Sense-making is a
qualitative, multi-disciplinary approach to make something sensible, i.e., how
we structure the unknown as so to be able to act in it. In other words, it
consists in constructing, filtering, framing, creating facticity and rendering
the subjective into something more tangible. According to Karl Weick,
sense-making is about plausibility, pragmatism,
coherence, reasonableness, creation, invention and instrumentality.
In this synthesis
exercise in which accuracy is secondary, I found a couple parallels and
antithesis to equity research, investing and managing an asset management firm.
On equity research and
investing:
- Sense-making is a synthesis exercise which usually
benefits from mental models utilization to simplify complex and open-ended
problems – it does not rely on extensive analysis and accuracy as
enactment is needed in the learning process. This one is partially correct
for investing in my point of view, since extensive analysis is a pre-requisite before synthetizing
what the analyst has learned. A complete due diligence is required to
mitigate risks, although it will never be complete due to the ever
changing landscape and eternal unknown unknowns;
- As I’ve just watched the True Detective TV series, I’ve learned from detectives this time (instead of Munger) that reading and studying
different topics from a variety of sources helps us arm our brains with
bits & bytes which can be combined later on our professional and
personal lives. Although, we need previous knowledge and context to
successfully use them “to
consolidate bits and pieces into a compact, sensible pattern frequently
requires that one look beyond those bits and pieces to understand what
they might mean. Often, it is necessary to move outside a system in order
to see the patterns within. (…) Of course, there is always more than one
metaphor that can capture a situation, which means that any given metaphor
is likely to be contested.”
- And when we are unprepared, the man-with-a-hammer
syndrome unleashes: "operators
who have specialized expertise do not see the big picture as crises
develop and therefore miss key events." We will try to frame the problem within our pre-existing models, unfortunately;
- We are more likely to uncover unanticipated
and potentially valuable viewpoints and information armed with open-ended
questions. Moreover, in this way we avoid confirmation bias;
- Marcel Proust helped me out in this one: “The real voyage of discovery consists
not in seeking new landscapes but in having new eyes.” Again, it's all about having perspective;
- Sense-making benefits from past data (quant, social,
etc.) in a given context to extrapolate necessary actions – just like
investors learning from post mortem analysis/financial
markets history to be better prepared for decision making;
- Consequences are difficult to forecast in advance,
though scenario planning could help out with this one;
- Sense-making opposes scenario planning as “explanations that are developed
retrospectively to justify committed actions are often stronger than
beliefs developed under other, less involving, conditions." This
one is screaming for me since I live in Brazil and we are used to see
growth embedded in 99% of potential investments here, thus we aren't THAT
creative imagining different scenarios. Unfortunately, we usually classify
then as improbable as a preconception;
- Learn not only what financial statements represent, but
what is behind it: “e very sensitive to operations. Learn from those
closest to the front line, to customer, and to new technologies.
On risk:
- “Human
errors are fundamentally caused by human variability, which cannon be
designed anyway - so our function is to be risk
mitigators which must be embedded in the capital allocator job description;
- Compounding mistakes: "Small events are carried forward, cumulate with other
events, and over time systematically construct an environment that is a
rare combination of unexpected simultaneous failures."
- Constant learning, perspective and team complementarity
as a knowledge growth vector and risk mitigator: "Capacity and response repertoire affect crisis perception,
because people see those events they feel they have the capacity to do
something about. As capacities change, so too do perceptions and actions.
This relationship is one of the crucial leverage points to improve crisis
management." As investors, we should only act or react when we
are prepared and comfortable with what we know and what we don’t know;
On governance:
- “The
dark side of commitment is that it produces blind spots" – This one
I’ve learned from Malcolm
Gladwell article in The New Yorker Magazine: do not engage in negotiation
with fanatics, nor trust entrepreneurs living their dreams in listed companies. In other words, do not them live their dreams with your money;
- "Turnover is as much a threat to capacity as is
understaffing, but for a different reason. Institutional memory is an
important component of crisis management"
- "Perception, however, is never free of preconceptions,
and when people perceive without institutional memories, they are likely
to be influenced by salient distractions or by experience gained in
settings that are irrelevant to present problems."
- “In a globally competitive environment
our reward structures are geared toward rewarding immediate action and
hence we may be signaling that sense-making is not a valued activity.”
- “Sense-making
is inherently collective; it is not nearly as effective to be the lone
leader at the top doing all the sense-making by yourself. It is far better
to compare your views with those of others – blending, negotiating, and
integrating, until some mutually acceptable version is achieved.
Soliciting and valuing divergent views and analytic perspectives, and
staying open to a wide variety of inputs, results in a greater ability to
create large numbers of possible responses, thus facilitating resilient
action." - Sutcliffe & Vogus, 2003
At the end of the day, no single discipline or tenet will solve any problem alone, although sense-making might be useful when analyzing the past performance or story of a company in order to understand how things went out. It is like a mapmaking process. Sensemaking also uses mental models from previous experiences and disciplines.
I do not agree though that it necessarily is a better exercise than scenario planning because it relies on past facts, as (i) facts are not as clean as they see, afterall someone made the fact up and you don't know in what context and motivation and (ii) in a constant changing landscape it's better to elucubrate about the future and try to foresee through group simulations what scenarios can come up.
References:
Enacted sensemaking in crisis situations - Karl Weick
Sensemaking in organizations - Karl Weick
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