2024-03-15
These will be my notes on the book The Yellow Pad by Robert Rubin
When we lack complete certainty, we must discuss things in terms of probability. Some people don't recognize that decisions involve chances, while others struggle to accept it. It's normal to feel uneasy with uncertainty, but to embrace probability and navigate complexity, we must actively learn and practice it.
Translating thoughts into numbers promotes clearer thinking. The yellow pad's simplicity - with columns for outcomes and probabilities - prompts consideration of complex questions: identifying realistic outcomes, assessing probabilities, managing trade-offs, and addressing unquantifiable scenarios.
“When the future becomes harder to predict than ever, they paradoxically act as though they are completely certain as to what the future holds”
Temperament often distinguishes those who make thoughtful decisions during disruption. Managing emotions is key; responding requires discipline, not merely reacting. Effective leaders recognize and counter emotional biases. Involving more people in decision-making can be advantageous, but the decision-maker must avoid compromising between personal views and group consensus. Developing discipline to respond thoughtfully, correcting emotional biases, and considering options and probabilities can help navigate high-stakes situations and improve outcomes.
Our discussion highlights a common risk-related mistake: waiting to address risk until it's completely understood or quantified. Risk is often viewed in binary terms: what happens if it succeeds versus if it fails. Alternatively, it's sometimes split into three scenarios: best, middle, and worst cases, with the middle one receiving the most attention. Decision-makers recognize other possibilities but often sideline or overlook them.
It's tempting to simplify risk into a single number for clarity, but this can be risky. Risk is more accurately represented as a range rather than a single figure. Acknowledging the complexity and variability of risk allows for better decision-making. Instead of projecting a country's GDP growth as 2 percent, it's better to project a narrow range like 1.75–2.25 percent. This small change acknowledges uncertainty and improves accuracy. People often overestimate the likelihood of the most probable outcome and underestimate rare scenarios.
That's why we need a practical tool to address complexity and uncertainty, like the yellow pad method. Decision-makers can select key potential outcomes, covering the full range of risk, and then apply judgment, backed by facts and analysis, to assign probabilities and magnitudes to each.
Consider if the tails of the distribution are thin or fat
Assess confidence in estimates and potential impact of additional information
Differentiate between overwhelmingly probable scenarios and merely likely ones
Identify nonquantifiable but significant factors
Example:
Goldman Sachs implemented a rule to limit the size of investment positions, even when there's high confidence in limited losses. This prevented a disastrous loss when a deal unexpectedly failed. Despite potentially reducing gains, it was deemed a worthwhile trade-off to mitigate the risk of significant loss. This highlights the importance of internalizing risk management to make prudent decisions.
Consistently predicting short-term market behavior is difficult for almost everyone except a few professional traders. Advertising that suggests otherwise is misleading; there are no "Secrets of Wall Street," only knowledge and discipline. And if someone really did know such secrets, you can be fairly sure they wouldn’t be sharing them with the public.)
“What level of uncertainty do you put around that judgment?”
Uncertainty about events and their consequences is unavoidable. Even if the odds seem favorable, acknowledging the possibility of being wrong is crucial. Recognizing the extent of uncertainty, particularly its potential negatie impact, helps to moderate decisions. Selling during market declines isn't necessarily foolish; it's impossible to predict the bottom or the duration of a downturn.
Internalizing risk as a range and analyzing risks and rewards rigorously is key for successful investing, regardless of the amount or type of investment. Adopting a yellow-pad approach to risk, which considers the full range of outcomes and probabilities, is crucial in managing the uncertainties of a complex world. While it may be uncomfortable, recognizing uncertainty is essential for making informed decisions, especially regarding the future of life on Earth.
“We can’t afford to be wrong.”-Al Gore
Who achieved a great deal of success, however one defines it, have for the most part tended to possess some common characteristics.
The Author remarked to Vernon, “You know, when I was a kid in Miami Beach, I never would have imagined being in a place like this.” To which Vernon replied, “I always thought I’d be here.”
“some people grow and some people swell.” - John L. Weinberg
→ recognize your luck in success
Acknowledging the role of luck doesn't diminish anyone's accomplishments; it fosters appreciation and humility
Traits: intense focus, dedication to their pursuits, mental toughness
"This seems right, but there are no guarantees. I've succeeded before, which boosts confidence, but success isn't assured." → believing in success while avoiding reckless moves, confidence without sacrificing sound judgment, Accepting the possibility of failure may not seem comforting, but it keeps you grounded while maintaining confidence in your decisions.
"Never assume anything" Guy Levy
Learning from mistakes is crucial, but dwelling on them isn't productive. It's essential to move forward without being weighed down by past outcomes.
Many people want to know about things that are directly relevant to them: their work, their professions, their families, and their hobbies. → linear curiosity, be energetically curious
Maintaining consistency in estimating probabilities despite leadership influence is crucial. Being true to oneself in group settings prevents decision-making impairment. Differentiating between group actions and personal beliefs is key, except for fundamental principles. Honesty simplifies communication, eliminating the need for strategic expression.
Behavior consistency over time allows past behavior to predict future actions reliably. Rapid personal transformation is often exaggerated; our inherent wiring and choices shape who we become.
I brought up the idea of “wiring,” and I don’t think I’m wired in such a way as to find them personally helpful
Be skeptical of universally applicable management rules but → good managers are key in any organization
Embracing human complexity: recognizing and engaging with the inherent strengths, weaknesses, and motivations of individuals, and then working to give them the best chance to succeed.
Success at a job does not necessarily translate into success at managing others. → often overlooked → People are promoted to management positions based on how effective they are at their operating role, rather than how effective they are, or are likely to be, at management.
Difference between getting the best performance out of oneself and getting the best performance out of others, effective management requires one to understand that every individual is unique.
Managers often fall back on a set of practices that treats all employees the same way.(Jacob Goldfield socks) “You work for the people who work for you.”
Determining compensation, promotions, demotions on the basis of each individual’s overall contribution is fundamental both to organizational success. Characteristic of any manager is how they distribute credit or blame. Some senior people in organizations take credit for successes and divert blame, either as a conscious tactic or because of their preexisting personal tendencies. The best managers do the opposite. If things went well, he gave us the credit; if things went wrong, he took the blame. In organizations, success accrues upward. If the group does well, it reflects well on the leader. I have found that if leaders give credit to others, that also redounds to the leader’s benefit over time.
Focus on the quality of the advice and ideas and not who offered them → organizational chart may be unavoidable to function properly,but → prioritizing the org chart above individuals means failing to get valuable contributions, and therefore making worse decisions.
“I’ve never had much patience for people, regardless of rank or status, who speak up without knowing what they’re talking about.”
Never let yourself be steamrolled by her higher-ranking colleagues. Have questions, ask a follow-up. Or two follow-ups. Or three. In some organizations, this kind of questioning might have been seen as inappropriate or intrusive, but it can help make better decisions. People watch the leaders of the organization and take cues about all sorts of things: how to behave, how to treat people (including customers and colleagues), ethical standards, strategic focus, how to respond during a crisis or to someone making a mistake, and much else. Dont have inconsistency in adhering to values, people notice. “What you say today, people are going to be quoting back to you five years from now.”
“It seems to me China’s economy has an awful lot of problems,” say “Does China have more problems than most American investors think?”. Ask questions, wonder, curiosity, think about it. React with questions not opinions.
Crisis management? How do you make it through to the other side? →managing oneself.
“You just have to kind of separate yourself from everything going on,” advised Tim. “Say ‘the hell with it.’ Go ahead and do what you think is right.”
Compartmentalize → focus completely on a dire situation in front of them, putting aside anxiety and fear and anything else that might interfere with that focus.
“How am I going to get through this?” I’d ask, “What do I have to do right now? What do I have to do today?”
Decide on your crisis-management team, strategies for handling clients, creditors, employees, and media, and overall crisis response strategy. While the ability to manage unexpected threats may not matter in the distant future, in the short term, effective crisis management is vital for addressing humanity's pressing challenges. Leaders must be prepared to both mitigate the likelihood of crises and adeptly handle them when they arise.
How do we learn from what goes wrong? And how should that affect future decisions?
My post here describes this chapter better:
At this point i stopped reading the book, not because it wasnt interesting anymore but just for the sole reason of me heading onto new things. Im still not quite sure if that is something that is good or bad.
Thanks,
Finn