Co-Opetition - Adam M. Brandenburger [107]
Economic forecasters all seem to come up with remarkably similar predictions—and, most often, all remarkably wrong. One reason is that they all use similar models and the same historical data. Another reason is that forecasters fear going out on a limb and being proved wrong. London Business School professor and leading business strategist John Kay explains the phenomenon:
Even when they ore proved wrong, forecasters see it as important to maintain the consensus in retrospect. For example, banks maintain as an article of faith that the depth of the recent [U.K.] recession and the magnitude of the property market collapse could not have been predicted. If it could have been, those responsible for the lending excesses of the 1980s would be guilty of gross negligence rather than helpless victims of events.… [I]t is often more important to be wrong for the right reasons than to be correct.16
If you follow the herd, you’ll succeed or fail along with the herd. The fog is preserved. You’ll never stand out if you’re right, but you’re also less likely to get eaten alive if you’re wrong. If it turns out that you’ve made a bad decision, you can say: “Who could have known? Look at all the other people who made the same decision. At the time, everyone thought it was the best thing to do.” With luck, no one will question your judgment.
The desire to preserve the fog can cause otherwise-hard-to-explain behavior. As teachers, we’ve noticed that some students don’t study for tests precisely when they’re in the most danger of failing. Obviously, they’ll be much more likely to fail, but now they can explain the failure away as the result of not studying. They avoid having to do much soul-searching. People set themselves impossible tasks for exactly the same reason: when they fail, they don’t have to question their abilities. Everyone, themselves included, remains in a fog.
Even if there’s a 90 percent chance that lifting the fog will reveal something good, the 10 percent chance that something really bad will come to light may be too much of a risk to take. That was the position taken by Continental Corporation, a financially troubled insurance company.
CNA Insurance had just made a bid for Continental, substantially outbidding the current contender, Insurance Partners. As a condition of its bid, CNA asked to engage in extensive due diligence. If the audit didn’t reveal any major problems, CNA would proceed with the deal. Otherwise, it would withdraw its offer altogether. In spite of the attractive price, Continental’s board of directors rejected CNA’s bid:
On November 17, 1994, the Board of Directors met and reviewed in detail the CNA proposal … and various risks inherent in CNA’s request to conduct intensive due diligence, including the potential adverse effects a possible decision by CNA (following such due diligence) not to make an offer could have on market and rating agencies’ views of the company and on the willingness of Insurance Partners to proceed with its transactions. The Board of Directors did not accept the CNA proposal because of the Board’s concerns with respect to such potential adverse effects. (Proxy Statement to Shareholders, the Continental Corporation, March 29, 1995)
The board wasn’t prepared to take even the small risk that CNA, having done its audit, would then say no. It feared everyone would infer that CNA had discovered some very bad news. Insurance Partners, and any potential bidders in the wings, would be scared away. Rating agencies might downgrade Continental. Customers might lose confidence and take their business elsewhere. A disaster.
In turning down CNA’s bid, Continental’s board increased the chance the deal would fall through. It did so in order to preserve an essential fog. In the end, CNA dropped its demand to do extensive due diligence, and the deal went through. Continental was lucky. CNA was also lucky, since no problems were uncovered.
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