GUEST POST from Greg Satell

When I lived in Poland, it was common to say that “life is cruel, and full of traps.” From an American perspective, the aphorism can be a bit of a culture shock. We’re raised to believe in the power of positivity, the American dream and the can-do spirit. Negativity can be seen as something worse than a weakness, both an indulgence and a privation at the same time.

Over the years, however, I came to respect the Poles’ innate suspicion. The truth is that we are far too easily fooled and taken in by those prey on the glitches in our cognitive machinery. Sometimes the ones peddling bunk have fooled also themselves. Their claims seem to be supported by logic and evidence, but their promises never quite pan out.

We’re taken in because we want their claims to be true. We’d like to think that there is a secret we’re missing, that there’s a black magic that we’re not privy to and, if we prove our worth and obtain access to a few simple truths, we’ll capture the success that eludes us. Yet these frauds follow common patterns and there are telltale signs we can learn to spot.

1. The Survivorship Bias Trick

In 2005 W. Chan Kim and Renée Mauborgne, both distinguished professors at INSEAD, published Blue Ocean Strategy. In their study of 108 companies the authors found that “blue ocean” launches, those in new categories without competition, far outperformed the shark-infested “red ocean” line extensions that are the norm in the corporate world. It was an immediate hit, selling over 3.5 million copies.

Bain consultants Chris Zook and James Allen’ book, Profit from the Core, boasted even more extensive research encompassing 200 case studies, a database of 1,854 companies, 100 interviews of senior executives and an “extensive review” of existing literature. They found that firms that focused on their ”core” far outperformed those who strayed.

It doesn’t take too much thinking to start seeing problems. How can you both “focus on your core” and seek out “blue oceans”? It betrays logic that both strategies could outperform one another. Also, how do you define “core?” Core markets? Core capabilities? Core customers? While it’s true that “blue ocean” markets lack competitors, they don’t have any customers either. Who do you sell to?

Yet there is an even bigger, more insidious problem and it is a trick that hucksters, gurus and consultants regularly employ to falsely establish dubious claims. It’s called survivorship bias. Notice how “research” doesn’t include firms that went out of business because there were no customers in those “blue oceans” or because they failed to diversify outside of their “core.” The data only pertains to the ones that survived.

Can you imagine a medical researcher failing to include the results of patients that died? Or an airplane designer forgetting to mention the prototypes that crashed? Yet hucksters, gurus and consultants get away with it all the time.

2. Dressing Up Social Proof As “Research”

Another trick hucksters, gurus and consultants use is to dress up social proof as research in order to increase their credibility as experts and establish a need for their services. They say, for example, that they find company profitability is strongly correlated with a customer focus or that culture has a statistically powerful effect on performance.

At first glance, these claims seem reasonable, but as Phil Rosenzweig explained in The Halo Effect, it’s all part of a subtle bait and switch. What is being “researched” is not really “customer focus” or “culture,” but perceptions about those things in responses to a survey. So it is highly likely that successful companies are merely being perceived as having these traits.

For example, in 2000, before the dotcom crash, Cisco was flying high. A profile in Fortune reported it to have an unparalleled culture with highly motivated employees. But just one year later, when the market tanked, the very same publication described it as “cocksure” and “naive.” Did the “culture” really change that much in a year, with the same leadership?

Some might say that it’s “obvious” that a strong culture and customer focus contribute to performance, but then why go through the whole kabuki dance of “research?” Why not just say, “if you believe these things are important, we can help you with them?” It’s hard to avoid the conclusion that their is either an intent to deceive or just pure incompetence.

You don’t have to look far to see that this is an ongoing con. A few quick Google searches led me to major consulting firms currently selling halo effects as causal relationships to trusting customers here and here.

3. The VUCA World

Today it’s become an article of faith that we live in a VUCA world (Volatile, Uncertain, Complex and Ambiguous). Business pundits tell us that we must “innovate or die.” These are taken as basic truths that are beyond questioning or reproach. Those who doubt the need for change risk being dismissed as out of touch.

The data, however, tell a very different story. A report from the OECD found that markets, especially in the United States, have become more concentrated and less competitive, with less churn among industry leaders. The number of young firms have decreased markedly as well, falling from roughly half of the total number of companies in 1982 to one third in 2013.

A comprehensive 2019 study from the National Bureau of Economic Research found two correlated, but countervailing trends: the rise of “superstar” firms and the fall of labor’s share of GDP. Essentially, the typical industry has fewer, but larger players. Their increased bargaining power leads to more profits, but lower wages.

The truth is that we don’t really disrupt industries anymore. We disrupt people. Economic data shows that for most Americans, real wages have hardly budged since 1964. Income and wealth inequality remain at historic highs. Anxiety and depression, already at epidemic levels, worsened during the Covid-19 pandemic.

So why do hucksters, gurus and consultants insist that industries are under constant threat of disruption?

4. The Allure Of Pseudoscience

In Richard Feynman’s 1974 commencement speech at Cal-Tech, he recounted going to a new-age resort where people were learning reflexology. A man was sitting in a hot tub rubbing a woman’s big toe and asking the instructor, “Is this the pituitary?” Unable to contain himself, the great physicist blurted out, “You’re a hell of a long way from the pituitary, man!”

His point was that it’s relatively easy to make something appear “scientific” by, for example, having people wear white coats or present charts and tables, but that doesn’t really make it science. True science is testable and falsifiable. We can’t merely state what you believe to be true, but must give others a means to test it and prove us wrong.

This is important because it’s very easy for things to look like the truth, but actually be false. That’s why we need to be careful, especially when it’s something we already believe in. The burden is even greater when it’s an idea that we want to be true. That’s when we need to redouble our efforts, dig in and make sure we verify our facts.

Hucksters, gurus and consultants love to prey on our weakness for authority by saying that “the science says…” The truth is that science doesn’t “say”anything, it merely produces hypotheses that haven’t been disproven yet. Some, like Darwin’s theory of natural selection, have been around a long time, so we’re pretty sure that they’re true, but even in that case a large part of it was debunked within months. The ‘theory” as we know it now is what survived.

There are no absolute answers. There is, as Sam Arbesman has put it, a half life of facts. We can only make decisions on higher or lower levels of confidence. In the real world, there are no “sure things,” and don’t let hucksters, gurus and consultants tell you any different.

— Article courtesy of the Digital Tonto blog
— Image credits: Pexels

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