Value Investing

Michael Mauboussin – Attention: Pay Now Or Pay Later

Michael Mauboussin – Attention: Pay Now Or Pay Later

Michael Mauboussin is the author of The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing (Harvard Business Review Press, 2012), Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009) and More Than You Know: Finding Financial Wisdom in Unconventional Places-Updated and Expanded (New York: Columbia Business School Publishing, 2008). More Than You Know was named one of “The 100 Best Business Books of All Time” by 800-CEO-READ, one of the best business books by BusinessWeek (2006) and best economics book by Strategy+Business (2006). He is also co-author, with Alfred Rappaport, of Expectations Investing: Reading Stock Prices for Better Returns (Harvard Business School Press, 2001).

Visit his site at: michaelmauboussin.com/

Michael Mauboussin - Attention: Pay Now Or Pay Later

Introduction

We all face a similar challenge: how to pay attention to what matters so as to make sure that we make good decisions. There are lots of bids for our attention, and the introduction of technology in recent years means there are more beeps and buzzes to divert our focus than ever before. Failure to allocate attention properly in the short run can add up to problems in the long run. Hence, the theme for the Thought Leader Forum in 2015—“Attention: Pay Now or Pay Later.”

This year’s forum featured economists, psychologists, and even a world-class pickpocket. Each explained how focusing the spotlight of attention left a great deal to the shadows. We heard that how you allocate your attention can affect your happiness, how organizational mindsets can perpetuate implicit biases, how a failure to pay attention to small problems can snowball into predictable surprises, and how the notion of multitasking is a myth that should be delegated to the trash heap. And you know that focus can be manipulated when a pickpocket takes an audience member on stage and proceeds to swipe all of his valuables in front of a delighted audience.

You can think of attention on three levels—individual, organizational, and financial markets. In our personal lives, we have to figure out how to filter the signal from the noise. In most cases, the answer is not to try to drink from a fire hose of information, but rather to prioritize attention. Further, one useful approach is to shape your environment in order to shift some of your cognitive load. Finally, we know that creativity is generally associated with a mind-wandering state, but constant focus on screens limits that time. Carving out time for mind-wandering may be the path to doing your best thinking.

Attention is also very important for your organization. Companies, similar to individuals, often have mindsets—a lens through which to see the world. Mindsets can have implicit biases that diminish performance. So, you need to think carefully about whether you can include “nudges” in your organization to steer behavior away from the biases. Motivation is also a crucial topic, and evidence suggests that the conditions of intrinsic motivation—autonomy, mastery, and purpose—can be fragile. Effective leaders shape the organization’s attention in such a way to promote motivation.

Attention is important for markets, too. There is always a topic, or worry, of the day. Understanding how to weight the relevance of that topic is critical. It is also important to pay attention to the person on the other side of your trade. What does he or she know that you don’t? Research suggests that we tend to be overconfident in our beliefs. Allocating attention toward the motivation of others can help check that overconfidence.

We all feel that the pace of change in the world is speeding up. This means that there are more demands on our attention than ever before. And there’s plenty of evidence that our attention wasn’t so good to begin with. So, we need to be aware of the challenges of attention and, more importantly, to adopt methods to allocate attention wisely.

The following transcripts not only document the proceedings, they also provide insights into how you can improve your attention management—as an individual and as a leader. One theme that ran throughout the day was how limited our attention truly is, and how much is going on outside our awareness. Once you recognize this reality, you can take concrete steps to address it in your own life and take advantage of it in business.

Michael Mauboussin – Attention: Pay Now Or Pay Later

Good morning. For those of you whom I haven’t met, my name is Michael Mauboussin, and I am head of Global Financial Strategies at Credit Suisse. On behalf of all of my colleagues at Credit Suisse, I want to wish you a warm welcome to the 2015 Thought Leader Forum. For those who joined us last night, I hope you had a wonderful evening. We are very excited about our lineup for today.

I’d like to do couple of things this morning before I hand it off to our speakers. First I want to highlight the levels at which you might consider today’s discussion of the role of attention. I then want to discuss the forum itself, including what you can do to contribute to its success.

You might listen to today’s discussion of attention at three different levels. Some of the points will span multiple levels, but these are some of the ideas that we’ll hear about throughout the day. So here they are.

The first relates to attention for us as individuals. How do I learn to pay attention more effectively? How can I improve my happiness or the happiness of those around me? How do I balance deep focus and mind-wandering? How do I handle the information deluge?

The second is at the level of your organization. This room is full of leaders. What biases are embedded in the organization? How do you motivate employees? How do you pay attention so as to avoid business discontinuities and, in an even more extreme case, ethical breaches?

The final level is that of markets. What information do we pay attention to? And how do we weight it? How do we pay attention to what others are doing without mindlessly falling in line with what they do?

So, let’s start with the individual. One of the big challenges most of us face is lots of demands on our time and attention. Our natural inclination is to want to do many things at once—to multitask. Well, the scientific community has studied multitasking, and the verdict is in: it doesn’t work. When we think we’re multitasking, we are really doing sequential tasking—and each individual task is done poorly. Further, switching tasks is cognitively costly.

So, the prescription is pretty straightforward: don’t do it. And don’t pretend that you can. You may gain some emotional gratification from multitasking, but the evidence is clear that it degrades your cognitive functioning.

Simply speaking, your mind can operate in two states: focused attention or decoupled attention, also known as mind-wandering. Focused attention is required to complete specific tasks, such as writing a crucial email or reading a legal document. Mind-wandering allows us to consolidate thoughts and provides easier access to associative thinking. Indeed, we often do our best thinking in the mind-wandering state.

I was once at a presentation where the speaker asked people when they got their best ideas. The most popular answers were: in the shower, while working out—and, more specifically, running—and on plane rides. This was before the days of WiFi and handheld devices.

So, the antidote to too much focus is to carve out time to allow for mind-wandering. Walking, especially in a natural setting, is a very effective method to encourage creativity.

Finally, most of us have the sense of being overwhelmed by information. And that sense is not misplaced. One estimate suggests that we are exposed to five times more information daily today than we were 30 years ago. That’s the equivalent of reading 175 newspapers!

The antidote for this is to reshape your environment. One idea is called “brain extenders”—offloading your cognitive load on to the environment. Let me give you two trivial examples. Say you check the weather forecast before you go to bed and see there’s a good chance for rain tomorrow. Instead of trying to remember that, you can simply place your umbrella by your door, or by your car keys. That way, the environment itself ensures that you remember. Another case is the ideas that pop into your mind as you are trying to focus. Rather than try to remember them, simply keep a stack of index cards nearby and jot down what you’re thinking. Again, that will free your mind and allow you to focus.

The next level is that of the organization. We have a room full of leaders, and you’re all trying to build great cultures that will last. Here’s a question—and you’ll hear Max Bazerman talk about this later this morning: are there problems in your organization that will become bigger if you don’t address them now? If so, are you doing anything about it?

Now, it may seem obvious that you would do something about it. But what if it relates to a person who is highly productive or a business that is very profitable? What then? In his great book, Creativity, Inc., Ed Catmull, the president of Pixar Animation Studios and Walt Disney Animation Studios, describes numerous instances when he had to change the direction at Pixar to preserve the firm’s culture. The firm wasn’t in trouble at these junctures. They were just vulnerable. He noticed, and took action.

One key idea in attention is mindset—the lens, defined by a set of beliefs, through which an individual or organization sees the world. One famous example is Carol Dweck’s work on growth versus fixed mindsets in learning. Part of paying attention is carefully considering your organizational mindsets. What you may find is that there are biases in those mindsets—biases that may impede performance.

How might you deal with those biases? One approach is to use nudges—a structure in the environment to encourage a certain, and presumably better, behavior. Let me give you one example of a nudge that’s saved my bacon lots of times—the signs written on the streets of London that tell you to look right. For Americans or Europeans used to cars coming from the left, this nudge is a godsend. And I’m sure the British drivers appreciate it as well.

The final issue I’ll mention for the organizational level is the idea of intrinsic motivation. We all want happy and motivated employees. And there’s a fairly well developed literature on intrinsic and extrinsic motivation. For the kind of work that the people here do, intrinsic motivation is the key. What’s important to understand is that intrinsic motivation is fostered by certain conditions, including autonomy, mastery, and a sense of purpose, and that these conditions can be fragile.

Attention is relevant in a couple of ways. First, it is important to be overt about these conditions and to do what’s possible to strengthen them. But you have to pay attention to do so. At the same time, organizations commonly make changes that make sense on one level but that undermine intrinsic motivation. Pay attention to unintended consequences.

The final level at which you might consider attention is that of markets. One example is the basic idea of paying attention to the person on the other side of the trade. Why is he or she selling? Or buying? What do you know that the person on the other side of the trade doesn’t know? Research in psychology shows that we can be overconfident in our judgments.

Here you see the results of about 2,000 people who answered 50 true-false questions and were asked to assign a level of confidence to their responses. On average, people were 70% confident but correct only 60% of the time. Paying attention to the motivations of others can be very useful in understanding the source of edge.

Markets are funny in that there always seems to be a topic of the day—concerns about Greece, China’s growth, deficits, interest rate changes, and so forth. It is also funny that there seems to be a rotation in the concern of the moment.

Attention can be helpful if you can properly weight the importance of the information in the context of what you are trying to achieve. The key idea is that not all information should be given the same weight in arriving at a proper decision. The ability to weight information is analogous to the ability to properly weight positions within a portfolio—you can get very different outputs depending on how you consider the inputs. Naturally, the key is to place the proper amount of weight on the topic of the day and to maintain perspective.

Finally, it’s important to avoid mindlessly falling in with the consensus. There’s a great line from Seth Klarman that I love to quote: “Value investing is at its core the marriage of a contrarian streak and a calculator.” The “contrarian streak” keeps you vigilant about considering the view that’s not popular.

But the calculator part may be more important—it suggests that the popular view has driven a wedge between price and value, which allows for attractive returns. A lot of investors think they treat fundamentals and expectations separately, but few actually do. Paying attention to that distinction is crucial. So, as you listen today, you might consider attention at all three levels.

Before I speak about the goal of the forum, I want to mention the talented folks from Ink Factory. Dusty and Ryan will be graphically recording all of our presenters today. This means they will be synthesizing the words of our speakers into images and text to capture the key concepts. Their slogan is “you talk. we draw. it’s awesome.” And we think you will agree.

Please feel free to take pictures of the artwork and to tweet the images. And we encourage you to ask them questions—after they are done drawing of course!

Let me end on what our goals are for the day. First, we want to provide you access to speakers whom you may not encounter in your day-to-day interactions but who are nonetheless capable of provoking thought and dialogue.

Second, we want to encourage a free exchange of ideas. Note that our speaking slots are longer than normal, in large part because we want to leave time for back-and-forth. We purposefully call this a “forum” instead of a “conference” precisely for this reason. We want to encourage an environment of inquiry, challenge, and exchange.

Finally, we want this to be a wonderful experience for you, so please don’t hesitate to ask anyone on the CS team for anything. We will do our best to accommodate you.

With that, I’m pleased to introduce our first speaker of the day.

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