Decision Making under Uncertainty For Success: Lessons from Jim Collins on Charlie Rose Show

I was listening to Charlie Rose’s interview with Jim Collins about his new book, “Great by Choice: Uncertainty, Chaos, and Luck–Why Some Thrive Despite Them All” (and his older work, “Good to Great: Why Some Companies Make the Leap… and Others Don’t“), about success stories.In his new book, he asks how small competing, aspiring companies starting out in challenging environment—Southwest Airlines and Pacific Southwest Airlines—end up with drastically different results.

He was saying that in his book, which I have not read, he uses march to south poles of Amundsen and Scott as a parody to explain how two different teams/companies approach for success under challenging circumstances differs so tremendously and why they are different. Amundsen, the Norwegian explorer beat Captain Scott to the South Pole and return back home safely. Scott and his company reached the pole but they perished on their return way back.

Collins was saying that difference was that Amundsen had three things going for him that Scott didn’t have: 1. Discipline, 2. Productive Paranoia,and, 3. Empirical Approach to What Works. Amundsen had decided that every day, no matter good or bad weather, they only make a 17 mile approach. Scott would kinda roll with it, good days he would go more to make up for bad days. The problem with this approach was after a good day, they were exhausted and fatigued and weak and so could not really handle a bad day. Amundsen would give himself a lot of margin for error. He would put marker almost 5 miles apart to make sure they would never get lost on the way back! He brought dogs because dogs eat dogs, so on the way back the healthier dogs could feed on the dying ones! Lastly, Amundsen had the foresight to live a year with Eskimos to learn about how to survive in the environment and unlike Scott didn’t exclusively rely on modern tools and machinery.

Collins then went on to say that great companies, like Southwest and Pacific Southwest, which started their ascend in a rough times, also differ from one another in major ways. For instance, the success stories hold a lot more cash, a productive paranoia of not being able to survive the Armageddon! In essence, they have an understanding that successive bad luck can wipe you out! Collins make the point that good luck cannot make a difference on your success but bad luck can! Bad luck in a row eventually would kill you off! That why you would need ten times cash to assets to survive the bad luck years!

This was fascinating because it has been a fixture on my lectures in investments and even corporate finance. I always make the parody with gamblers. Decision making under uncertainty is very much a gamble and in fact every business manager is a gambler. All great gamblers actually share the same traits: they are unbelievably disciplined, they understand gamblers’ ruin problem (i.e., you need capital to survive bad hands), and they are flexible in the face of adversity and they constantly learn and reexamine their methods. Good managers thus need to have a discipline, that is stick with well-thought-of plan! But they also need to be more-than-prepared for nightmares! And, lastly, they are humble enough to know that they don’t have all the answers and they need to learn constantly.

Of course, Collins went out to also say that the above is not necessarily against risk-taking. He said that great managers clearly take risk but they almost perfectly understand the risk they are approaching. More importantly, they embraced sudden changes and think how to scale the change up in their own favor. This, of course, was something that I do believe but I have not spent a lot of time exploring. I do know, and particularly, in the last couple months with all the volatility in the market, that while my stocks picks have been great, I needed to be more reactive and harvest my profits faster. If not, they would vanish in a manner of days. I am a fan of Charlie Rose and this interview of him with Jim Collins certainly ranks in one of the his best.

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