Thursday, September 23, 2010

Hybrid Thinking

Let me start with a few brief quotes from Dev Patnaik, Forget Design Thinking and Try Hybrid Thinking Fast Company, Tue Aug 25, 2009

Something bigger is going on, more powerful than the adoption of a single school of thought. The secret isn't design thinking, it's "hybrid thinking": the conscious blending of different fields of thought to discover and develop opportunities that were previously unseen by the status quo.

Hybridity matters now because the problems companies need to solve are simply too complex for any one skillset to tackle.

Hybrid thinking is much more than gathering together a multidisciplinary team. Hybrid thinking is about multidisciplinary people. ... Hybrid thinkers [are] folks who can connect the dots between what's culturally desirable, technically feasible, and viable from a business point of view.


I think the key here is to recognize that hybrid thinking doesn't have to be any particular combination of thinkings, but represents an open-minded quest to bring many thinkings together.

Any new or new-to-us thinking (for example, design thinking is attracting a lot of interest in some circles) should generate some new sources of innovation and value. This is because new thinking is always implicitly combined with old thinking, and so we have hybrid thinking by default. The problem arises when the new thinking is given the full credit for any successful outcomes, because it then starts to become dominant and the hybridity (which was perhaps the true cause of the success) is weakened or altogether lost.

Wednesday, September 22, 2010

Bearing Limit and Financial Regulation

An excellent keynote address by Avinash Persaud at the Long Finance conference yesterday, in which he deployed a few apparently simple ideas about risk management to mount an eloquent and powerful critique of the Basel 3 regulatory regime.

Here is a crude summary of some of the key points of Persaud's argument

1. Regulation should be counter-cyclical. Credit mistakes are made during the boom and exposed during the downturn. Regulation therefore needs to be stricter during the boom and relaxed during the downturn.

2. Basel 3 attempts to regulate risk in terms of risk sensitivity. This concept has several flaws.
  • It focuses on the private risks to banks and their shareholders, rather than the public risks to system and society.
  • It is based on the market price of risk, which is cyclical and therefore cannot support counter-cyclical regulation.
  • It assumes that all risk is homogeneous.
3. Financial risk is not homogeneous. There are different types of risk, which call for different kinds of hedging over different timescales. Persaud identified three types.
  • Credit risk denotes the risk that a given creditor will be unable to pay. This risk is mitigated by having a portfolio of uncorrelated creditors, and assuming that the failure of each creditor is a statistically independent event.
  • Liquidity risk denotes the risk that a given asset cannot be sold at short notice for the desired amount. This risk is mitigated by a preparedness to hold assets for long periods.
  • Market risk is a combination of credit risk and liquidity risk.
3. Banks are good at dealing with credit risk and bad at dealing with liquidity risk. Insurance companies and pension funds should be good at dealing with liquidity risk, provided they are not forced into inappropriate measures by stupid regulation.

4. Sustainable long-term investment entails liquidity risk. A regulatory regime that supports credit risk and fails to support liquidity risk tends to militate against sustainable long-term investment. But this is exactly the outcome of the Basel 3 regulations, according to Persaud. Instead, he argues, we need a regulatory regime that encourages firms to take appropriate long-term risk, according to their risk absorptive capacity.

5. The Basel 3 regulations force risk to be misallocated, because of a failure to appreciate time and its effect on risk. The goal of regulation should not be on reducing risk sensitivity but on increasing risk absorptive capacity.

6. The Basel 3 regulations therefore represent a missed opportunity for financing sustainable activities and longterm finance.



Note: In our risk management work, we use the term Bearing Limit, which roughly corresponds to what Persaud calls Risk Absorptive Capacity.


Papers by Avinash Persaud:

Thursday, September 9, 2010

Emotional Intelligence

Some of my thoughts here were originally posted in a discussion in the Linked-In Rightshifting group.


In my work on organizational intelligence, I have always tried to make it clear that intelligence of the whole is not equal to the aggregate intelligence of its parts. An organization such as a university can be packed with brainy people, but if they don't talk to each other, the collective intelligence of the whole can be pretty poor.

Something similar applies to emotional intelligence. A large religious organization can be packed with sincere and caring people, mostly with very high personal levels of emotional intelligence, but if they don't trust each other (or conversely trust each other too much), then the collective EQ of the organization could leave much to be desired.

It is also worth noting that intelligence is not always correlated with ethics. Thus some individuals with high personal levels of cognitive and/or emotional intelligence may use their powers for selfish, deceptive or manipulative ends, and this may well have a negative impact on the collective intelligence of the organization.

My primary goal in working with organizations is to increase the collective intelligence of the organization, but I'm very happy if individuals get some personal benefits from this as well. This would apply to emotional intelligence as well as other kinds of intelligence.

In complex systems, the whole is never equal to the sum of its parts. If the whole is greater than the parts, then we have a kind of surplus intelligence. If the whole is less than the parts, then we have a deficit. (I suspect the latter is pretty common.) We may be able to tackle the communication mechanisms and "information systems" (in the broadest possible sense of this phrase) to increase the surplus or reduce the deficit, but because the whole organization is a complex adaptive system then this will change the parts as well, hopefully in positive and productive ways, so the net surplus or deficit might not change, but that's okay as long as both the whole and the parts are better off.

As I see it, organizational intelligence depends on a number of capabilities: information gathering (awareness of relevant events and trends), sense-making, and decision-making, as well as collective memory and communication. I guess emotional intelligence has some of the same elements: emotional awareness (situation awareness, people awareness, self-awareness), a degree of self-discipline, and a high degree of personal and group authenticity. Along with the ability to detect and interpret emotional signals from other people, emotional intelligence brings an awareness of the emotional state of the group, which is not simply an aggregation of the emotional state of individuals. We all know that a group or organization can have an emotional state or mood, which affects all those in and around it. It is a common error to identify the person who expresses this mood most strongly, and to blame this person for causing or amplifying the mood ("scapegoat"), but removing the scapegoat merely shifts the task of expressing the collective mood onto someone else.

Here's where I think emotional intelligence is particularly important. If you want to work with a group or organization in a low emotional state, or with poor morale (and let's face it, that's where a lot of organizations are when we start working with them) you have to be able to engage authentically with the negative emotions of the group without being overwhelmed by the same emotions yourself.