffett as a counterexample; he is much more amenable to change (including investing in those “financial weapons of mass destruction,” derivatives) than he lets on.