Gresham’s Law of Strategy: Why Bad Advice Drives out Good Advice

Near the end of a seminal essay on strategic surprise, Richard Betts writes, “The intelligence officer may perform most usefully by not offering the answers sought by authorities, but by offering questions, acting as a Socratic agnostic, nagging decision makers into awareness of the full range of uncertainty, and making authorities’ calculations harder rather than easier.”  I believe that the same should be true for corporate strategy consultants:  often their job is to make long-range calculations harder rather than easier.

Why then, is the opposite so often true?  In a world in which surprise, disruption and the unanticipated are rife, why do strategists who promise to make calculations easier rather than harder often succeed?  I think a phenomenon that I call of “Gresham’s Law of Strategic Advice” is at work.

E pluribus unum

As my friend Dylan Grice at Société Générale recently reminded us in an issue of Popular Delusions, Gresham’s Law is an economic term which proposes that when two currencies are in circulation side by side, bad currency – that which is debased – tends to drive out sound, pure currency.  Dylan summarized why:  when two currencies are in circulation together, one stable and the other falling in value, consumers choose to pay for goods and services with the declining currency while hoarding the stable one.  Over time, only the depreciating currency is left in circulation:  sound money “disappears”, bad money drives out good.   While the law is named for Sir Thomas Gresham, a Tudor banker who witnessed Henry VIII’s debasement of the coinage, the phenomenon was noted as early as the fifth century BCE in Aristophanes’ play The Frogs.

Similarly, let us imagine two strategists have been invited to present to a Board how they would prepare a long range (say ten-year) corporate strategy.  Our first strategist might open by holding up a copy of a business bestseller from a mere five years ago, The World is Flat.  He could say that when this book came out, “Skype was a typo, Facebooks were paper, Twitter was a sound birds make, 4G was a parking spot, and Linkedin was something that happened at college parties.  None of these phenomena are even in the index, and this is a book about how technology is going to change business in the future!”  (Friedman made the same point in a radio interview I heard promoting his newest book).

This first strategist stresses that even without technology undergoing rapid change, complexity, uncertainty and surprise will confront the firm in the next decade.  They always have.  This poor, naïve soul might even point out that in such a world, the firm won’t succeed by applying stale “strategic” frameworks like the BCG Matrix (which dates back to 1968), Porter’s Five Forces (created in 1979), or Value Chain Analysis (introduced in 1985).   Anyone who has studied or done business in the last 30 years – including the competition – uses these!   Like it or not, this strategist might say, your firm is likely to face a world in which an integrated, adaptive, and non-predictive strategy is likely to work best.  Such a strategy can be formulated and executed consistently, but the outcomes are hard to determine, and impossible to quantify.  “At best”, he concludes, “We might use some Monte Carlo simulation tools like @risk to specify a range of outcomes.”  This strategy consultant has the intellect, the experience and the the integrity to admit that no amount of PowerPoint can overcome the inherent complexity, uncertainty and surprises of the future a decade ahead.

Now the second consultant comes in.  This fellow also makes the decade ahead sound dangerous.  He also talks about complexity, uncertainty and surprise.  But then, using the tempo and rhetorical tricks of a revival preacher, he lays out a clever, clear chain of cause and effect-based actions the Board can take that will carry the firm’s profits along a steady Newtonian “trajectory” to new heights.   Risks are not merely acknowledged, they are even quantified (each Risk gets a bubble on a grid whose size and position indicates some combination of likelihood and impact).  This fellow shows the Board Hell, but then offers a clear strategic path to corporate salvation:  “Use this part of the Value Chain to pull yourself into this part of the Matrix, and by 2023 you’ll be the master of all Five Forces – Hallelujah!”

Now the board isn’t dumb.  The second strategist, however, has made their job easy, neat and tidy.  The company is publicly traded, and the CEO has a conference call with analysts tomorrow.  She knows which story she’d rather tell.  And there are structural factors at work – big organizations need forecasts, even when they’re known to be wrong.  Kenneth Arrow, the Nobel laureate in Economics, worked as a statistician during the Second World War. When he discovered that the Army’s month-long weather forecasts were worthless, he tried to warn his superiors. In response, he was told, “The Commanding General is well aware the forecasts are no good. However, he needs them for planning purposes.”

Look into my crystal ball and see what the future holds for you!

Gazit may stress the differences between intelligence officers (and by extension, strategy consultants), and Fortune Tellers, but my experience highlights the similarities.  Given a choice, the analyst or consultant promising illusory certainty is likely to carry the day with most Boards.  If you understand the basic techniques of Cold Reading, you’ll find them used by many strategists and prediction services who offer long-range strategies and forecasts; some substitute the internet for a crystal ball, but the game is the same.

Dylan quoted Cicero, and so will I:  “Human nature being what it is, all men prefer a false promise to a flat refusal.”  That is why I propose “Gresham’s Law of Strategic Advice”:   in a world of complexity, uncertainty and surprise, you can bet that most of the time, bad strategic advice (predicated on clear predictions) will drive out good (non-predictive) strategic advice.

Philippe and I will be offering some ideas on how to craft non-predictive strategy in the next few  posts, so if you’re interested, please subscribe to this blog.

French version of this post here / Version française de ce billet ici.

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20 responses to “Gresham’s Law of Strategy: Why Bad Advice Drives out Good Advice

  1. Most strategy is never implemented – fact. People generally tend to own what they help to create. I would like to think that anyone who has been worked in the field of strategy consulting for the past 5-10 years has been simply asking the right questions, not providing the answers.

    • Jamie,

      I completely agree. But I don’t encounter that much humility about prediction or an unwillingness to provide “concrete” strategy answers among an awful lot of practitioners.

      The post above was inspired by a conversation with the head of due diligence for overseas acquisitions for one of the largest corporations in the world. His bosses (and the Wall Street analysts to whom they spoke regularly), insisted on a *fifty* year growth forecast! He knew such “strategy” and the forecasts on which it was based it was pure nonsense, but they paid a lot of money for someone to drag excel formulas out that far! Ethical consulting should be frank about the limits of knowledge, but that can be a tough sell.

      Thanks for your comment!

      Milo

  2. This seems to have a connection with the idea of memes – a meme being a discrete idea or piece of knowledge or insight that is transferred between people. Strong memes persist, and weak memes die out (just like genes – memes also breed and mutate).

    Since any strategy is going to require a degree of consensus and communication to be selected and implemented correctly, it needs to quite a strong meme…but here’s the catch: A strong meme is not necessarily correct; it is just strong.

    So what makes a meme strong/persistant? Probably something to do with the cost / benefit of transmission between people. The “Cost” of transmission is low if it is easy to explain – hence simple messages tend to be stronger.

    The “Benefit” of the meme is often assessed very rapidly – using the pattern matching thinking approach (that gives rise to “common sense”) rather than the abstract, symbolic, structured thinking approach, which is significantly more reliable, but vastly slower to employ on behalf of the receiver. (Think formulae, research, and mathematics).

    Furthermore a low cost transmission will typically take less time to transmit: Many strong memes of mixed quality can crowd-out a true, but unexpected, meme.

    On this basis, I’m not convinced by your good/bad advice argument; but under the action of competition, where improvements tend come from insights that are hard to talk about, I can easily see that a progressive strategy can come in the form of a weak meme, and that these are easily crowded out by simpler strong memes that may not be correct, or may be superficially useful.

  3. Milo, A good piece…..but I think the old adages that “you can catch more flies with honey than with vinegar” and that “people like to hear what they want to hear” between them also simply sum up the ‘selling’ forces at work when a strategy consultant dispensing poor (e.g. glib) advice wins out over one trying to do the job properly!

    No-one likes to hear the journey is going to be a long, hard, unpredictable slog…….especially when its true……so they often shop around to get the advice they want (and can more easily sell to others), rather than the advice they need……hence the saying that “clients get the consultants they deserve!”

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  6. Kudos. Excellent article! Bad strategy generally does drive out sound reflective strategy. In this manner, it is a good thing that corporations work on auto-pilot an in fact never implement strategy.

    Interestingly Tolstoi used to say that success in battle has nothing to do with the commands of the general. As he explains, generals (CEO’s) spend the entire battle issuing orders, only a small fraction of which can actually be executed. Most are ignored or simply fail. However, when a battle is won the exact orders that were implemented that led that victory become enshrined as military brilliance, while the 99% of orders that were not followed are simply forgotten.

    The moral of the story is that we fit the story to fit the outcome.

  7. Exellent blog and discussion. The dichotomy in dealing with routine product and process development, supported by a wealth of ITC structures and the decision making processes related to e.g strategies and other uncertainties, is to me amazing. There are no enterprises taking good decisions the slow way. In other words, enterprises taking good decisions the fast way have a competitive advantage. Surrounding non-routine decision making processes with social media will only work when a goal oriented structure is present. When such a structure is present and a variety of stakeholders are responding independently from each other, a pattern of certainties and uncertainties will emerge. This often provides an excellent basis for decision-making in these uncertain times.

  8. Irma A. Balulot

    We all know that good or bad, decisions have to be made. When one has to face a syndicated questioning as to the soundness of a decision- as the decision maker one would surely fall back on something that presents a semblance of logic. The very reason why the write up and this discussion thread exist on the first place. The question then is, how should one present or package the “good advice” such that it becomes useful to the decision maker? Does it mean that the proponent of the “bad advice” is more creative than he who champions the “bad advice”, all the time?

  9. I suggest that the 100 year time frame is useful…if you want your organization or country to exist in 100 years. While one can identify the kind of world they want for their heirs (it really is easy and we gain major consesus on what I call ‘the ideal vision’) then you can set your operations toward that and do continual improvement.

  10. Thank you for an excellent article! The one constant seems to be the irrationality of human behaviour, in this case humans faced with uncertainty and fear. Good to know this didn’t change since SunTzu. The price of the assumption that humans are rational, mechanical, analytical ‘computers’ is the current economic crisis?

  11. Bad advice wins not because it is better packaged but because it is better aligned with the corporate decision making process. As the article suggests, management needs certain expected traits in an advice on strategy, suited to a hierarchical organization growing on a gradual curve.
    Usually, the managers got there by being consistently good team players and adopting and driving the corporate goals. Why should we expect them to bet on the advice that doesn’t conform to the decision making process known as ‘death by committee’ ?

    I think the onus is on the advice giver to package his suggestion to fit the decision making process he aims to sway. That is, if he isn’t content to stand idle at the sidelines and watch his advice ignored and the business go to the cleaners.

    If you remember Clayton Christensen’s work on why successful organizations often miss out on disruptive technologies, I think the same discord works for strategy formulation. If you want to innovate and help drive an agile and highly-adaptive strategy – make it look like part of a more traditional advice, then make sure you’re around to drive implementation towards the method you think is right.
    If you’re right, the fact that strategic goals were missed won’t matter because the business will be successful in unforeseen directions. If it doesn’t work, you will be very much in the doghouse, but not much more than the man whose advice was discarded and now dances on the sidelines of chaos shouting ‘I told you so’…

  12. Good stuff! – the certainty-uncertainty dichotomy reminds me of The Law of Incompatibility (Lofty Zadeh): “As complexity increases, precise statements loose their meaning and meaningful statements their precision”.

  13. Thank you for providing explanation on how the law is relevant across disciplines.

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  15. I am reminded of what Abraham Kaplan wrote in his book Conduct of Inquiry about scientific theories: we hold to certain theories not because they are true, but because they have proven useful. Your first hypothetical strategist is on an admirable quest for the truth, and, hey, bless his heart. Maybe somewhere in that Monte Carlo simulation and range of possible outcomes, he will be able to predict what actually does become of the company– along with a bunch of other predictions that will ultimately prove false.

    The second strategist has provided something useful: a specific strategy that can be worked into a plan, something that will give some operating principles when decisions need to be made quickly and with imperfect information. Could his strategy be wrong? Of course. Such is the nature of the world. No one can see the future. It might even be disastrously wrong (though with some good judgment and prudence, it shouldn’t be; unforeseeable catastrophies are mercifully rare), but at least it will give us a definite direction to move in. We will have to deal with the failures as they come up, there is no escaping that.

    As an intellectual, there would be a lot I could learn from the first strategist, and I’d love to have long, weighty talks with him. But as an executive, I’m hiring the second guy.

  16. Milo, if there is one thing I admire it’s an expert who doesn’t give any quick and easy answers. One of the best MDs I ever worked with – Paul Heath – almost never posed any top-down solutions in planning meetings. He was the best questioner I have ever worked with. By asking other players how they justified what they proposed, then asking questions about the justifications, he prompted a deeper analysis of what was being proposed. He was an avid opponent of the false promise. Guess what? He got fired . . .

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