Conversations with a Spy

“Imagine that a car bomb is set to go off tomorrow at 11:00 a.m. What do you do?”


A difficult question. As an investor and ent

  1. What known individuals might get involved?

repreneur, I have faced many uncertain situations, but none quite prepared me for the challenge of car bombs. My companion paused to allow time for his question to sink in. He then continued speaking and I listened intently—after all, it is not often that one finds oneself having a discussion with a spy.

The man speaking to me had spent roughly 30 years fighting kidnappers, criminals and terrorist organizations, and had recently returned from negotiating the release of a hostage in the Middle East. To say our worlds were different would be like calling the sun hot. Yet there I was, listening to this man share a major life lesson: it is necessary to consider multiple ideas when dealing with complex problems.

We live in a society that is evolving at a rapid pace. Every day there are developments taking place in science, technology, business and politics that change how we interact with each other and the world around us. Ten years ago, had I recommended that you get into an unmarked car with a complete stranger and leave the car without paying when you arrived at your destination, you would have probably called me crazy. But today, this is exactly what thousands of people do when they use the car service Uber. Likewise, who would have believed that there would soon be driverless cars? Or 3D printers? Our world is an intricate, ever-evolving maze that is not only dynamic but fundamentally unpredictable.

Generating and exploring multiple ideas are skills that allow us to cope with the uncertainty and complexity of our lives. And yet most of us are far less competent in this area than we imagine. Often, we delude ourselves into thinking we excel at these skills, when empirical evidence suggests otherwise. In order to make more effective decisions in complex situations, we must not only acknowledge that it is critical to generate multiple ideas, we must also accept that we are inherently limited in our ability to do so. Only then can we put strategies in place to address our limitations and improve our skill set.

Much can be gained in our professional, investing and personal lives by intentionally considering multiple options when we’re faced with a complex decision. Considering multiple possibilities allows us to reduce the probability of error and open our eyes to more opportunities.

The Need for Many

If you have less than 24 hours to stop a car bomb from detonating…what do you do?

What you DON’T do is panic, jump to conclusions and attempt to solve the case alone.

To understand why this is a very bad decision, it is helpful to differentiate between two types of decision-making situations: technical and complex.1

In a technical situation, there is a clear right or wrong answer and a prescriptive best practice. What is 2+2? How do you fix a car engine that is broken? How do you land a plane in free fall? In technical situations, there is typically one right answer and the problem-solving process is straightforward: (1) determine the problem, and (2) identify the correct solution based on expert knowledge. It is reasonable in these cases to move swiftly to the answer.

Complex situations, however, involve uncertainty because multiple outcomes are possible. How should you position your investment portfolio given the current environment? Where should your children go to school? How do you deal with intelligence indicating that a car bomb will explode tomorrow? In these situations, we need to consider multiple ideas in order to effectively deal with the unknown. When we fail to do so, we increase the probability of errors and missed opportunities.

As an example, let’s consider your investment portfolio. In the current environment, one of the main concerns on investors’ minds is the prospect of interest rate normalization. If you believe that interest rates will definitely go up in the next 12 months, you may be inclined to sell all of the bonds within your portfolio—after all, rising rates should negatively impact bond performance. But this could prove disastrously short-sighted for an investor with a balanced portfolio. While interest rates may rise in the next year, it is also possible that they may not and there could be a number of scenarios in which the protection of bonds proves vital. For example, bonds would offer some protection in the event of a Chinese financial system meltdown, deflation, or an equity market correction. By failing to consider multiple scenarios, investors could unknowingly increase the risk in their portfolio.

Exploring multiple ideas also enables us to uncover more opportunities. This is perhaps best demonstrated in Google’s famous “20% time.” For years, Google has maintained a policy allowing its employees to spend up to 20% of their time on passion projects of their own choosing. This policy has led to products like Gmail, Google News, Google Suggest and AdSense, an ad engine that generated $3.4 billion in the first quarter of this year, amounting to roughly 22% of total revenue. Had Google never created the flexibility to explore different ideas, none of these products would have come to life.

Unfortunately, most of us are not very adept at generating and considering multiple possibilities. This is because we:

a) only know so much,
b) cannot easily stomach ideas that conflict with our existing beliefs, and
c) have the tendency to focus on one idea at a time.

The Limits of the Individual Mind

Our creativity helps to set us apart from every other species on the planet. In many respects, we are effective problem solvers. But there are practical constraints to what our minds can do. Our knowledge is limited and we inherently approach situations with a biased viewpoint. These shortcomings curb our ability to be fully creative in considering multiple solutions to a problem.

For starters, the mind struggles to imagine something if it has never had exposure to it. A person who is blind does not enjoy autumn’s red and orange hues. A man who has never seen images of the ocean struggles to comprehend its vastness. We had no idea that such bizarre creatures lived in the seas before we explored their depths. While novel ideas do occur, most of our thoughts are strongly influenced by our experiences. This implies that
the set of possible solutions or ideas we can imagine is also limited.

Similarly, our thoughts are naturally limited by our existing knowledge base. As an example, consider a person who is invested in commercial real estate. Having spent decades in the market, this investor understands the boom-and-bust cycle of property markets and the impact of interest rates. He also knows enough to not take on extra debt at the wrong time. However, if this investor is unfamiliar with the major consumer shifts happening with online retail, and has not read that as many as two-thirds of shoppers may prefer shopping online,2  then he may be unaware that the demand for square footage related to commercial real estate is diminishing. His ignorance could lead to overlooking a risk that he should be managing.

It is not just the limits of our knowledge base that lessen our ability to generate multiple ideas. Even if one has an encyclopedic knowledge, a savant memory and the deductive reasoning of Sherlock Holmes, one would still be approaching a situation from the viewpoint of individual perspective—a framing that is formed throughout our lives through our interactions, experiences and education. So in addition to being limited to our current repertoire of knowledge, we also have limits of perspective. Both serve to constrain the generation of ideas we need to make more effective decisions.

The Anglerfish. Who would have imagined this fish before it was discovered?

The Anglerfish. Who would have imagined this fish before it was discovered?

Cognitive Dissonance

Humans also struggle to consider multiple ideas due to a tension, or uneasiness, created when we are confronted with ideas that conflict with our existing beliefs—a phenomenon called cognitive dissonance.

In 1957, psychologist Leon Festinger coined the term cognitive dissonance to describe the discomfort produced by the combined presence of two thoughts that do not agree with one another. Festinger argued that humans strive for internal consistency of values, beliefs and ideas, and that they will experience discomfort when conflicting thoughts are present. His observation was that people will seek to reduce this tension: the greater the discomfort, the greater the desire to curtail it.

A good example of this phenomenon can be seen in one of Aesop’s traditional fables, “The Fox and the Grapes.” A fox comes across some grapes that he desires, but he soon discovers that they are out of his reach. Unable to attain what he desires, the fox concludes that he never really wanted the grapes in the first place. After experiencing the discomfort of conflicting thoughts, or cognitive dissonance, the fox reduces his discontent by rationalizing that he did not really want the grapes from the start.

Cognitive dissonance is one of the main reasons why individuals fail to consider a broad spectrum of options in a situation. For example, suppose you decide to purchase a stock because you believe the company’s management is trustworthy and excellent. Five months from now, you observe that the auditor for this firm has resigned. Rationally, you should view the auditor’s resignation as a red flag. However, this new information is at odds with your existing belief that the management team is excellent, so you elect to ignore it. This decision demonstrates that cognitive dissonance can lead to a premature and irrational dismissal of important information.

In our experience, cognitive dissonance appears to be stronger when ego is involved. Most people have a tendency to view decisions and ideas as possessions. When we buy a stock or make a business decision, we treat it as our decision. The decision is appropriated as though it is a part of ourselves. In these cases, the discomfort experienced seems to be strong.

Overcoming cognitive dissonance is difficult, in part, because so few of us are aware of it. Moreover, those who are mindful of it tend to downplay its impact. In fact, a number of readers are likely, even now, brushing off the theory because of cognitive dissonance. Believing themselves to be rational and self-aware, they will reason that they are beyond its influence.

Chauveau Fables de La Fontaine
Ever hear of the expression “sour grapes”?
Source: François Chauveau (1613-1676), Wikimedia Commons

One Idea at a Time

Even when our ideas agree with one another, we often fail to consider multiple perspectives due to our tendency to give greater weight to our favourite idea.

In 1960, cognitive psychologist Peter Wason discovered that people have the tendency to perform research in a one-sided manner. Wason ran an experiment in which he challenged participants to guess the mathematical rule he had in mind. He provided an example—2, 4, 6—and instructed them to guess another triplet of numbers that would fit the unknown rule. Participants suggested numbers, such as 8, 10, 12, and Wason told them if their sequence was correct. Participants were allowed an unlimited number of questions before stating “with high confidence” what they believed was the correct answer. In the end, exceptionally few participants got the right answer, which was “increasing orders of magnitude.”

Why did this happen? Even though participants had unlimited guesses, most of them selected a series of questions that merely confirmed their existing beliefs. Participants would see the 2, 4, 6 series and guess that the rule was increments of two. They would then start guessing series with increments of two, which all fit the true rule (increasing magnitudes). Empowered by their “correct” guesses, they stuck with a strategy that was “winning.” Of course, had they presented any three numbers that increased in magnitude, like 1, 2, 3, they would have quickly realized that “increments of two” was wrong. The participants failed to falsify. Wason coined this tendency as confirmation bias—the inclination to search for information in a way that confirms one’s beliefs.

Wason’s experiment demonstrates that people have a tendency to do research in a serial manner. We often apply a win-stay/lose-shift strategy for hypothesis development. In other words, even when we imagine we are considering multiple ideas equally, we have a tendency to favour one idea over others.

Strategies for Improvement

In our experience, the following strategies can be effective in improving our ability to generate and consider multiple ideas when faced with complex decisions.

1. Proactively expose yourself to new ideas to broaden your
knowledge base

Exposing yourself to subjects that are unrelated to your career can spark new insights and even help you attain a better understanding of your own discipline. Berkshire Hathaway’s Charlie Munger is famous for doing this. By exploring a wide variety of topics and disciplines, Munger develops mental models that he then layers like a lattice to help him make investment decisions.

Within our research team, we encourage each other to travel, meet with interesting individuals and study non-investment subjects. It is fascinating to observe the investing insights that our team has gleaned from exploring seemingly unrelated areas. For example, we have learned much from the study of ants, avalanches and entropy. Likewise, we have uncovered insights from discussions with spies, investigative journalists, professional athletes, scientists, entrepreneurs and other investors. Learning about a wide variety of topics and speaking with many kinds of individuals allows us to expand our ideas on what is possible.

2. Address the win-stay/lose-shift tendency by explicitly developing multiple working hypotheses

Explicitly building multiple working hypotheses into our processes (rather than proceeding with one hypothesis and testing it until it is either falsified or accepted) can address our tendency to fall victim to a win-stay/lose-shift pattern. 

For example, most research reports focus on one hypothesis and tend to cast facts under the umbrella of this thesis. Yet for any company, there are typically many theses possible. Let’s imagine that Tim Hortons grew its market share in the quarter. One theory to explain this fact could be that management has successfully reformatted its menu, leading to a surge in sales, and therefore, a greater share of the market. Another theory could simply be that one of Tim Hortons’ competitors went bankrupt. If an analyst could not disprove one of these theories after thorough research then it would make sense to include both theories in the report.

3. Manage cognitive dissonance through awareness and non-attachment

One of the most important steps that an individual can take to reduce cognitive dissonance is awareness.

When our behaviour conflicts with an existing belief, we have three options:

a) alter the value of the conflicting belief,
b) emphasize a new belief that supports the behaviour, or
c) change the behaviour.

By consciously reflecting on cognitive dissonance, an individual has a greater ability to resolve it in a rational manner.

For example, let’s say that you recently sold a stock because you lost confidence in a company’s management team and its ability to compete in an increasingly competitive environment. Six months later, you notice that the stock price has increased by 15% and management has delivered on its strategy and increased earnings by 10%. At this point, you might experience cognitive dissonance.

Existing belief: Management is “bad”
Behaviour: Selling out of the position
Conflicting belief: Management is “good” because they delivered on their word and the stock is up

To resolve this tension, you could reason that it doesn’t matter if management is good, as the company won’t be able to compete in a tough environment (i.e., you reduce the importance of the conflicting belief). You could also determine that short-term earnings increases are not reliable indicators of a good management team (i.e., you emphasize a new belief). You could also decide that management is talented and repurchase the stock (i.e., alter your behaviour/existing belief). Whatever you decide, the act of explicitly considering the resolution forces you to confront the logic of your thoughts.

Another strategy for limiting the impact of cognitive dissonance is the principle of non-attachment. This strategy addresses the tendency that people have to associate their Self with an idea. By disassociating our ideas with who we are, we have the ability to lessen the emotional impact of conflicting ideas.

If we stop approaching thoughts as possessions and instead start treating them as experiences, we can begin a process of non-attachment. If an idea is simply something we experience, instead of something we possess, then it is easier to see it as separate from ourselves. Thus, we can take it less personally if our idea is contradicted.

4. Use cognitive dissonance to create multiple ideas

It is also possible to use cognitive dissonance to our advantage. By creating a belief system in advance, we can influence the behaviours that happen in the future.

How does this work? Let’s say that you are confronted with an idea that conflicts with one of your existing beliefs, like the auditor resigning on a company you own. Under typical circumstances, you might be tempted to ignore the auditor’s resignation because this response would ease the tension caused by cognitive dissonance. But if you saw yourself as the kind of person who never dismisses information, this would be hard to do. By adopting a belief that “you always pursue the truth” and “always consider multiple options,” you would be using cognitive dissonance to encourage the development of multiple ideas.

While this might seem like a Jedi mind trick, it is actually a very common strategy within cognitive therapy. In order to encourage certain behaviours, therapists will encourage their patients to adopt certain beliefs, which helps ensure that they behave in a desired manner.

5. Accept your limitations and solicit the opinions of others

As much as we endeavour to improve, individuals will always face natural limitations. Therefore, it is crucial to consult with others in order to make more effective decisions.

The first step in collaborating with others is an obvious one: construct a process in which all the relevant parties are consulted. For example, if you want to put your kids in an after-school activity, you might want to speak with both your spouse and your children before making a decision. Although this may seem self-evident, it is amazing how often traditional views of hierarchy dictate who can provide ideas and when, to the detriment of idea sharing. To fully benefit from a team dynamic, leaders must ensure that they seek input from anyone who may have useful information—whatever their seniority level. Of course, this means it is necessary to have a culture that exalts the meritocracy of ideas over hierarchy. Job title cannot matter more than quality of thought.

My spy contact made this point several times during our conversation. He argued that strategic leaders must always maintain an effective “grip” on a situation, meaning that they must know what is happening at ground level without being on the ground themselves. To do this, it is necessary for a process and culture to be in place that allows them to hear and consider what members of their tactical teams have to say.

Well-flowing communication channels are also necessary when we need to generate multiple ideas in order to analyze complex situations. In this regard, technology, process and culture matter a great deal. When communication channels are blocked, errors have a tendency to be made.

One of the best lessons on the importance of well-flowing communication channels is a story my spy contact told me about a British intelligence officer in World War II. The officer was responsible for covering the enemy’s transportation and logistics systems in the Middle East, an important assignment, as enemy transportation systems influence tactical maneuvering. He was asked whether the German army had shipped a specific kind of tank to a location in North Africa (the British army struggled against this particular kind of tank). The officer answered that, most certainly, there were no tanks of this kind in the region. He argued that since none of the ships in the enemy’s fleet had the loading equipment necessary to get the tanks on board, there were no tanks in that area.

Unfortunately, when the British army arrived at this location, there were tanks. Many tanks. The British army had to retreat hundreds of miles.

What happened? It turns out that the officer had failed to consider one ship. This ship was among three that had been commissioned before the war that had the capability of loading these particular tanks on board. This one ship had been quietly going back and forth each night from Italy carrying the tanks. The intelligence officer never knew about this detail and therefore a large mistake was made. But the worst part was that other British intelligence teams knew about the ship. Communication channels had broken down and the information was simply not communicated back.

While we do believe it is important to seek input from others, we are not advocating for decision-making by committee. There is a big difference between multiple inputs and multiple decision-makers. While seeking multiple inputs is usually warranted in a complex situation, committees often struggle because authority is spread out over too many people. It is too easy to shirk responsibility and avoid making timely decisions.

From our experiences evaluating thousands of companies and speaking with thousands of managers, the decision-making model that is most effective is usually leader-with-input. This model benefits from multiple perspectives but ultimately one, or sometimes two, leaders have final decision-making authority. For a portfolio, this means that the portfolio manager has final say on investment decisions. In the intelligence community, the commissioner has final decision on the game plan. In the home, Mom and Dad overrule the desires of the children.

How to Handle a Car Bomb

At this point, the reader might be thinking, That’s all very nice…But what about the car bomb?

Since we wouldn’t want to disappoint our readers, below is an example of how the situation could be addressed.

In a crisis like this, an intelligence team would likely go through four steps:

1. Consolidate information for analysis
2. Consider the options (multiple)
3. Prepare a plan
4. Execute the plan

Having received the intelligence, there would be some consolidation of information. The necessary people and information would be brought together. Most likely, the relevant decision-making parties would meet.

The team would then consider multiple options. A white-hat (data, facts and figures) brainstorming session3 would likely be conducted, allowing the team to pull together their various thoughts on the situation. The agents would assemble a set of theories and various probabilities would be explored. This would likely include the kind of bomb that would be deployed, where the bomb might detonate and how the bomb might physically get into the city. The questions considered might look something like this:  

1. What known individuals might get involved?
2. In what neighbourhoods do they reside?
3. How can they be found?
4. In what communities might the bomb be hiding now?
5. Where might individuals meet to plan out the next day?
6. What roads might be used to get to the destination?

Having explored various possibilities, a plan would be prepared and executed. Most likely, the agents would move into the field and look for further signals. They would begin following suspects and looking for suspicious activity. They might get warrants to tap phone lines. In effect, they would all have their eyes and ears on the ground. The goal would be to find the bomb in advance of the morning and shut it down. If this failed, the tactic would shift to deterrence. In a coordinated move, the intelligence officers and the city would work together to scare off the perpetrators using a combination of checkpoints, helicopters and feet on the ground.

Final Words

Using a similar process, my spy contact was able to prevent many car bombs from detonating under his watch. Clearly, it was his team that managed this feat and not him alone. Even spies need to make sure they are operating as a team and openly communicating. No one has a lock on knowledge.

In this world, it can be easy to feel like one must go it alone. Many social and business norms suggest that “winners” have all the right answers and are capable of tackling problems independently. Yet there is little basis in reality that indicates this is a prudent approach. Complex problems are fundamentally uncertain and warrant the consideration of multiple possibilities in order to effectively handle them. There is virtue in seeking the input of others.


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Kara Lilly, CFA
Investment Strategist

September 2014


  1. A distinction made by numerous authors, most notably in James Surowiecki’s Wisdom of Crowds. A similar distinction is made frequently by the Cambridge Leadership Institute, which differentiates between “technical” and “adaptive” work.
  2. Morris, Betsy. “More Consumers Prefer Online Shopping.” The Wall Street Journal 3 June 2013. Web. 1 Oct. 2014.
  3. de Bono, Edward (1985). Six Thinking Hats: An Essential Approach to Business Management. Little Brown and Company.