Read the book Military Misfortunes: The Anatomy of Failure in War by Eliot Cohen and John Gooch and strolled away with the theory that their framework for taking a look at failures could be very helpful for investment managers. This is not a fresh publication but the basic ideas regarding failures are classic.

The evaluation between battle and investing is not far-fetched if you believe that what both face is a VUCA environment of volatility, doubt, complexity and ambiguity. Investment managers do not spend much time creating a culture of positive failure or one that is willing to go over failure in the open in order to find out ways to get better.

Cohen and Gooch focus on the premise that disaster theory from other areas of life can be employed to military thinking. There are different types of failure from simple to complex, but failing can be centered on three major themes, failure to adapt, failing to learn, and failure to anticipate.

The size of a failure is compounded when these failures are aggregated. Aggregate failing on a true number of levels can lead to catastrophic failing. The problem with analyzing failure is that a lot of just do not want to take action. There is the politics of failing whereby you want to attribute mistake with an individual often.

There has to be a person who is responsible and can be blamed for why things go wrong. In investments, it will always be the portfolio supervisor and not the business that has been developed around the individual. Cohen and Grooch use a matrix for examining failure based on the command-word level versus critical tasks like communication of warnings, the correct degree of alert, and coordination across groups.

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Looking at the investment world, it is easy to see a performance failing can be positioned in a failure matrix. If a huge risk goes wrong, you should ask the question of if the warning was presented with about the potential risks actually, the warning was given the right degree of concentrate, and whether all interested group was provided with the correct information.

To do this type of review needs open communication and a deep debate of policy and procedures. There can be failing to learn because the critical duties: resource allocation, coordination and communication, command and control, and techniques and doctrines are not focused in order to allow for learning to occur. You could have the right team set up but if the critical tasks aren’t undertaken you won’t be able to study from others to make a better organization. If learning does not go on, a failure that may be avoided will take place. There can be a failure to foresee.

Here the critical tasks are: cleverness collection and reporting, the web assessment of the given information given, and the appropriate alert once information is obtained. There will be surprises, however the issue is whether an organization is prepared on their behalf after they take place. In the investment work, there may be surprise shocks to markets, the critical organizational concern is whether the firm is able to anticipate these shocks and then have a plan in place to respond to this surprise.

The Fed will surprise, but is there an idea in place to foresee or at least be able to respond to a surprise. If the answer is that something will never occur, there will be failure. Addititionally there is the failure to adapt where in fact the critical jobs are: the resources for the method of adaptions, the identification of goals, and control or coordination of activities once adaptation is necessary.

Categories: Finance