Psychology of Intelligence Analysis Annotated: Linchpin Assumptions

This is the fourth 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.

In my opinion, the next topic lies at the core of investment cases. And it is not the investment thesis per se, it’s a subset of it. Linchpin assumptions are the core companies value drivers. Those are the KPIs executives and investors should understand and follow closely. For investors, those KPIs are simply lagging indicators. For executives, they work with both leading and lagging indicators. Internally, middle management need to act on leading KPIs that shall yield the desired outcome for investors and global goals for the company executives (lagging indicators).

For instance, take a retailer. Gross margin is the lagging indicator. The leading indicator could be the amount of sales sold with some markdown. And the leading indicator of the leading indicator could be a new COO that would redesign the supply chain or even more basic store processes. Many analysts consider gross margin to be the value driver. To be right before Mr. Market, you have to decipher that the COO is the value driver.

Linchpin Assumptions

  • “Analysts actually use much less of the available information than they think they do.”
  • “People’s mental models are simpler than they think, and the analyst is typically unaware not only of which variables should have the greatest influence, but also which variables actually are having the greatest influence.”
  • “When analysis turns out to be wrong, it is often because of key assumptions that went unchallenged and proved invalid.”

It’s easy to become lost with too many pieces of information. One must be sharp, separating what matters from a fundamental value perspective which will eventually be translated to the stock price from pure data garbage. You must pick one, two, no more than three value drivers for your investment case. If you haven’t identified those yet or just have too many of them, maybe you still don’t have an investment case. From previous posts, remember to make them visible and challenge them. Try to disprove your hypothesis and formulate new ones with their respective value drivers.

Psychology of Intelligence Analysis Annotated: Peripheral Vision

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 horizontalityverticality, 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.

Psychology of Intelligence Analysis Annotated: Making Things Visible

I recently ended up reading Psychology of Intelligence Analysis from 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. My previous post was about the analyst job in a series of posts that I try to lay down the most relevant lessons from the book.

Moving forward, one must grasp the whole to notice the missing parts. But if the whole isn’t visible, you likely wouldn’t have noticed the constellations drew in the above picture. Once they are noticed, they become obvious. And that’s what I wanted to talk about today.

Making Thinking Visible

  • “Intelligence analysts should be self-conscious about their reasoning process.”
  • “The analyst operates from a set of assumptions about human nature and what drives people and groups. Those are like to remain implicit in the analysis.”
  • “The question is not whether one’s prior assumptions and expectations influence analysis, but only whether these influences are made explicit or remain implicit.”
  • “One’s attention tends to focus on what is reported rather than what is NOT reported. It requires a conscious effort to think about what is missing but should be present if a given hypothesis were true.” 
  • “Assumptions are fine as long as they are made explicit in your analysis and you analyze the sensitivity of your conclusions to those assumptions.”

All of those excerpts from the book points to a single direction, which is the name of the topic I picked: make things visible (explicit). That should be the mantra. Acknowledging it is the first and so important step, but some tools should help the routine.

Writing is a topic I have already discussed here and I consider to be of the utmost importance. Sharing the research material previously with colleagues enriches the discussion and leaves time to other people criticize your thinking. Colleagues should not only read the material for the meeting, but also look up for complementary material that could reinforce or invalidate preconceived hypotheses. The ultimate step would be for the whole company to have a single investment thesis documenting the team’s work on the object company, not the lead analyst’s view on it.

Finally, when reviewing the material, always use two questions to check the rationale behind every assumption: “Is it? If so, why is it?” Those are brilliantly simple questions capable of enabling information sharing among team members and even debunking pseudo robust hypothesis.

I believe there’s much more to develop on this topic, but I believe those are a good first step in a profitable direction.

“Seeing should not always be believing.”

Psychology of Intelligence Analysis Annotated: The Analyst Job

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

The Investigative Reporter Handbook: Investigative Journalism Reframed to Investors

In the last post, I have advocated in favor of writing investment cases down and making explicit each linchpin assumption not only for yourself, but to the investment team. As the previous book target public ranged from students to research reporters, I took my time to read another book called The Investigative Reporter Handbook, which aims to be a reference book for investigative journalists, irrespective of which sector they cover – from the government, to healthcare and so on.

I pretty much do not recommend the whole book, but there are some gems we can use in our day-to-day job, pretty practical ones. They tangle 3 main topics:

Research process:

  • Work the case from the outside in / Step back and see the bigger picture, don’t get lost in the details. What are the key questions of the case? And it can’t be more than 3, otherwise you still don’t know how to ponder what is the unknown that must be known
  • Constantly summarize the story in as few words as possible – be sharp
  • Collect both supporting and contradictory evidence
  • Parallel backgrounding: traits left by institutions lead to insights on people, and vice versa
  • “Documents” can lie just like human sources, after all, humans craft them: triangulate
  • Review primary, secondary and tertiary sources
  • Analyze power structures, both formal (likely in the form of organograms), but informal ones too (remember who actually run ANF?) – Understanding power structures gives a journalist a road map for discovering secret sources and hidden motivations
  • Since most recent evidence may make old research material relevant, periodic reviews of the case are recommended
  • Start writing as on as the investigation begins


  • You must convince your sources that you are a human being and that you are interested in the as people, too. Not merely transactional
  • Interviewing is all about building bridges, maintaining them and sometimes repairing them
  • Because you might have only one shot to interview a source, it is best to wait until most documents are in hand
  • Ask WHY. Use silence in your favor. Questions that lead to yes or no answers should be avoided. Ask for potential sources, people, articles, books. Ask for what you left uncovered but that should be mentioned or analyzed


  • Weigh carefully what the evidence shows
  • Always question conventional wisdom
  • Investors must confront what they think and become aware of certain assumptions they have brought to their subject. Everything should be scrutinized
  • “Questions yield new dimensions for the final stories”
  • Remember not to learn something every day, but craft a new good question for the next day as well
  • An investigation story should answer the SO WHAT, as well as the WHY, WHAT, WHEN, WHERE, WHY, HOW. The answers are generally in the details. The surviving details should form a chain of facts rather than a stack of facts. INSIGHT is key
  • The effective writer should always have an essential naivete, skepticism must be balanced with innocence
  • Think visually about your story, simulate your hypotheses