Thursday, February 21, 2008

What in hell is retrospective coherence?

It's perfectly clear why the dot-com bust happened. A bunch of internet startups all chased the same customer base, sought eyeballs instead of revenue, and tried to get big fast. Telecoms operators, hardware companies and software vendors all got fat on the investments of these startups. Then, when it became clear revenue wasn't forthcoming, the whole house of cards collapsed.

The problem is, that wasn't at all clear in March 2000, the top of the bubble. From my recollection, everyone owned stocks and checked Yahoo Finance throughout the day, calculating their (paper) net worth in real time. (Remember the book "Dow 36,000"? It's now available for $0.93 on Amazon.)

Our utter clarity on the events of the dot-com bust is an example of retrospective coherence. I first saw this term in the writings of Dave Snowden of Cognitive Edge. Retrospective coherence means that, in hindsight, it's easy to explain why things happened in a complex environment. Yet it is impossible to predict them ahead of time. (The long-running Dartboard investment competition in the Wall Street Journal bears witness to this phenomenon.)

Another example from the US sporting world is the recent Super Bowl. From all the post-game coverage, it's perfectly sensible why the New York Giants beat the Patriots. Their defensive line was superior, their coaching was better, the players were tougher.

But--before the game, nearly everyone had picked the Patriots. And a couple of key plays affected the outcome--if Manning had gotten sacked, or Tyree not made the catch on the same play, the papers would have written a very different story.

Getting seduced by RC causes us to create foolproof strategies and riskless plans. Once these are exposed to the complexities of the business world, their usefulness quickly deteriorates. The real damage occurs when we hang onto them too long.

When we recognize this trap, we can approach problems in a different way. Rather than trying to find the one correct path to our goal, we can perhaps decide on the first few steps, take them, assess where we are and whether to change direction, and progress in that manner. Or we can attempt some experiments and see which path is working best for our objectives (see what Dave says on "safe-fail" probes).

But always we must be aware that the playing field is constantly changing, that today's "no lose" investment strategy is tomorrow's $0.93 Amazon special, and that, sometimes, when the championship is on the line, the Giants will beat the Patriots.

(Photo: Sports Illustrated's cover of the Giants' Super Bowl win)

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