By Michael E. Raynor
The announcement that the Higgs boson had been observed as expected in the bubble chambers of the Large Hadron Collider created quite a buzz, and understandably so. I felt just that much better knowing that the universe works the way it was thought to. But it wouldn’t have fazed me one bit if the announcements from the Franco-Swiss border were that the search had been abandoned and a new model explaining the basic structure of matter was under construction. Learning something that is new and true is fun and easy—when the substance of what is learned doesn’t really matter (at least to the person learning it).
On the other hand, news much closer to home would take some real effort to take on board. Tell me that industry has no effect on company profitability, or that diversified conglomerates are more dynamic than small start-ups, or that the United States really is better than Canada at hockey, and you will have rocked at least part of my world. I care about these things, and so it becomes harder to learn something new about them.
The unfortunate irony, then, is that learning something that is both new and true seems to be extraordinarily difficult only when it is extraordinarily important.
I’ve had the chance to see this up close of late, and my experiences have given fresh merit to the cumulating research underlining how tenuous is the grip of rational thought on our beliefs and actions.
My colleagues at Deloitte and I have been conducting research into the drivers of long-term profitability. As the findings have emerged over the last year or so, I’ve had the opportunity to discuss the work with a number of executives in companies that we’ve studied in detail.
As much as we thought we had something insightful, there was an unmistakable, and sometimes explicit, belief on the part of our interlocutors that what we had to say was wrong or incomplete, or obvious and irrelevant. Most surprising, perhaps, is that all of these charges could be leveled at the same conclusions in the course of a single meeting.
But every once in a while, the exchanges have had an entirely different complexion, my most recent meeting being the most memorable yet. I spent a couple of hours with a twenty-plus-year veteran—with better than the last decade in the CFO slot—of a major U.S. corporation with revenue in the billions. Our research categorized his company as a “Miracle Worker”—that is, an organization that has been so profitable for so long that it’s clear something more than luck has been at work. In particular, this company has bested a well-known competitor (one with revenue in the tens of billions) by, on average, several percentage points of return on assets per year for the last three decades.
A defining element of our research has been uncovering what we’re calling “elements of advantage”: how differences in key measures such as gross margin and asset turnover explain differences in overall performance, and then connecting that underlying economic structure to specific behaviors that plausibly account for those observed differences. I learned that over the last thirty years, his company has had a significant disadvantage in a variety of subsidiary measures—asset turnover; selling, general, and administrative costs; and so on—that has been more than compensated for by a shockingly large advantage in gross margin. My Deloitte colleagues and I had concluded that the key to the company’s superior profitability has been a highly differentiated competitive position that allowed it to charge higher prices, which made up for its higher costs.
That’s when things got interesting.
The CFO’s response was spontaneous and vigorous (although still entirely gracious): This could not be true. This company competes in what most people would say is a highly price-sensitive industry. Its marketing collateral has for decades touted low prices, and the business has been relentless in keeping costs down. (A tour of the company’s offices gives you a visceral appreciation for how seriously management takes this.) Entertaining the notion that high prices have been the key to sustained success made this man physically uncomfortable. His initial posture, which had exuded magnanimity (leaning back in his chair, arms behind his head, relaxed face, and a warm smile), transformed into a pinched hunch as he studied my charts and quizzed me on the minutiae of our calculations.
So it went for nigh on two hours, at which point I witnessed the remarkable transformation that inspired this column: He sat back, his eyes unfocused, then looked at me with surprising equanimity. “You know,” he said, “I think you’re right.”
For the next couple of days, I was feeling very pleased with our research. We had been able to uncover a fundamental insight about the drivers of profitability that went against the intuition and considered beliefs of a capable and successful senior executive at a highly successful company. Where others had been dismissive, this time around, we’d made a breakthrough that I credited to improvements in our work.
I have since realized that the true hero of this story is the CFO. In fact, our analysis and presentation hadn’t changed much at all. What warrants attention is not that we could teach this CFO anything new but that he was able to overcome his initial knee-jerk reaction. Credit for that belongs to him, not to us, because it’s not teaching that’s difficult—it’s learning.
Learning is tough, it seems, because new information is not fed into our prefrontal cortex and processed by the rational mind, with the outputs then driving our emotional responses and behaviors. Based in part on the fMRI analysis of people making decisions, it is increasingly generally accepted that by the time we are consciously aware of new data, it has already been processed by our “old brain”—those bits of gray matter at the back of our skulls that have more in common with reptiles than computers—and its responses are entirely emotional. Conscious thought is then brought to bear not to determine how we should think and feel about the world but, rather, to construct narratives that justify the reactions we’ve already had.
Problems arise not necessarily because our emotional responses are irrational. The problem is that these emotional responses draw upon a very limited vocabulary: Can I eat it, can it eat me, can I mate with it?
This creates difficulties because the complex challenges and opportunities of the modern world require a range of responses that goes far beyond this limited repertoire. Consequently, new information that challenges long-held beliefs very often triggers what has become an atavistic emotional response that is all too often negative. Mechanisms that operate in most cases beneath our conscious control then marshal our rational mind to reduce the ensuing cognitive dissonance by discrediting the data that made us feel that way.
I don’t know how he did it, but my new CFO friend overcame his initial autonomic emotional aversion to our findings—in the course of a single conversation. I don’t want to oversell it, but it was a rare moment that revealed as much to me about the workings of the human mind as anything I’ve ever witnessed.
We must never forget who’s really in charge of our beliefs and, hence, our actions. In the words of one commentator, our rational mind is a mouse riding, and attempting to steer, the elephant that is our emotions. Since that elephant, even when entirely even-tempered, can wreak havoc with our rational intent, we must—at the risk of getting all new age-y—be far more in touch with our emotions than most of us typically are, and in every facet of our lives. To borrow and adapt a phrase, we are not rational beings having an emotional experience but, rather, emotional beings having a rational experience. Unless and until we accept and embrace that fact, we will be unwitting slaves to invisible passions, unable to expand the very horizons we most dearly wish to see beyond.
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