“Adapt” is not just another book about problem solving in a complicated world. What is so exciting about Tim Harford’s new book is that he convinces us that most of the time, success is the outcome of randomness, muddling and a trial and error approach.
Right from the very first pages, the author asks us to think differently. To start with, we underestimate the mega complexity of our modern world and overestimate the performance of our leaders. We often assume that somebody very good at some things will be good at everything. Harford warns us that even deep expertise is not enough to solve today’s complex problems.
A two-decade investigation led by a young psychologist, Philip Tetlock, proves the limits of expertise. For this study, he gathered 300 experts and asked them to make specific forecasts answering a total of 27,450 questions between them. He then waited to see whether their forecasts came true. “They rarely did,” says Harford. “The experts failed, and their failure to forecast the future is a symptom of their failure to understand fully the complexities of the present.” And another striking discovery, according to Tetlock’s report, is that the most famous experts, seen on television, were especially incompetent!
Even in business, excellence is not what it seems to be. Following the release, in 1982, of “In Search of Excellence,” which listed 43 excellent companies, Business Week published a lead story entitled, “Oops! Who’s Excellent Now?”
Two years later, the magazine showed that 14 companies were in serious financial problems. In a market economy, failure is not only ubiquitous, but there is also room only for a few winners.
“Few company bosses would care to admit it, but the market fumbles its way to success, as successful ideas take off and less successful ones die out.”
This process, known as evolution or survival of the fittest, is not merely a biological phenomenon. It happens in a market economy where new ideas are created by scientists, engineers, corporate managers and even daring entrepreneurs.
Paul Ormerod, an economist bent on innovation, decided to take a look at the data for corporate extinctions. He compared statistics on the death of corporate giants, as well as smaller corporate extinctions with half a billion years of fossil records. His findings strongly imply that effective planning is rare in our modern economy. Whether we like it or not, trial and error is the right way to solve problems in a complex world while expert leadership is not.
This is especially true of the Soviet economy, whose failure was due to an inability to experiment.
”The Soviets…found it impossible to tolerate a real variety of approaches to any problem; and they found it hard to decide what was working and what was not…The whole system was unable to adapt.”
Most people faced with a mistake or a loss experience a state of denial, instead of acknowledging the error and turning a new page. The economist, Terrance Odean, found that we hold on stubbornly to shares that have plunged, hoping they will rise again, and we willingly sell shares that are doing well.
However, the author reminds us that selling winners and holding on to losers has, in retrospect, been a poor investment strategy. He is convinced, that the adaptive and experimental approach can work almost anywhere. His recipe for adapting is first to try new things, expecting that some will fail; second, to make failure survivable because it will be common; and third, to make sure that you acknowledge your failure.
The wise decision, to try something new, was taken by an enterprising British civil servant, Henri Cave-Browne-Cave, who bypassed the regular commissioning process and ordered a new plane as “a most interesting experiment.” The plane turned out to be the Supermarine Spitfire, an aircraft described as, “out of this world.” Thanks to its 300 spitfires facing 2600 German planes, the British won the Battle of Britain, prompting Winston Churchill to say that:
“Never in the field of human conflict has so much been owed by so many to so few.”
Currently, the most successful company to believe in trying new ideas, knowing that many will fail, is Google. Google implements a 20 percent time policy, which allows any engineer, and some other employees, to spend one fifth of their time on any project they find worthwhile. Google News, Google Suggest, Adsense and the social networking site, Orkut, are projects that emerged from these personal projects as well as half of all Google’s successful products and a bewildering number of failures.
When Harford speaks of the financial crisis, he readily acknowledges that the tolerant attitude to failure can create catastrophic consequences. The banking system, even in the eyes of experts, is viewed as exceedingly complex. Harford reminds anyone believing the financial systems should be safer, that safety systems do exist, and it is precisely these safety systems, which made the problems worse. This is the case with the credit default swaps known as CDS which created a margin of safety that enabled banks to take even more risks thus introducing more opportunities for things to go wrong.
Three ways can ensure the safety of the banking system: first, to make sure banks hold more capital, second to prohibit banks from holding each other’s contingent convertible bonds known as “CoCo” bonds, and third, to find a much better way of handling bankruptcy.
“Above all, when we look at how future financial crises could be prevented, we need to bear in mind the two ingredients of a system that make inevitable failures more likely to be cataclysmic and tight coupling. Industrial safety experts regard the decoupling of different processes and the reduction of complexity as valuable ends in themselves. Financial regulators should, too,” writes Harford.
“Adapt” is an intelligent book and is easy to read, thanks to its powerful combination of data and anecdotes. Harford urges us to understand and profit from our muddling. The ability to adapt requires a willingness to risk failure. “Without it, we will never succeed.”
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Published by Little, Brown
Paperback, 309 pages
