In Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life (Amazon,) Rory Sutherland makes a strong point that the pendulum has swung too far to the side of “rationality.” Businesses are so enthralled by scientific thinking that they have stopped taking risks.
The problem that bedevils organisations once they reach a certain size is that narrow, conventional logic is the natural mode of thinking for the risk-averse bureaucrat or executive. There is a simple reason for this: you can never be fired for being logical. If your reasoning is sound and unimaginative, even if you fail, it is unlikely you will attract much blame. It is much easier to be fired for being illogical than it is for being unimaginative.
The fatal issue is that logic always gets you to exactly the same place as your competitors. If you are wholly predictable, people learn to hack you.
For an investor, there are quite a few aha moments. To out-perform, you need to be different from everybody else. But if you are a professional money manager, then being different is very hard to defend if things don’t work out. So the larger your get, the lesser the risks you can take. If you think quantitative models will solve this problem, think again:
The risk with the growing use of cheap computational power is that it encourages us to take a simple, mathematically expressible part of a complicated question, solve it to a high degree of mathematical precision, and assume we have solved the whole problem.
We should also remember that all big data comes from the same place: the past. Yet a single change in context can change human behaviour significantly. For instance, all the behavioural data in 1993 would have predicted a great future for the fax machine.
The book is an insightful, yet easy read.
Recommendation: Must read!