Embracing Complexity An Interview with Michael J.

Mauboussin by Tim Sullivan

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Artwork: Jen Stark, Radial Reverie, 2008, Hand-cut paper on wood backing, 20" x 20" In his job as chief investment strategist at Legg Mason Capital Management, Michael J. Mauboussin has developed a healthy appreciation for complexity. Along the waythrough his reports, books, teaching at Columbia Business School, and frequent conference appearanceshe has become a leading exponent of how to navigate complex systems in financial markets and other aspects of life. In this edited conversation with HBR senior editor Tim Sullivan, Mauboussin talks about how his views on complexity feed into his daily practices and attitudes. HBR: How do you think about complexity? Mauboussin: I look at it through a specific lens, of complex adaptive systems. Meaning? A complex adaptive system has three characteristics. The first is that the system consists of a number of heterogeneous agents, and each of those agents makes decisions about how to behave. The most important dimension

here is that those decisions will evolve over time. The second characteristic is that the agents interact with one another. That interaction leads to the third something that scientists call emergence: In a very real way, the whole becomes greater than the sum of the parts. The key issue is that you cant really understand the whole system by simply looking at its individual parts. Can you give us a concrete example? A canonical example of a complex adaptive system is an ant colony. Each individual ant has a decision role: Am I foraging? Am I doing midden work? Each one also interacts with the other ants. A lot of that is local interaction. What emerges from their behavior is an ant colony. If you examine the colony on the colony level, forgetting about the individual ants, it appears to have the characteristics of an organism. Its robust. Its adaptive. It has a life cycle. But the individual ant is working with local information and local interaction. It has no sense of the global system. And you cant understand the system by looking at the behavior of individual ants. Thats the essence of a complex adaptive systemand the thing thats so vexing. Emergence disguises cause and effect. We dont really know whats going on. Why is an ant colony the first example you think of? Complex adaptive systems are one of natures big solutions, so biology is full of great examples. Ant colonies are solving very complicated, very challenging problems with no leadership, no strategic plan, no Congress. Once youre aware of how the structure works, though, youll see these systems everywherethe city of Boston, the neurons in your brain, the cells in your immune system, the stock market. The basic featuresheterogeneous agents, interaction, and an emergent global systemare consistent across domains. Why should businesspeople pay attention? So what could a biologist or an ant specialist or a honeybee specialist possibly tell us about running businesses? The answer is, a whole lot more than you might guess, if you are willing to make some connections. This to me is an essential way to thinkespecially in the 21st century. Consider capital markets. Rather than looking at them through the rationalexpectations model, or even using the no-arbitrage assumptionthe idea that you wont find any $100 bills on the sidewalk because somebody has already picked them upyou can look at them through a complex adaptive systems

model, which empirically fits how the markets work. But complexity doesnt lend itself to tidy mathematics in the way that some traditional, linear financial models do. What are the dangers of misunderstanding complexity? In the late 1800s rangers at Yellowstone National Park brought in the U.S. cavalry to try to improve the game population by hand-feeding elk. The elk population swelled, and the elk started eating aspen trees, and aspen trees were what the beavers were using to build their dams, and the beaver dams caught the runoff in the spring, which allowed trout to spawn. More elk equaled less trout. That one choice, feeding the elk, led to a series of cascading events that were completely unanticipated. People seek to improve complex adaptive systems, sometimes with disastrous consequences. It doesnt take a lot of effort to make the leap from elk to the economy. People really have the best of intentions. But there is no way they can anticipate the ultimate results. The question, then, is What conditions have to be in place to actually solve these kinds of challenging problems? That spills over to organizations very quickly. What prevents us from dealing effectively with complexity? The biggest issue, in my mind, is that humans are incredibly good at linking cause and effectsometimes too good. Ten thousand years ago most cause and effect was pretty clear. And our brains evolved to deal with that. But it means that when you see something occur in a complex adaptive system, your mind is going to create a narrative to explain what happenedeven though cause and effect are not comprehensible in that kind of system. Hindsights a beautiful thing. Also, we have a tendency to think that certain causes will lead to particular effects. Thats our Yellowstone story. And we just dont know. I think thats the biggest single bias. What else gets in the way? First, we tend to listen to experts, although its been well documented that expert predictions are quite poor. But theyre authoritative, so we listen to them, even when we know that these people are predicting something thats

fundamentally hard to predict. The individual who comes across as more authoritative is actually more believable. People are much more comfortable deferring to the person in the pinstripe suit with the PowerPoint slides. Second, were reluctant to share private information, so we aggregate information poorly. In one study the researchers gave team members shared information about the same three candidates, but also gave each member a unique piece of information about one candidate. If the team members shared all the unique information, they would choose the best-qualified candidate. If they used only the information common to all of them, they would pick the wrong candidate. A vast majority of the time, they selected a suboptimum candidate. Why? Because they chose to talk about the shared information and to reserve the unique information. Committees are not optimized to share private information. So even in organizations where the information exists, its not being surfaced. Print Email Purchase Article Log in to continue reading. To continue reading, register now or purchase a single copy PDF. Registered users may view 3 HBR magazine articles for free each month. Become a paid subscriber for full uninterrupted access. Already an online or premium subscriber? Sign in. Comments
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Max J. Pucher

1 week ago

We don't have to prove complexity 'theory' or evolution because we see it at work every day of our life if we are willing to look and don't fall into the arrogant illusion that we can causally explain eveything. All measurement in itself builds on a measurement assumption and theory and produces no more than data points. We have no direct proof as to what exactly produces those datapoints. Further follows from Shannon's Communication theory that measurement data are about reducing the noise in the data channel and that requires another assumption. Shannon's theorem is actually about complexity and so are Mandelbrot's theories. But the worst illusion is the belief that data correlation that we find is somehow also a proof of causation. There is no such thing. All causation is assumption and so are therefore all conclusions drawn from measurement. Social network theory as it is relevant for business is an application of the concepts of complex adaptive systems and thus emergence. We can't predict from the 'parts' of the system what kind of new features and structures can emerge and often we can't even explain how it does when we see it. Jacek's reductionist, rational and causal perspective is limited as he proves himself wrong. The dissection of corpses was opposed for inherited knowledge embedded in religious reasons as there was no understanding of why. It was actually that dissection of corpses by doctors who then would simply go on to treat humans without desinfection that killed a huge amount of people. No one knew about bacteria back then. The disection of corpses does not produce any knowledge as to WHY the body is built the way it is. Dissassembling a British car doesn't tell you why the steering is on 'wrong side' despite the fact that it can be decomposed. Looking through an electron microscope at a microprocessor without prior knowledge doesn't tell you what it does and certainly not why. Only the machine code to go with it might do so. But even the microprocessor design emerges from a huge technology and science stack of the past. When people invented the first transistor they had no idea that Intel processors would be possible or that it would spark the Internet or an iPhone. More on my blog: http://www.adaptive-process.co... Flag
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John

1 week ago

Wow! Reading the 'measurement' comment nonsense I had to set my watch back 50 years. LOL. Understanding complexity means working with outcomes not measures. Have you ever heard of Goodhart's Law? "When a measure becomes a target, it ceases to be a good measure." The malignant measurement culture in the USA is why govt does not work, It is why the country is in a pre-revolutionary state. ( "Just 17% of likely U.S. voters think that the federal government today has the consent of the governed." WSJ) Complex systems are NEVER measured or managed, they are only served. In complex systems, focus on outcome, never measurement.

Wow! Reading the 'measurement' comment nonsense I had to set my watch back 50 years. LOL. Understanding complexity means working with outcomes not measures. Have you ever heard of Goodhart's Law? "When a measure becomes a target, it ceases to be a good measure." The malignant measurement culture in the USA is why govt does not work, It is why the country is in a pre-revolutionary state. ( "Just 17% of likely U.S. voters think that the federal government today has the consent of the governed." WSJ) Complex systems are NEVER

measured or managed, they are only served. In complex systems, focus on outcome, never measurement.

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Fausto Carlos de Almeida

CAS and Management - An intelligent approach

1 week ago

In science a theory to be accepted has to be replicated everyplace and by everyone in his or her lab. It all starts as an observation (physical or otherwise) that creates in the researcher mind a conceptual model which after a lot of thinking and sweat is postulated as a law and it is translated in mathematical language. It is a universal language relating variables in a cause effect manner. If I increase the acceleration the car moves faster, if I touch on the brakes the velocity decreases.

When we pursue to understand an organization from the standpoint of management, especially now at the 21st century, if we insist on looking at the parts, just as in simple linear systems we tend to ignore the most important variable people. For a long time fields like economics tended to describe and elaborate on mathematical models representing cause-effect dynamics. Recently, when the human dimensions were brought into, things started to come a lot closer to reality we are dealing not with simple, linear systems, but with complex systems. But complex systems are closed system so the concepts behind a complex adaptive system, an open system, seemed a lot more appropriate to conceptually look at an organization.

Organizations are created by people, with people, and for people. They are managed by people. A truth left behind in name of simplification!

Remember, cause effect relationships are very important for us to understand. But be careful when trying to understand and manage an organization from that perspective alone the most important variable in the system people - does not offer a clearly mathematically stated equation for their relationships. This brings us to predictability. Our common interpretation model goes by cause effect relations and predictability of the next state of the system.

If we can establish that offering a salary increase causes performance to boost, voila, we would have solved most of our organization management problems. Dealing with organizations is ultimately dealing with human beings and their entire multiple, intricate, forms of interactions, a very complex system. So it is quite natural to start drawing from the Complex Adaptive System - CAS research all it has to offer as a possible conceptual model to deal with the management of organizations. But that is not the end. It is indeed a wonderful start.

Let us add to the CAS conceptual model an infinite resource of system examples which can be used to help us evolve in the art of managing an organization. I am talking about the bioecomimetization looking at, for example, the nervous

system or the immune system of human beings as excellent examples of centralized and decentralized systems. Much can be gained by drawing parallels between these systems and the organization management systems we have to construct for our organizations to succeed in the 21st century.

How to deal with change in these organizations? How to innovate? How to build special characteristics that will push a competitive vantage that disrupts that status quo in a sustainable way? If we take CAS as a starting point, we will be pushing our cognitive thinking a lot closer to the nonlinear, dynamical, evolutionary and adaptive mind view of the real world our organizations are. From this advantage point it will be easier to realize that to construct success and sustainability we should be strategically focusing on opportunities instead of problems and move quickly from managing for results to managing for consequences.

In the book Gesto de Oportunidades A Gesto por Consequncia Management of Opportunities The Management for Consequences I have tried to appropriate these ideias in a coherent conceptual integrated model to deal with the task of managing organizations in the 21st century.

I want to congratulate Tim Sullivan and J. Mauboussin for bringing forward a topic, that rightly empowered can sure be an open door to deal with one of the most important challenges of business today to rethink the way we manage our organizations in the 21st century. Thank you. Flag
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John

1 week ago

"If you want to build a ship, don't drum up people together to collect wood and don't assign them tasks and work, but rather teach them to long for the endless immensity of the sea."

- Antoine de Saint-Exupry Flag

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KrazyP

1 week ago

I have been a practitioner of complexity in my business for the last 15 years with much success. As has been noted, the first commenter represents the "one truth" world view of the reductionist scientist. Another world view is the "relativist" (think of Porter and differentiation strategy). Complexity is about bounded rationality and probabilities. It is an art AND there are some simple rules that work. Narratives are more powerful in a complex environment, deconstruction works better than other techniques. The question to ask in complexity is where are the adaptations needed and how can you identify the deep structures in the changes to help facilitate emergence? In our business the adaptations are occurring in channels, operations and products. Other tips: artifacts and rituals matter. Clothing is a powerful artifact. Watch for value exchanges at low levels between agents in your system. Integration of experimentation is important. Flag 1 person liked this. Like ReplyReply

Al T.

2 weeks ago

Actually, the article never explicitly mentions the term, "complexity theory." I think it's trying to present the idea of complexity as a way of viewing the world, life, and organizations. I believe it's trying to encourage people to employ a more systemic, holistic, or top-down view of organizations. It's the idea that with respect to complex systems, the whole is more than the sum of its parts - the relationships between the parts are important to consider as well. I know all too many people who employ an overly simplistic mindset when it comes to complex problems: too much waiting time at the hospital ER? Add more doctors. Too many passengers waiting on the platform? Add more trains. Check-in lines too long at the airport? Open more counters. With an understanding of complexity; employing a more systemic perspective, one can understand that these simple solutions can be disastrous if only because it increases backlogs in other parts of the system whether it relates to health care, transit, airport, or otherwise. The most prudent solutions to problems afflicting complex systems are those that improve the efficiency and effectiveness of the systems as wholes (i.e. global optimality) as opposed to just an individual part of a system (i.e. local optimality), and that requires one to embrace and understand the idea of complexity. That being said, it seems to me that such a mindset is best suited for managers and executives, but what about their subordinates? I'm curious to know the way in which the idea of complexity can benefit employees at and near the bottom of a corporate hierarchy. I agree that one must be able to understand various points of view to gain clarity on a complex problem (i.e. to see the whole picture), but it's so easy to become attached to an idea/perspective in which I've invested considerable time and effort. How would one break free of that attachment? Is it merely habitual, or are there other ways to keep an open mind? Flag 1 person liked this. Like ReplyReply

Angus Jenkinson

1 week agoin reply to Al T.

I agree with much of what you say - but the facet under discussion is emergence as the specific property of complexity. The key point is that the executives who have sought the right to control the system that effects people exercising their local responsibilities have not learned the art of this science. However, each person has the opportunity to apply it to their own situation, for example family dynamics (see family therapy) Flag Like ReplyReply

Jacek Marczyk

2 weeks ago

Yet another article that speaks about complexity without even mentioning a solid definition or means of measuring it. And if you can't measure it then you can't manage it. Without that, how can you ever hope to "sell" such concepts to anyone running a business. There has been talk about complexity and "complexity theory" for over two decades. But anything that can be called a theory can be verified (or falsified) via independent teams in independent labs. I claim there is no such thing as "complexity theory". A theory usually has some basic equation, a characteristic constant (like G, c, H, R, etc.). What does this one have? And if something constitutes the central concept in a "theory" then, at least, it should be measurable. The equations and theorems may come later. So how do people come up with all the wonderful properties of complexity if they don't measure it? Truly extraordinary! A final comment: science gets serious when you begin to measure. Flag
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Angus Jenkinson

1 week agoin reply to Jacek Marczyk

First, you are applying the very mindset that it is counselling against - the Cartesian cause and effect measurement model that does not work in most organic systems. And it does imply forms of measurement - he talks about the ability to see outcomes such as decline of fish populations (measurement) based on feeding elk (measured) Flag 1 person liked this. Like ReplyReply

JC Moreno

1 week agoin reply to Jacek Marczyk

You completely missed the point. Educate yourself by reading James Gleick's Chaos, Stephen Strogatz's Sync, and Albert Barabasi's Linked. Flag Like ReplyReply

Anumakonda Jagadeesh

1 week agoin reply to Jacek Marczyk

Latin word complexus, which signifies "entwined", "twisted together". This may be interpreted in the following way: in order to have a complex you need two or more components, which are joined in such a way that it is difficult to separate them. Similarly, the Oxford Dictionary defines something as "complex" if it is "made of (usually several) closely connected parts". Here we find the basic duality between parts which are at the same time distinct and connected. Intuitively then, a system would be more complex if more parts could be distinguished, and if more connections between them existed. More parts to be represented means more extensive models, which require more time to be searched or computed. Since the components of a complex cannot be separated without destroying it, the method of analysis or decomposition into independent modules cannot be used to develop or simplify such models. This implies that complex entities will be difficult to model, that eventual models will be difficult to use for prediction or control, and that problems will be difficult to solve. This accounts for the connotation of difficult, which the word "complex" has received in later periods. Dr.A.Jagadeesh Nellore(AP),India Flag
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linwunai

4 days ago
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http://tinyurl.com/3tnmjr8 Flag

Evan Molho

5 days ago
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There is only one place for complexity in business: market protection. Flag

Mark Montgomery

5 days ago

Seems that indoctrination and rigid thinking is alive and well with views on complexity-- a sign about a decade ago that the field was maturing as practices and reputations became entrenched in what was still a nascent discipline-- would urge folks to open up and soak up some of the wisdom even if not entirely relevant or misaligns with long-held positions-- & don't forget adaptive and systems, including in our own life long learning. Otherwise we quickly become part of the problem. Flag Like ReplyReply

Rupy Yuan

1 week ago

Angus Jenkinson's comments have been very helpful to me in thinking about complex adaptive systems without falling into the trap of business as usual. I have seen a few clips of "mindwalk" which look like a great intro in this area, and though I have browsed the work of Margaret Wheatley, the important part of the learning journey for me is to set aside my biases and learned beliefs and try to adapt to this thinking with a beginners mind. The ant example isn't something that I like to cite, as far as I understand it, ant behaviour is guided by pheromones and I certainly don't want to accredit business behaviours to thousands of people trusting

following their pheromone trails in order to produce a whole system effect. The trouble with ideas of emergence and CAS is the same trouble with science in general, it puts forth a language that is unto itself and yet the core ideas of CAS are, as I see it, crucial to the way we look at the emergence of 21st Century organizations and learning to see. I am sure there is a mathematical formula that might rival E=MC in the business world, but I am not one who is waiting for that, I want to understand this area at a personal level. If I am learning to see a bigger picture of connections, I am only serving to help myself become more intelligent about organizational relationships - and I do so because I am in effect dropping my "I know something" shtick. I don't know it all, that is the beauty as I see of emergence and so the intelligence here is practical humility, but the problem for me is grasping the whole without speaking a language that people in the business world will not want to speak. As for the Embracing Complexity book, I will just have to purchase that, then I will be able to see the whole of it, rather than assume the part which is being discussed or on offer here. [$M.] "rupy yuan" @thoughtspaces Flag
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Jacek Marczyk

1 week ago
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Dear Rudy, do you know enough about our complexity metric to make such a claim? Flag

Rudy Snippe

1 week ago

Dear Jacek MarczykYou are using the definitions of scientific measurements and logic of a positivistic paradigm in a social interpretative paradigm. Thats like using the rules of football during a volleyball match or vice versa. Flag
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Jacek Marczyk

1 week ago

Who is talking of cause and effect?!!! Who is talking of Netwonian mechanics? Just because I propose a measure of complexity?!!! I have sustained for a long time (see some of my book) that cause-effect relationships are tremendously difficult to isolate and that for all practical purposes it is as if they didn't exist. In fact, I am proponent of a new model-free approach whereby you forget cause-effect altogether. As a final comment: I find it shocking that anyone reading my comments would come up with things like Newtonian mechanics, cause-effect, and, worst of all, REDUCTIONISM! Trulye extraordinay, since we all wrote in English! Flag Like ReplyReply

deb louison lavoy

1 week ago

A couple of things. First, I don't think our brains are hard wired for newtonian cause and effect alone - we are beginning to be able to think in complex systems (i hope). Second. The strong guiding principles - the few immutable laws but open decisionmaking in that context - its a great description and one that not only describes the very best companies, but also, say the US constitution, which has so far proven to be durable through some pretty interesting bits of history. Great article, thanks. Flag

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Jacek Marczyk

1 week ago

I see that attempts to rationalize something and manage it (from a quantitative, not "poetic" perspective) continue to face today the same opposition as those corageous individuals who centuries ago disected corps in an attempt to learn something. Coming up with a (new) measure of something is the ultimate exercise of holism and synthesis, surely not reductionism. What an extraordinary way to misunderstand things! Flag
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Jacek Marczyk

1 week ago

Cause and effect is not something you pursue when you have thousands of linked parameters (but, again, that is something you see when you do quantitative work). We are not keen on cause and effect at all, not sure where you got this from. Emergence is a phenomenon that occurs at all scales in physics and there is no need to call it "complexity" or a property thereof. I perceive a negative attitude towards the act of measurement. Many avoid measures since they cannot be held accountable for the consequences of their measures. Flag Like ReplyReply ShowReal-time updating is paused. (Resume) ADD NEW COMMENT Post as

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