Decision Making
from Robert Rubin's Commencement Address at Harvard
From the guidance of this gentle professor, and from all my other experience at Harvard, I developed in the core of my being the view that there are no provable absolutes, and that, with the absence of provable certainty, all decisions are about probabilities - that is, all decisions are about the respective probabilities, of each of a number of possible outcomes actually occurring. Moreover, recognizing that all decisions are about probabilities rather than certainties should lead us to uncover and engage with the full array of complexities around making the best decisions.
Perhaps most importantly, rejecting the idea of certainties and needing to make the best judgments possible about probabilities, should drive you restlessly and rigorously to analyze and question whatever is before you - and to treat assertions as launching pads for analysis, not as accepted truths - in pursuit of better understanding.
Moreover, judging probabilities is far from the only complexity in decision-making. Often, each alternative possible outcome is not a simple, single effect, but the net effect of tradeoffs between competing considerations. I'm not expecting in these remarks to fully discuss these thoughts, but rather to convey my view as to the intellectual complexity inherent in making good decisions.
To exemplify both probabilities and tradeoffs, when the new administration's economic team opted for deficit reduction to stimulate economic recovery in 1993, we told the President that the likelihood of success was good, but that there were no guarantees, so that he could make a decision on this dramatic change in fiscal policy with full awareness of the economic and political risks. We also said that even if the strategy did work, the result would be a tradeoff between competing considerations - the positive of economic recovery and the negative of being unable to fund some of his desired programs. Again life is about making choices, and that quickly leads you to probabilities and tradeoffs.
With that, let me make one final point about how complex decision-making can be - the point that sometimes all choices are bad, but some are better than others. For example, our administration was greatly criticized for having worked with the International Monetary Fund to extend support to Russia in 1998, when Russia was facing a severe financial and economic crisis. Clearly, there was a substantial risk that additional assistance would not be effective. On the other hand, there was no question that our country had a very substantial national security interest in attempting to help stave off economic crisis in Russia, even if the likelihood of success was relatively low. All choices were probably bad in that case, including doing nothing, but there was still one choice that was least bad. Often, decision-makers faced with a situation where all choices are bad, react by not deciding. That, however, is a decision in itself, and often the wrong decision.
Let me mention one other situation that exemplifies what I've been saying about decision-making.
I often remember an experience early in my own Wall Street career, when I was investing our firm's capital in arbitrage and a friendly competitor at another firm explained his massive investment in what he viewed as a sure thing.
I agreed that it looked certain, but on the theory that there are no certainties but only probabilities, I made a very large investment, but still at a level where the loss was affordable if the entirely unexpected happened. And, it did. The investment failed: we took a large loss, and he took a loss beyond reason - and lost his job.
I doubt if Kant or Spinoza viewed themselves as offering the best and more important preparation for risk arbitrage or for intervention in the dollar/yen foreign exchange market or for the many other activities of a finance minister. But, in my view, they did. Looking back on all my years in the private and public sectors, in the most important issues, certainties were almost always illusory and misleading, as were the simple answers or opinions that often were the response to the complicated issues in both political discourse and the private sector. Reality is complex, and recognizing complexity and engaging with complexity was the path to best decision-making.
This, as you leave Harvard to undertake a vast variety of pursuits, I believe that nothing will be as important to you - no experience or professional training - as the ways of thinking and the restless pursuit of understanding you have had the opportunity to develop at this great institution.
An important corollary to recognizing that decisions are about probabilities is that decisions should not be judged by outcomes but by the quality of the decision-making, though outcomes are certainly one useful input in that evaluation.. Any individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome. In managing trading rooms, I always focused on evaluating and promoting traders not on their results alone, but also and very importantly, on the thinking that underlay their decisions. Unfortunately, this approach is not widely taken, much to the detriment of decision-making in both the private and public sectors.
In Washington, for example, there is very little tolerance for decisions that don't turn out to be successful, creating a tendency to counter productive risk aversion. In 1995, for example, our administration decided to assist Mexico financially in attempting recovery from an economic crisis, and the program succeeded. Then, three years later, we made a conceptually similar decision with regard to Russia and the effort did not succeed. I believe that the decision on Mexico would have been right even if the program had failed, and that the decision on Russia was right even though it did fail. In both cases, we knew that there were no guarantees of success - and in fact, real chances of failure. But we also felt that the chances of success were good enough, and the consequences of not engaging were a severe enough threat to American economic and national security interests, that involvement was the right decision. We were praised for the Mexican program, and criticized for the Russian program, in both cases because of the outcomes. I think both those reactions were based on looking at the wrong things. And that has real consequences. In the Mexican case, especially, President Clinton made the decision well knowing that failure could cause him great political damage, and that the judgment and evaluation of the decision in the media and the political universe would be based solely on the outcome. Fortunately, President Clinton was willing to take that risk, but too often this environment deters optimal decisions where there is a risk of failure.
From the guidance of this gentle professor, and from all my other experience at Harvard, I developed in the core of my being the view that there are no provable absolutes, and that, with the absence of provable certainty, all decisions are about probabilities - that is, all decisions are about the respective probabilities, of each of a number of possible outcomes actually occurring. Moreover, recognizing that all decisions are about probabilities rather than certainties should lead us to uncover and engage with the full array of complexities around making the best decisions.
Perhaps most importantly, rejecting the idea of certainties and needing to make the best judgments possible about probabilities, should drive you restlessly and rigorously to analyze and question whatever is before you - and to treat assertions as launching pads for analysis, not as accepted truths - in pursuit of better understanding.
Moreover, judging probabilities is far from the only complexity in decision-making. Often, each alternative possible outcome is not a simple, single effect, but the net effect of tradeoffs between competing considerations. I'm not expecting in these remarks to fully discuss these thoughts, but rather to convey my view as to the intellectual complexity inherent in making good decisions.
To exemplify both probabilities and tradeoffs, when the new administration's economic team opted for deficit reduction to stimulate economic recovery in 1993, we told the President that the likelihood of success was good, but that there were no guarantees, so that he could make a decision on this dramatic change in fiscal policy with full awareness of the economic and political risks. We also said that even if the strategy did work, the result would be a tradeoff between competing considerations - the positive of economic recovery and the negative of being unable to fund some of his desired programs. Again life is about making choices, and that quickly leads you to probabilities and tradeoffs.
With that, let me make one final point about how complex decision-making can be - the point that sometimes all choices are bad, but some are better than others. For example, our administration was greatly criticized for having worked with the International Monetary Fund to extend support to Russia in 1998, when Russia was facing a severe financial and economic crisis. Clearly, there was a substantial risk that additional assistance would not be effective. On the other hand, there was no question that our country had a very substantial national security interest in attempting to help stave off economic crisis in Russia, even if the likelihood of success was relatively low. All choices were probably bad in that case, including doing nothing, but there was still one choice that was least bad. Often, decision-makers faced with a situation where all choices are bad, react by not deciding. That, however, is a decision in itself, and often the wrong decision.
Let me mention one other situation that exemplifies what I've been saying about decision-making.
I often remember an experience early in my own Wall Street career, when I was investing our firm's capital in arbitrage and a friendly competitor at another firm explained his massive investment in what he viewed as a sure thing.
I agreed that it looked certain, but on the theory that there are no certainties but only probabilities, I made a very large investment, but still at a level where the loss was affordable if the entirely unexpected happened. And, it did. The investment failed: we took a large loss, and he took a loss beyond reason - and lost his job.
I doubt if Kant or Spinoza viewed themselves as offering the best and more important preparation for risk arbitrage or for intervention in the dollar/yen foreign exchange market or for the many other activities of a finance minister. But, in my view, they did. Looking back on all my years in the private and public sectors, in the most important issues, certainties were almost always illusory and misleading, as were the simple answers or opinions that often were the response to the complicated issues in both political discourse and the private sector. Reality is complex, and recognizing complexity and engaging with complexity was the path to best decision-making.
This, as you leave Harvard to undertake a vast variety of pursuits, I believe that nothing will be as important to you - no experience or professional training - as the ways of thinking and the restless pursuit of understanding you have had the opportunity to develop at this great institution.
An important corollary to recognizing that decisions are about probabilities is that decisions should not be judged by outcomes but by the quality of the decision-making, though outcomes are certainly one useful input in that evaluation.. Any individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome. In managing trading rooms, I always focused on evaluating and promoting traders not on their results alone, but also and very importantly, on the thinking that underlay their decisions. Unfortunately, this approach is not widely taken, much to the detriment of decision-making in both the private and public sectors.
In Washington, for example, there is very little tolerance for decisions that don't turn out to be successful, creating a tendency to counter productive risk aversion. In 1995, for example, our administration decided to assist Mexico financially in attempting recovery from an economic crisis, and the program succeeded. Then, three years later, we made a conceptually similar decision with regard to Russia and the effort did not succeed. I believe that the decision on Mexico would have been right even if the program had failed, and that the decision on Russia was right even though it did fail. In both cases, we knew that there were no guarantees of success - and in fact, real chances of failure. But we also felt that the chances of success were good enough, and the consequences of not engaging were a severe enough threat to American economic and national security interests, that involvement was the right decision. We were praised for the Mexican program, and criticized for the Russian program, in both cases because of the outcomes. I think both those reactions were based on looking at the wrong things. And that has real consequences. In the Mexican case, especially, President Clinton made the decision well knowing that failure could cause him great political damage, and that the judgment and evaluation of the decision in the media and the political universe would be based solely on the outcome. Fortunately, President Clinton was willing to take that risk, but too often this environment deters optimal decisions where there is a risk of failure.
