Tag Archives: system 2 thinking

Why do bad things happen to good companies?

Last week, I attended a Finance conference were one of the speakers (a coach and keynote speaker by the name Martin Carper) delivered a talk titled “Why do bad things happen to good companies?” (1).

Martin opened the speech with the fall of the Medici bank collapse at the end of the XV century, followed by the more recent sound cases of  Enron scandal (fraud accounting), the BP oil spill (in the Gulf of Mexico), Volkswagen emissions scandal (rigged tests on diesel cars). Why all those companies which seemed so good found themselves immersed in such crises. Were they so good? Those companies were filled up with outstanding individuals, following well thought, proven processes, yet they found themselves caught in fire. As it turns out, those companies were not so good after the fact. Investigations revealed major frauds, wrong incentives schemes, bad attitudes.

The reason according to Martin: the key to keep being good is about mindset.

He proposed the audience a couple of quick exercises:

  • triangles“Rate yourself as driver in relation to the rest of the group”. Studies show that 80% of the individuals to whom this question is asked, rate themselves above average. The key: Illusionary superiority.
  • How many triangles do you see here?” “Does anyone see more than 4, 6… 8 triangles?

I was one of those in the audience seeing plenty of triangles. One new triangle after each couple of seconds. But there are none. “A triangle is a polygon with three edges and three vertices“. There are no three edges in any of those figures you may think you see.

This trick helped him to introduce what is commonly known as System 1 thinking, the kind of short-term memory, quick way of thinking, as opposed to System 2 thinking; the more rational way, responsible of the complex thought process used to solve difficult problems. The difference between multiplying mentally 3×3 or 17×23. The difference between driving home or finding your route in an unknown place with the only help of a chart (without a GPS navigator). This terminology of System 1 and 2 was introduced in the book “Thinking, fast and slow” by the 2002 Economics Nobel prize laureate Daniel Kahneman (1).

The speaker then recommended to pause, and, in order to have the correct mindset to avoid those bad things from happening, he invited us to adopt what he called the 3 Ps:

  • Pace. He stressed the need to combine the different ways of thinking, systems 1 and 2, with their respective speeds. Not to be driven always by automatic processes into a purely system 1 way of thinking. He used the classical adage “Festina lente“, meaning “More haste, less speed”.
  • Position. He called for taking a step back to see the overall picture before taking action. To analyze the situation, see all possible options before chosing one. He showed the difference in the layout of a captain’s deck vs. an admiral one in a major British navy ship.
  • Perspective. Here he mentioned an anecdote from Jan Carlzon, the CEO of the SAS airline during the 80s and beginning of the 90s, and credited with the transformation of the company. To stress that small things mattered, Jan would check on and insist that coffee stains be cleaned in the lavatories, as it served as an indicator to the everyone (including the customers) of how seriously SAS took all maintenance procedures. Otherwise, if a coffee stain had slipped through the processes, what other faults could have done so as well.

(1) His speech shares almost squarely the title with but has no relation to the Harvard Business School case study published in the 90s by the authors Benson P. Shapiro, Richard S. Tedlow and Adrian J. Slywotzky, in which they introduced the concept of value migration.

(2) This a fabulous book, published in 2011, on the mental process and the biases of our mind, which references plenty of psychology studies made by different researches along decades. I read it back in 2013 and I strongly recommend it.

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