I negotiate deals for a living. I’ve come up with various names for the thing that I think you are describing, specifically in the context of doing a deal. Currently, I call it “missing mediocrity.” The reason I call it that is that I see business people cluster their analyses in two areas: great success and great failure. They focus on great success for fairly obvious reasons: (1) it is what the deal is intended to obtain, (2) you have to prepare operationally to deliver on the deal after you sign, and (3) their compensation is often tied to success.
They also focus on great failure, but for less transparent reasons. Often, they feel they have an obligation to assess risks for the organization. So they undertake it only as a burden, without creativity. And they aren’t very good at it. And, in a case of motivated reasoning, they may want to dismiss the failure case as something that they don’t need to plan for. So, you sometimes get statements like, “If that happens, we’ll be retired by then.” Or “If that happens, we’ll be bankrupt anyway.” Those statements could even be true, but they are inadequate in the sense that (a) they are missing the more likely cases and (b) they do not fulfill an officer’s responsibility to his or her organization.
Both of those extreme outcomes are rare. Instead, what we see is a lot of mediocrity, especially in comparison to great success or great failure. One frequent outcome is that the deal is just a decent one. It neither makes nor breaks the company, but it contributes somewhat to the bottom line. If you do a lot of them, you will be successful. Another frequent outcome is a deal that was not good enough to do, but good enough to stick with once done. (For example, where marginal profits are positive, but will never be enough to cover the already incurred up-front fixed costs.) If you keep doing a lot of them, you will eventually run yourself out of business. And another possible outcome is one that is just a loser of a deal that the company ought to gracefully exit. It won’t bankrupt you, but you lose a little money on every transaction and that won’t change.
One way to combat the cognitive problem is to recognize your own relative incompetence at this particular type of analysis and bring in an expert. In the deal setting, they are mostly lawyers, but any executive with lots of experience could fill the same role. For example, after an acquisition, a CFO or a CFO’s right hand will often analyze the acquired company’s deals, to weed out the losers and stop doing new deals where fixed costs exceed the payback. Organizations often have controls in place to require review or oversight by staff functions and committees for this type of reason. (That is, not specific to the missing mediocrity problem, but to address the classes of failures where different types of expertise can prevent a bad decision.)
I negotiate deals for a living. I’ve come up with various names for the thing that I think you are describing, specifically in the context of doing a deal. Currently, I call it “missing mediocrity.” The reason I call it that is that I see business people cluster their analyses in two areas: great success and great failure. They focus on great success for fairly obvious reasons: (1) it is what the deal is intended to obtain, (2) you have to prepare operationally to deliver on the deal after you sign, and (3) their compensation is often tied to success.
They also focus on great failure, but for less transparent reasons. Often, they feel they have an obligation to assess risks for the organization. So they undertake it only as a burden, without creativity. And they aren’t very good at it. And, in a case of motivated reasoning, they may want to dismiss the failure case as something that they don’t need to plan for. So, you sometimes get statements like, “If that happens, we’ll be retired by then.” Or “If that happens, we’ll be bankrupt anyway.” Those statements could even be true, but they are inadequate in the sense that (a) they are missing the more likely cases and (b) they do not fulfill an officer’s responsibility to his or her organization.
Both of those extreme outcomes are rare. Instead, what we see is a lot of mediocrity, especially in comparison to great success or great failure. One frequent outcome is that the deal is just a decent one. It neither makes nor breaks the company, but it contributes somewhat to the bottom line. If you do a lot of them, you will be successful. Another frequent outcome is a deal that was not good enough to do, but good enough to stick with once done. (For example, where marginal profits are positive, but will never be enough to cover the already incurred up-front fixed costs.) If you keep doing a lot of them, you will eventually run yourself out of business. And another possible outcome is one that is just a loser of a deal that the company ought to gracefully exit. It won’t bankrupt you, but you lose a little money on every transaction and that won’t change.
One way to combat the cognitive problem is to recognize your own relative incompetence at this particular type of analysis and bring in an expert. In the deal setting, they are mostly lawyers, but any executive with lots of experience could fill the same role. For example, after an acquisition, a CFO or a CFO’s right hand will often analyze the acquired company’s deals, to weed out the losers and stop doing new deals where fixed costs exceed the payback. Organizations often have controls in place to require review or oversight by staff functions and committees for this type of reason. (That is, not specific to the missing mediocrity problem, but to address the classes of failures where different types of expertise can prevent a bad decision.)
Max L.