Currents:Book Review—Problem-Findingand “Fat Tail” Events: Minimizing Biasesand Enabling More Effective Leadership GILL IAN RICE

Bremmer, Ian, and Keat, Preston. The Fat Tail:The Power of Political Knowledge for StrategicInvesting, Oxford University Press, 2009. 272 pp.ISBN: 978-0195328554 (hardcover). $27.95.

Roberto, Michael. Know What You Don’t Know:How Great Leaders Prevent Problems Before TheyHappen, Wharton School Publishing, 2009. 224 pp.ISBN: 978-0131568150 (hardcover). $29.99.

About a year before Yugoslavia descended intocivil war, the Wall Street Journal recommendedYugoslavia as the most promising place to invest inEastern Europe. In the mid-1990s, very few analystsforesaw the East Asian financial crisis. In 1985, therewas no shortage of international experts, Russia spe-cialists, and Kremlinologists. Yet, virtually no onepredicted the imminent collapse of the Soviet Union.Why? Ian Bremmer and Preston Keat, in The FatTail, show that there are many risks that organi-zations, states, and individuals cannot see—muchless avoid—because these risks are unknowable, toocomplex to mitigate, or simply misunderstood. InKnow What You Don’t Know, Michael Robertoquotes G. K. Chesterton: “It isn’t that they can’t seethe solution. It’s that they can’t see the problem.”

Is it futile to try to forecast political risks, risks thatmight not be “seen”? No, argue Bremmer and Keat.In The Fat Tail, they illustrate in detail how ex-ecutives can identify, analyze, and mitigate politi-cal risks—just like any other risks. In Know WhatYou Don’t Know, Roberto explains the specific skills

business leaders should possess in order to becomeproblem finders. These skills, gleaned from researchinvolving almost 150 interviews at large and smallenterprises, help executives discover the bad newsthat typically does not surface until far too late.Roberto’s scope of likely problems is broader thanthat of Bremmer and Keat and encompasses anykind of problem or risk. He argues that if leaderssharpen their skills as problem finders, they can pre-empt the threats that could mean disaster for theirorganizations.

The “fat tail” referred to by Bremmer and Keat com-pares to “what you don’t know” in Roberto’s booktitle. Bremmer and Keat define fat tails as “the un-expectedly thick ‘tails’—or bulges—that we find onthe tail ends of distribution curves that measure risksand their impact. They represent the risk that a par-ticular event will occur that appears so catastrophi-cally damaging, unlikely to happen, and difficult topredict, that many of us choose simply to ignore it.Until it happens.” Bremmer and Keat acknowledgethat most corporations actively manage credit, mar-ket, and operational risks but spend far less timeand energy on political risks. Decision makers tendto ignore political risk until it produces a crisis fortheir organizations.

Political risk is the probability that a particularpolitical action will produce changes in economicoutcomes. In reality, various risks are interde-pendent. For example, the politically motivatedseizure of farmland by the Mugabe government in

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Zimbabwe (2000–2005) has led to, among otherthings, hyperinflation (an economic risk) and famine(a threat to social stability). Political risks includegeopolitical events or processes (wars), terrorism(property destruction, kidnapping), internal strife(social unrest), expropriations, currency controls,profit repatriation, discriminatory taxation, andcorruption.

Ultimately, our understanding of political risk isinherently tied to our cultural and ethical values.Bremmer and Keat explain the potential events weconsider most frightening are those that threaten thethings we most want to protect, like our indepen-dence, and the value of our assets and investments.It’s perceived risk that matters. These perceptionsare crucial, whether we are trying to identify po-litical risks or other kinds of risks and problemsthat could negatively affect us. The new behaviorsand competencies recommended by Roberto andBremmer and Keat are insufficient without intellec-tual curiosity. Executives need a restless mind thaturges them to ask questions about both the famil-iar and the unfamiliar—a mind that is never sat-isfied with its understanding of a topic, no matterhow much expertise and experience one has accu-mulated on the subject. Roberto highlights a clas-sic study by Roberta Wohlstetter that examinedhow the U.S. government discussed warning signsprior to the Pearl Harbor attacks. She argued thathuman beings tend to exhibit a “stubborn attach-ment to existing beliefs.” Cognitive scientists havesince provided ample evidence to support her con-tention. “What most people are not aware of, andare sometimes shocked to discover, is that most ofour thought—an estimated 98 percent—is not con-scious,” writes George Lakoff (2009), a professor ofcognitive science and linguistics at the University ofCalifornia-Berkeley.

Unconscious thought is reflexive—automatic anduncontrolled, like what the leg does when the doc-tor taps the knee. Conscious thought is reflective:knowing one’s own mind and being in control of

one’s decisions. Roberto refers to the work of orga-nizational learning experts Chris Argyris and DavidSchon, who conclude that the unconscious mindplays a role in explaining the gap between what peo-ple say and what people do. They contend that wehave certain mental models, or theories, in our headsthat govern how we will act in certain circumstances.Lakoff calls these models “frames,” to which we areoblivious. Social scientist Herbert Simon coined theuseful term bounded rationality. Bremmer and Keatexplain: our ability to hear, deliver, judge, and acton facts rationally is limited by the ingrained biasesand perceptions that allow us to cope successfullywith the daily grind of doing business. Which risksor problems do we consider then, and which do weignore?

One of the key difficulties Bremmer and Keat iden-tify when analyzing and identifying geopolitical riskis bias. Samuel Huntington’s “clash of civilizations”framework is an example of analytical bias in geopo-litical theory. He envisions a world of future geopo-litical conflict among great civilizations or culturalblocs. U.S. government officials, Russian generals,and al Qaeda supporters have each used it to supportarguments for a particular worldview. Bremmer andKeat ask: Does Huntington’s theory truly permit aglimpse of the future? Or is it simply a self-fulfillingprophecy used by different groups and individualsto further their particular agendas?

Roberto suggests that one way to deal with biasesis to become an effective observer. Principles of ef-fective observation that he details in depth include:trying to eliminate preconceived notions of whatone expects to see, collecting observations under dif-ferent circumstances and from varied perspectives,seeking informants wisely, engaging in active lis-tening, taking good notes, and keeping systematictrack of observations that surprise or contradict ex-isting beliefs. Important characteristics of the bestforecasters studied by Philip Tetlock (2006) are theabilities to think eclectically and to be tolerant ofcounterarguments.

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Political risks are usually generated by individuals:people with particular and identifiable sets of mo-tivations and limitations. According to Bremmerand Keat, this is what makes political risks pre-dictable. They point to Business Bank, a small andsuccessful private bank in Uzbekistan. In 2005, theUzbek Central Bank closed Business Bank and liq-uidated its assets. Surprisingly, a few days before, ata meeting of the Uzbek Central Bank, the BusinessBank had been praised. To the owner or businesspartners, the closure of Business Bank would seemto be a catastrophic, unpredictable event. How-ever, in the months prior to the seizure, BusinessBank’s parent corporation, Naitov Group, had part-nered with a U.S. firm, SkyTel, to enter the Uzbekmobile telephone market, bringing it into conflictwith mobile telephone investments held by GulnaraKarimova, the eldest daughter of Uzbekistan’s pres-ident. Bremmer and Keat note that the presenceof politically influential people in the mobile tele-phone sector should have raised red flags. Addi-tionally, there was a pending investment in BusinessBank by the European Bank for Reconstruction andDevelopment (EBRD). The EBRD has had a longand contentious relationship with the Uzbek gov-ernment, particularly with respect to human rightsand transparency.

Problems remain hidden within organizations fora number of reasons. Understanding these reasons,argues Roberto, is the beginning stage of findingproblems. People fear being marginalized or pun-ished for speaking out. In some organizations, struc-tural complexity (multiple layers, convoluted matrixstructures) may operate like a dense canopy in a for-est, which makes it difficult for sunlight to reach theground. Powerful gatekeepers may insulate leadersfrom bad news, even when intentions are the best.An overemphasis on formal analysis and a lack ofappreciation of intuitive reasoning can cause prob-lems to remain hidden for far too long. Roberto’sresearch suggests that, in highly analytical cultures,employees may self-censor their intuitive concernsbecause they fear that they do not have the burden

of proof necessary to surface the potential problemthey have spotted. Also, overly elaborate risk analy-sis systems can breed false confidence. Bremmer andKeat show how the subprime mortgage crisis in theUnited States illustrates this problem: the financialinstitutions involved were “lulled to sleep by theirown perceived analytical sophistication” and tookon too much high-risk debt. Many organizations donot train employees in how to spot problems. No-vartis senior executive Larry Allgaier told Robertothat he always keeps in mind an adage: “I worry themost about what my people are not telling me.”

Roberto presents a set of techniques to circumventgatekeepers. Sometimes, he says, leaders need towalk outside without an umbrella and feel the rain-drops on their skin. He offers specific strategies,such as creating opportunities for candid conver-sations between key constituents and senior leaders.As CEO of Xerox, Anne Mulcahy created a pro-gram whereby each member of the top managementteam serves as a “Customer Officer of the Day”at corporate headquarters once each month. Theyhear unfiltered comments from customers who maybe having problems with the firm’s products andthey are personally accountable for addressing theconcerns. Roberto advises leaders to connect withyounger people to learn about new trends and gainaccess to a different worldview. Tom Glocer, CEO ofThomson Reuters, spends time on Facebook. Somein the British press have criticized him for spend-ing his time this way. Roberto presents Glocer’srebuttal, from his blog, of course:

Now it could be argued, I suppose, that imaginationand experimentation should be left to more junioror younger staff, and the chief executive should onlyperform “serious” duties like strategy formulationand ordering people around. I think this is a lousyand disconnected way to lead. I believe that unlessone interacts with and plays with the leading tech-nology of the age, it is impossible to dream the bigdreams, and difficult to create an environment inwhich creative individuals will feel at home. . . . Ibelieve it is a very worthy investment of my “free”

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time to explore the latest interactions of media andtechnology.

Where data are lacking and standard statistical anal-ysis is inappropriate, scenario analysis is a usefultool both for political forecasting and for problemfinding. Bremmer and Keat provide the exampleof Royal Dutch Shell’s successful use of this tech-nique. When careful scenario analysis inspires cre-ative problem finding, it can help uncover strategicoptions and opportunities never imagined by ex-ecutives. Roberto relates the experience of formerF-15 pilot James Murphy, who recommends thatleaders should “chair-fly” a mission. By chair-flying,he means that the leader should sit down, visualizehow the mission will unfold, and seek out potentialflaws in the mission, as well as unplanned eventsthat might affect the team. Mountaineer DavidBreashears spends weeks before an expedition “en-visioning every possible scenario that might unfoldon the mountain.” Roberto explains that both Mur-phy and Breashears visualized potential problemsand shared these thoughts with their team. Chair-flying the mission and visualizing possible pitfallssend a strong message to one’s team that a perfectimplementation process is not expected; the leader isprepared for myriad errors and disruptions. Then,individuals in the team feel more comfortable speak-ing up later about a problem they have spotted.

Political risks are much more likely to occur thannormally distributed risk events would imply. Mostcompanies do not have the luxury of planning20 years ahead, especially when management isjudged by annual (and even quarterly) performance.Most executives are not trained to evaluate howgeopolitical events could affect their organizations.It is in this context that the advice provided by Brem-mer and Keat is most useful. They recommend ex-ecutives keep an open mind on long-term risks andstructure their organizations to be nimble and readyto adapt in case of a major shock. It is also benefi-cial to apply scenario analysis and plan for radicallydifferent worlds. Analytical techniques should be

varied and complementary: some qualitative andsome quantitative methods. Humans generally pre-fer the tangible to the abstract. For example, whenit comes to political risk, they will trust a pieceof quantitative data more than a piece of quali-tative data. They assume that “the numbers don’tlie.” Bremmer and Keat contend that one rea-son risk management departments ignore politicalrisk is that they have trouble translating it intoquantitative terms.

Bremmer and Keat stress that there is no grand uni-fied theory that explains how political risk affectscapital markets. Rather, there is a broad range oftools that executives can apply to specific cases.Some of these tools take the form of answers toquestions like the following: Do different types ofregimes behave differently when it comes to mar-kets? (Contrast, for example, the regimes in Mexico,Russia, and Saudi Arabia.) What are a government’sstated policies and ideas? What kinds of voting,constitutional, organizational, and political interestgroups limit the ability of a government to act? Whatpolicy changes can impact markets? How do elec-tions impact markets?

Are there patterns that can be identified? Huntingfor patterns is a useful skill in problem finding orrisk analysis. Roberto describes how intuition is apattern-recognition process. Does the existing situ-ation being examined fit the pattern of past expe-rience or not? Experts can function as mentors tohelp others hone their intuition and become betterproblem finders. This is a gradual process, however.Roberto cautions against using analogies withoutcareful analysis of similarities and differences to theissue under review, and recommends ways execu-tives can improve the use of their intuition. The ex-ercise of writing things down adds discipline andrigor to a leader’s thought process. He includes ad-vice from Lee Iacocca, former Chrysler CEO: “Inconversation, you can get away with all kinds ofvagueness and nonsense, often without realizing it.But there’s something about putting your thoughts

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on paper that forces you to get down to specifics.That way, it’s harder to deceive yourself—oranybody else.”

Roberto discusses studies of athletes that show eliteperformers do not excel simply due to innate talent.They engage in highly effective “deliberate practice”of specific techniques and do “after-action reviews.”Reflection and review should focus on four funda-mental questions: What did we set out to do? Whatactually happened? Why did it happen? What willwe do next time?

Bremmer and Keat quote Joseph Wertheim, presi-dent of Connecticut-based Tea Importers, Inc., ashe explains why his small firm stayed in Rwanda inspite of the brutal civil war of the early 1990s: “Youcan’t move 15 million tea bushes. That’s where theyare, so that’s where we are.” The company sufferedproperty damage, threats to employees, and chal-lenges associated with unsafe public infrastructure,as well as the costs of failure to comply with time-sensitive delivery contracts because it had to shutdown operations for the duration of the armed con-flict. The leaders of Tea Imports, Inc. decided tocontinue with its long-term business after the war.Crucially, the firm’s foresight in purchasing politicalrisk insurance coverage helped it absorb its financiallosses. The company even managed to expand itsoperation during 1997 and operates a Fair TradeCertified tea factory in Rwanda.

Many firms conduct postmortems to study fail-ures but not successes. However, Roberto stressesthat many small problems and mistakes occur evenduring the most successful projects. If such issues

are not tackled, they may escalate, and contributeto a major failure in the future. Many companiesexamine projects in isolation. Bremmer and Keatnote that this is a particular problem with politi-cal risk assessment. Executives tend to look at eachcountry separately. Comparing and contrasting aparticular project with others either inside or out-side the organization helps to protect against spu-rious conclusions. When executives study a singleproject, they may jump to easy conclusions aboutwhat factors led to the outcome. However, thismight not be the correct cause-and-effect relation-ship. Exploring how the same behaviors and activi-ties played out in multiple situations, some perhapsmore successfully than others, enables leaders to re-fine their attributions and conclusions. They can de-velop richer models of cause and effect as they gainexperience and expertise in problem finding and riskassessment.

References

Lakoff, G. (2009). The political mind. New York: Penguin.

Tetlock, P. (2006). Expert political judgment: How good isit? How can we know? Princeton, NJ: Princeton UniversityPress.

Gillian Rice is Professor Emerita at the Thunderbird Schoolof Global Management and was a Fulbright Senior Scholarat the University of Bahrain in 1996–1997. She holds aPhD from the University of Bradford. Dr. Rice’s researchinterests include environmentally related consumer behavior,the fair trade movement, and models of employee creativ-ity and organizational innovation. She can be contacted atgillian.rice@thunderbird.edu.

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