This is the third of a series of posts that I try to lay down the most relevant lessons from the book Psychology of Intelligence Analysis by Richard Heuer.
I believe this one topic, perspective or better yet, peripheral vision, to be one of the trickiest to analysts. It’s easy to literally get lost as research per se is simply never-ending. “Data collection” pitfall might play a big role in security analysis.
Perspective or Peripheral Vision
- “By studying similar phenomena in many countries, one can generate and evaluate hypotheses concerning root causes that may not even be considered by an analyst who is dealing only with the logic of a single situation.”
- There are many possible market segmentation exercises that possibly yield interesting questions, such as geographic, demographic, social, ethnic, economic, political, etc. The concept of horizontality here is introduced in the business environment analysis. Conclusions are dangerous since causality is difficult to fathom;
- “Historical analysis often precede, rather than follow, a careful analysis of the situation. The most productive use of comparative analysis is to suggest hypotheses and to highlight differences, not to draw conclusions.”
- Verticality: understanding how a specific firm and its sector weathered prior crises and demand peaks are great expectation calibrators. A little history coupled with sector-specific operational know-how satisfy analysis from this particular angle;
- “When faced with an analytical problem, people are either unable or simply do not take the time to identify the full range of potential answers.”
- Combining horizontality & verticality, with a little luck and a sharp mind, you can have a holistic view of the subject company. After spending a good time imagining possible scenarios and their impact in the key value drivers, you are likely set to have a investment-case-oriented research project;
Additionally, mind PR/IR company departments exist for a couple of reasons. One of them is to be the regular communication channel with investors. Also, a crucial part of their job description is storytelling. That’s the story the company tells investors during meetings with investors. Beware if one does not own the framework, one becomes susceptible to whatever story he is told.
The bottom line is extensive sweeping for comparisons propels better questioning, thus enabling one to ask sharper questions and to ponder new possibilities that previously weren’t even considered. To do that, peripheral vision is required.
What entertains me the most is learning and the discovery journey. Sometimes you are able to assemble the puzzle, sometimes you have to live with no answers and simply deal with. And that’s why I find the topic of Intelligence Analysis so interesting. I have recently read Psychology of Intelligence Analysis by Richard Heuer, based on a compilation of declassified articles from the CIA’s Center for the Study of Intelligence, prepared for intelligence analysts and CIA directors. I intend to make a series of short posts containing what I deemed to be the most relevant from the book, categorizing topics and commenting to fit my, and hopefully our, needs.
The Analyst Job
- “Human mind has limitation dealing with ambiguous information, multiple players and fluid circumstances”
- This is what the real world is all about. Acknowledge it and be humble. Consider nonprobable hypotheses. Deconstruct boundaries. Fathom scenarios.
- “We must battle against bureaucratic and ideological biases. The other guy most likely have a different cultural background, life premises and values. People built-in systems are not the same. One must understand people’s values and assumptions, and even their misperceptions and misunderstandings.”
- Remember companies actually are a group of people working towards theoretical global goals and many individual goals. Consider each key member of it and their respective background. Motivations are crucial. Mind those are not explicit most of the time .
- “It always involves an analytical leap, from the known to the uncertain. And still, you are not going to be certain. It’s a matter of odds a sense-making. The intelligence analysts function might be described as transcending the limits of incomplete information through the exercise of analytical judgment”
- Some questions are simpler puzzles, others lead analysts to mysteries. Grasp not even executives know what lay down on the road for their companies. Be skeptical and proceed with caution.
- “When dealing with a new and unfamiliar subject, the uncritical and relatively non-selective accumulation and review of information is an appropriate first step. But this is a process of absorbing information, not analyzing it. Analysis begins when the analyst consciously inserts himself into the process to select, sort and organize information.”
- Usually it’s more interesting begin collecting non-biased information than biased ones (company filings vis a vis sell-side reports). The extensive work of number-crunching, people background checking and reading competitor-related articles are exploratory. One starts creating value when one begins to think, i.e., lays down an opinion on a summary (investment case).
- “Major intelligence failures are usually caused by failures of analysis not collection. Relevant information is discounted, misinterpreted, ignored, rejected or overlooked because it fails to fit a prevailing mental model.”
- We must see the whole to notice the missing parts. Additionally, we must recognize the linchpin pieces of what could be a potential investment. No doubt this is easily said than done. Experience helps a lot here. History also. Shortcuts? Read, read, read…
- “Analysts will often find, to their surprise, that they can construct a quite plausible scenario for an event they had previously thought unlikely.”
- This could be translated as “Hey, please take a step back and think it over.” Second-level thinking helps a lot, i.e. extensive sense-making.
- “When one recognizes the importance of proceeding by eliminating rather than confirming hypotheses, it becomes apparent that any written argument for a certain judgment is incomplete unless it also discusses alternative judgments that were considered and why they were rejected.”
- This trick helps a lot dealing with confirmation bias. Being extensive in your preliminary research aids to eliminate biased thesis ahead. “What if” aids tremendously when fathoming investment cases.
- “What is difficult to find, and is most significant when found, is hard evidence that is clearly inconsistent with a reasonable hypothesis.”
- One can never be so certain.
“The historian uses imagination to construct a coherent story out of fragments of data.” – Richard Heuer
Analogies between chess and investing are somewhat frequent. What those usually fails to address is that the chess game is a closed-end system (masters usually memorize thousands of game set-ups like an algorithm so they can outplay opponents), while investments analysts and investors are required to constantly assess the ever-changing business environment. Taking a step back, sometimes the definition of what the business environment is not that linear. At the end of the day, it’s like investing is a matter of perspective and framing, not data collection and processing per se.
Additionally, it’s worth emphasizing what Heuer put brilliantly when he addressed the downside of mental models: it’s the principal source of inertia in recognizing and adapting to a changing environment.
There is a crucial difference between the chess master and the master intelligence analyst. Although the chess master faces a different opponent in each match, the environment in which each contest takes place remains stable and unchanging: the permissible moves of the diverse pieces are rigidly determined, and the rules cannot be changed without the master’s knowledge. Once the chess master develops an accurate schema, there is no need to change it. The intelligence analyst, however, must cope with a rapidly changing world. (…) Schemata that were valid yesterday may no longer be functional tomorrow.
Learning new schemata often requires the unlearning of existing ones, and this is exceedingly difficult. It is always easier to learn a new habit than to unlearn an old one. Schemata in long-term memory that are so essential to effective analysis are also the principal source of inertia in recognizing and adapting to a changing environment.
From Psychology of Intelligence Analysis; Richard Heuer