Saturday, March 06, 2010

Decisions - Naiveté and Innocence

A student at an investment bank asked an interesting question yesterday and my answer unfortunately lacked the benefit of the perspiration, incubation, inspiration that comes from a good nights sleep.

He wanted to know if there was a mathematical formula to enable correct selection of projects into a portfolio. We had discussed differences between subjective and objective methods and he was leaning towards the latter.

I should have asked him how he had chosen his wife – and did he believe that a formula could exist that would have made a better choice for him? for her?

I should have explained how great thinkers had grappled with this very problem from Quentelet, Laplace and Hume right up to Lehrer, Bernstein and Talebs of today.

I should have told him a story of our selection method for General Motors projects in the mid-90’s that involved a weighted matrix approach. We measured 7 target ‘benefits’ for each project and gave them a weighting score to reflect their true relative value. Unfortunately my naiveté led me to take the numbers literally until a senior manager took me aside and quietly explained that the weights were for public consumption (e.g. sustainability ranked above preserving the architecture and both above cost) but were not be used in real decision making. I felt like a schoolboy in front of the headmaster instead of a professional earning his keep.

Which leaves me with the last regret:

I should have explained the difference between Innocence and Naiveté. That innocence was keeping alive the idea that it might be possible in the future but naiveté to believe that it could be done today.

Or more simply as a great thinking friend put it - Innocence is to childlike as Naiveté is to childish.

So Max – there are no easy answers, no simple formulas to take away the pain and frustration of decision making at this level. You are senior enough to take on this responsibility. Maintain your innocence as you go forward but leave behind the naiveté as it will only cloud your thinking even more.

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