“The older I get the more I realize how many kinds of smart there are. There are a lot of kinds of smart. There are a lot of kinds of stupid, too.”
– Jeff Bezos
You can ace the most prestigious grad school and then spend years in prison for insider trading. It’s happened. And the decision to risk everything on a trade that nets you a few percentage points is the kind of thing someone with half the IQ will look at and say, “How stupid are you?”
There are types of smart that have nothing to do with intellect. And there are types of stupid that have nothing to do with unintelligence.
Smart is the ability to solve hard problems, which can be done many ways. Stupid is a tendency to not comprehend easy problems. It’s also is a diversified trait.
A few kinds of stupid prevalent in business and investing:
1. Intelligence creep: Not knowing the boundaries of what you’re good at, and assuming talent in one area signals skill in all others.
Dictators are never marketed as just good at politics. They’re portrayed as superhumans, masters of everything. Joseph Stalin was born Joseph Jughashvili, but changed his name to a word that translates to “Man of steel.” North Korea said Kim Jong Il shot 11 holes in one on his first round of golf, was an architectural master, and a music virtuoso.
An innocent version of this happens when you’re good at one thing, so you and those around you assume you should be good at all other things.
Take the investor who is gifted at, and made a lot of money doing, one kind of strategy (merger arbitrage) and then extrapolates that confidence into something they have no experience in (gold, macro, politics, predicting recessions). The odds of a disappointing outcome then round to 100. Of course they do – the kind of nuance and skill needed to, say, forecast global interest rates is not the kind you thing you can pick up in a year.
The important thing is most investors without big success in one strategy would never consider betting their portfolio on a new, disparate strategy. They’re more likely to stick to what they know. You need intelligence in one strategy to make you think, with confidence, that you’re good at all the other ones.
An important investing skill is defining what you’re incapable of and staying away from it.
2. Underestimating the complexity of how past successes were gained in a way that makes you overestimate their repeatability.
There’s a thing in biology called Dollo’s Law that says organisms can never re-evolve to a former state because the path that led to its former state was so complicated that the odds of retracing that exact path round to zero.
Say an animal has horns, and then it evolves to lose its horns. The odds that it will ever evolve to regain its horns are nil, because the path that originally gave it horns was so complex.
Dollo’s Law affects investors and CEOs with a unique kind of stupid.
There are things that, once lost, will likely never be regained, because the chain of events that created them in the first place can’t easily be replicated. If you realized how valuable those things are you’d be more careful about risking their loss.
Brand is one. Brands are so hard to build, requiring the right product at the right time targeted to the right users who want that one thing, produced in the right way by the right people, all done with consistency. Once lost it is nearly impossible to regain, because of odds of building a successful brand in the first place were so low. So when management cashes in brand equity for short-term gain, I want to shout, “Stop! This isn’t a factory that you can just rebuild when it’s broken. If you lose that brand it’s gone for good.”
Teams are another. Success is often personalized among one person, discounting how important members of their team were to a win. That one person will often marginalize their team, or go out on their own, only to learn the hard way how vital others were to what they considered to be “their” success. And once disbanded that specific team will likely never return.
3. Discounting the views of people who aren’t as credentialed as you are, underestimating the special knowledge they have since they’ve experienced a world you haven’t.
A different kind of stupid is not believing that there are different kinds of smart.
Only seeking the input from those who fit your singular definition of smart misses the masses whose knowledge wasn’t measured by standardized tests. And those masses, with lower credentials than you, have likely experienced a world that you haven’t, which gives them a perspective you don’t have.
Solving problems means understanding how people behave. And you’ll only understand how lots of people are likely to behave if you open your mind to their views, opinions, goals, and solutions. Even people who are different than you. Especially people who are different than you.
4. Not understanding that in the classroom the game is you vs. the test, but in the real world it’s you vs. coworkers, employees, customers, regulators, etc., all of whom need to be persuaded by more than having the right answer.
This is a cousin of #1 above. It’s common when technical founders assume their ability to design a great product is correlated with their ability to manage hundreds of people, when in fact those things can be miles apart.
People who create the best products are often able to do so specifically because their thought process isn’t restricted by norms that ground most people. But that same trait can make them counterproductive bosses, because the “rules-don’t-apply-to-me” mindset that’s so effective when building a new product can be disastrous when managing people, especially as a company scales. Very talented engineers, designers, product people can make HR and managerial decisions for which the only response is, “How stupid are you?”
The first rule of natural maniacs: No one should be shocked when people who think about the world in unique ways you like also think about the world in unique ways you don’t like.
5. Closed-system thinking: Underestimating the external consequences of your decisions in a hyperconnected world, or dismissing how quickly those consequences can backfire on you.
There’s a thing in economics where the professor says “assume a closed economy.” You model how an economy works assuming zero trade with, or influence from, other countries. Then you drop that assumption, view at the world as it actually operates, and BOOM … the original models are useless.
One kind of stupid is when you assume your business decisions live in their own closed economy, and the things you do either don’t affect others, or if you know they do, you underestimate those people’s ability to turn around and stick it back to you.
This is especially true in today’s world where things aren’t just connected; they’re an untangleable web where nothing is more than a few degrees removed from everything else in the world. If you mistreat your employees, or your customers, or your suppliers, and assume that it’s OK to do so because those actions will be contained to those people, the odds that your actions will eventually become known to someone who’s indispensable and who you rely upon are greater than they’ve ever been.
Bernie Madoff summarized this idea a year before his scheme unraveled. “In today’s regulatory environment, it’s virtually impossible to violate the rules,” he told an audience in 2007. “This is something the public doesn’t really understand. It’s impossible for a violation to go undetected. Certainly not for a considerable period of time.”
Casualties of Your Own Success
Conflicting Skill Sets
An Art Leveraging a Science