It’s one of those occasions where we’re supposed to remind you to seek the source material, remain skeptical and filter the signal from the noise. However, the ‘multidisciplinary geek’ in us wants to see some scientific foundations shaken up.

Back to the study, whose abstract can be found here: they also looked at >45,000 NCAA (US college-level basketball) games and found the same effect, albeit smaller.

The hypotheses to explain these findings were loss aversion and diminishing sensitivity: that is, losing by 1 point made teams seek to reverse the situation and losing by a “lot” made teams care less or subjectively try less hard as those losing by 1 point, tied or winning. The researchers then devised a “game” to test subjects’ motivation in similar situations and they did find that those losing by little increased their efforts.

Even more interesting is the finding that people with higher confidence in themselves increased their efforts more than those with less confidence. In the article’s own words: “Being slightly behind won’t increase motivation if you think you’re not capable of turning things around. And, similarly, a large deficit might also be motivating if you think you’ve got what it takes to stage a glorious comeback.”

Motivation isn’t an easy issue – not even as a study field – so it’s only natural that it seems so hard to instill it in oneself and/or others. When you mix the issue with confidence, it’s hard to know what comes first – this study seems to say that confidence is the fertile ground for motivation.

Very interesting story in the NYT this Sunday: how the Web is making it easier to fund/ develop companies that aren’t web-based at all, and actually make tangible products. It reminded us of a conversation we had internally last Tuesday about “open-source chips” and other electronic hardware available for a fraction of the cost of a few years ago, and how much easier it is nowadays to build prototypes. All that was needed was a way to organize like-minded people and help their ideas find interested investors, however tiny the capital needs. No longer. In the words of an MIT professor, “The situation resembles the way that anyone with a laptop and an Internet connection can now start a Web-based company” – and we all know what innovation and wealth creation can come out of that “mold”.

TED Talk by Marcin Jakubowski on “Open-sourced blueprints for civilization” – Feb 2011 (4:11)

About John Brockman, here’s an interesting interview on March 2011 Wired UK magazine.

First of all, it’s humbling that such a commonsensical notion about the brain has been at least in dispute for almost 15 years, while we still get everyday stories of “right side vs. left side”. Good reminder to keep one’s preconceived notions in check – including the assumption that the current line of thinking is definitive.

The author then goes into the “modern” theory and highlights some alternative approaches to try to stimulate insights, the “Aha!” moments. Here are a few quotes that caught our attention:

- “The shelves of the brain are stocked with what you’ve seen or heard or read about what others have done before. This process takes place naturally in every human brain, but active study can accelerate and improve it (…)” – indeed. Compare it to two quotes by Charlie Munger: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.” and “Spend each day trying to be a little wiser than you were when you woke up.”

This is from our “Why we write” page on Buysiders.com:

“At IP we seek to fight our structural cognitive limitations acting with discipline and dedication in 4 fronts: (…) 1) Investing our attention in the acquisition of “frameworks”, “mental models”, “vocabularies” and information of several disciplines, industries, companies, geographies, business models, vehicles and investment structures. These resources form a tacit knowledge mosaic that: a) creates context(s) for us to understand and organize the innumerable stimuli we receive, helping distinguish what is relevant and what is not; b) functions as a repository of information with potential to be used in the future; c) encourages our creativity, providing us with perspectives and starting points different from the “average view” for everything we do.”

Another quote from the article:

- “The presence of mind Clausewitz describes is akin to the calm state that precedes a flash of insight, (…) when your brain is relaxed and wandering, instead of focused on a particular problem.” – Again we turn to Charlie Munger, who has said: “We both (Charlie Munger and Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.”

Finally, the author describes GE in the 1990′s. Then-CEO Jack Welch and his Chief Learning Officer Steve Kerr had a method for problem-solving that the author considers very clever. Describing the method he calls “the GE matrix” he says:

- “(…) Then ask the most important question you can ever ask to solve any problem of any kind: Has anyone else in the world ever made progress on any piece of this puzzle?” – Or, as we’ve written in a 2009 post: “(…) But we can greatly improve where and how we get our “building blocks” by looking abroad. We joke that it’s the “crystal ball that works” – we wish it was that good, but we find more and more over the years that we gain valuable insights. (…) In some cases, NOT doing it may blind you to risk factors not previously seen.”

We’d like to add another dimension to the first and third quotes we’ve highlighted above: networking. Part of the active, relentless effort to acquire mental models, knowledge, facts and other building blocks involves getting to know the right people and foster these relationships. As we’ve written (again…) in the “Why We Write” page:

“2) Building up and developing a local, national and international “intelligence network”. According to our experience, it is not very “wise” to leave out of consideration, in a strict process of evaluation of investments, the input of people who know much more than you about some key points of your analysis. (…) There are also thousands of formal and informal specialists spread throughout Brazil and worldwide. They are former company administrators, regulators, shareholders, investors, consultants. They are very useful on several manners: as independent sources of information on companies, people background checks (administrators, shareholders), as ‘devil advocates’, for specific aspects of an investment thesis, and are also useful to make us get quickly up to speed with respect to relevant themes that take place in countries different from ours.”

Other references at Buysiders.com:

- Creative problem-solving – Dec. 20th, 2010.

- Multidiscplinary approach and communication – Feb. 17th, 2010.

First, the basics: Dr. Atul Gawande published an “instant classic” New Yorker article called The Checklist in 2007. It’s a must-read, and highlights how another physican, Dr. Peter Pronovost, started using a “stupidly” simple checklist in intensive care units and how that saved lives and money. This was a key insight: procedural complexity had become so mind-boggling that no single “maestro” could be singularly responsible for all steps. Designing a checklist and making sure it was followed achieved enormous results through better execution, oversight and especially communication between a team of now-empowered nurses/other helpers and doctors/surgeons. This initial research has since been expanded to different intensive-care procedures, different areas in hospitals and all this in different geographies in the US – and abroad – in varying social and economic conditions, with encouraging results.

In the words of a NY Times review of the ensuing book, The Checklist Manifesto: “What a powerful insight this is: In an age of unremitting technological complexity, where the most basic steps are too easy to overlook and where overlooking even one step can have irremediable consequences, something as primitive as writing down a to-do list to “get the stupid stuff right” can make a profound difference.”

- An aside: the fact that these simple health care procedures haven’t been adopted elsewhere with the utmost urgency is a clear example of how incentives (in this case, misaligned incentives) and ingrained culture can really bend rational thought and defy logic. Big ships turn very slowly, as the captain of the Titanic certainly would tell us. -

Here’s a quote from another review of the book: “Sometimes a deeply complex problem has a deceptively simple answer.” Definitely. Which is completely different from “a deeply complex problem must have a deceptively simple answer”, which is something the book can inspire since it tries to adapt the original research into other fields. In a podcast with Harvard Business Review, for instance, Dr. Gawande tells us of Walmart’s impressive response to Hurricane Katrina – how central management built a few vital points (a list), then empowered local managers (i.e., allowed for creativity) and demanded constant communication so that the best ideas could be spread (and the worse cut off quickly). He lists more examples and we can certainly think of other complex fields in which checklists should be helpful.

At IP, for instance, we are paranoid about making sure we know every nut & bolt, rule, general procedure and accounting impact of every investment instrument we ever consider negotiating (in that sense, having a global fund for almost 10 years has been terrific). Then we store it and discuss it in our Intranet, and when we do decide to initiate a position in it we start much smaller than we want to – so we can see how it “behaves” in real-life. As Buffett likes to say, “risk comes from not knowing what you’re doing” and checklist approaches in such cases can help.

But even if there weren’t cases where checklists seem inappropriate, there would still be good and bad checklists. In yet another review, there were quotes of Dr. Gawande’s interview with a Boeing expert on pilot checklists:

“There are good checklists and bad… bad checklists are vague and imprecise. They are too long; they are hard to use, and they are impractical. They are made by desk jockeys with no awareness of the situations in which they are to be deployed. (…) They turn people’s brains off rather than turn them on.”

This is a point we’ve made in a very early Buysiders.com post called “Turn off your debugger“: beware of mental crutches… The Boeing guy continues:

“Good checklists, on the other hand, are precise. They are efficient, to the point and easy to use even in the most difficult situations. They do not try to spell out everything.  – a checklist cannot fly a plane . Instead they provide reminders of only the most critical and important steps – the ones that even the highly skilled professionals could miss. Good checklists are, above all, practical.”

It seems like a paradox, but it isn’t: we’ve argued before that good synthesis is as important as far-reaching research in our investment process. In a sense, it seems like we’re searching for a simple solution to a complex problem, but it’s not the case. For a checklist to work, you must have a solution, and in our job there isn’t one – there is no replicable procedure.

We’ll agree with another NY Times book reviewer: “When Gawande writes that an investment manager he knows believes a checklist can help him reliably beat the stock market, the case seems to have been pushed too far.”

While we remain skeptical about checklist approaches “in general”, we took away from the article and the limited time we’ve spent with the book that checklists can help in special situations, perhaps more often than we thought, not because they are helpful per se, but 1) because the process of creating it can be useful and 2) because of what the WSJ Health Care Blog’s reviewer put it so well: “checklists can (…) also remind us to talk to each other and coordinate our activities at particularly crucial junctures.”

IP has learned over 22 years that, when it comes to teamwork, neither individual talent nor diversity of background alone – ultimately no single factor in a group, by itself – is enough to create a high-performance team if the efforts aren’t coordinated (and incentives well aligned, but that’s another story).

Finally, the book also carries with it a deep message about discipline. Big-shot surgeons, top-gun aviators, whatever you are: make sure you’ve taken the right steps, however small they seem, or the consequences may be dire. The “financial instruments” example is in the same vein. That kind of commitment can certainly be transported to other fields.

Here’s a light video of Dr. Atul Gawande at Jon Stewart’s The Daily Show, followed by a 43-minute lecture that’s very comprehensive (the first 10 minutes are taken by the Austrian girl drowning story of the article).

Keep those suggestions coming!

The good: The idea that groups of people can be better suited than individuals to take on some tasks has been around for a while, and we’ve discussed crowdsourcing on Buysiders.com rather extensively. The idea that you should foster diversity in the team building effort isn’t new either. That said, this very interesting article looks at “Group I.Q.” and tries to determine the collective intelligence of teams and when/ why it varies. It’s still preliminary research and it raises almost as many questions as it addresses, but it’s a great field to explore.

The bad: The behavior number 3 in this article (via Farnam Street blog) is another entry in the large collection of highlights of the dumb things we can do when we’re in groups. In this case, dumb shopping behavior. The 5 tricks come from Robin Lewis’ (of The Robin Report newsletter) new book, “The New Rules of Retail”.

The other posts at Buysiders.com regarding crowdsourcing/ groupthink:

Where do good ideas come from? – Sept. 30th, 2010

The end of management – Sept. 9th, 2010

Multidisciplinary approach and communication – Feb. 17th, 2010

Follow the red balloon – Dec. 6th, 2009

Crowdsourcing revisited – Nov. 18th, 2009

Netflix’s smart crouwdsourcing initiative – Sept. 22nd, 2009

The (weak) analogy would be to relentlessly seek to build up your arsenal of mental models and knowledge – the point is to be better suited/ “fertile” for the associations and “click” moments. Another interesting aspect: much of the “recent” developments in the study of the human brain vs. thought mechanisms involves the use of MRI brain scans – yet there’s no consensus in the scientific community about it being fail-proof in revealing causality (“if this area of the brain ‘lights up’, therefore it’s this mechanism at work”). Perhaps one day it will be demonstrated once and for all that MRI brain scans do reveal what they’re assumed to reveal, but in the meantime there could be some body of science built on sand… And if science has its logical pitfalls, investing is much more crowded with “fake axioms”.

Throughout the other articles in this series, the NYT has included videos, podcasts and even puzzles to illustrate or enrich the discussion. Just don’t forget the 24-hour day axiom!

Monumentally Mistyfying: The series opener. Quick read, not much to highlight but this: “Taking on a brain-teasing challenge ‘is hard-wired into our nature,’ (…) ‘There’s something very deep in human nature that loves to solve puzzles — even small children, before they can read, love taking things apart and putting them back together.’ Take the labyrinth, a mystery that can be embodied in stone or hedge or even bales of hay. It promotes ‘wandering — in a physical and a mental way,’ said Hélène Guenin, a curator of a show on labyrinths coming next September to the Centre Pompidou-Metz in France.” A show on labyrinths? Can’t miss it.

No memory, but he filled in the blanks: About a patient who lost all capability of storing new memory but still loved crossword puzzles – and how it actually helped him cope and learn.

The wizard of crossword puzzles: absolutely soft conjectures, but… “He excelled at math as well as music, abilities that he thinks go together with crossword solving. (…) What they all have in common, he said, is pattern recognition (…) ‘Mathematicians and computer scientists are also constructors.’ Arthur Schulman, a crossword constructor and retired psychology professor from the University of Virginia, who taught a seminar called “The Mind of the Puzzler,” agreed that there is a strong correlation between skill at word puzzles and talent for math and music. All, he said, involve playing with symbols that in and of themselves are not meaningful. ‘There’s an underlying connection, but I’m not sure what it might be,’ Professor Schulman said. ‘It’s finding meaning in structure.’

Crafting the perfect crossword: On creating puzzles – “Like about a third of the puzzling students, Ms. Lucido is a computer science major. ‘A very large percentage of crossword puzzle constructors are into computers or math as professions,’ Mr. Shortz said. He thinks that is because ‘crossword making involves having this huge amount of data and synthesizing it into a grid.’ But constructing puzzles is like writing, too. ‘You want the perfect word,’ he said, ‘le mot juste.’

Why do puzzles at all? – Teller (half of the Penn & Teller duo) writes about why humans subject themselves to the “pain and frustration” of problem-solving. His prose is actually surprisingly good.

The rush of the crossword puzzle moment: Do you learn stuff you didn’t know when doing crossword puzzles, or do you just “recall” what you didn’t know that you knew? Again we go back to the associations and “click” moments that the prepared mind is probably better set to experience.