All Hail the Generalist

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We have become a society of specialists. Business thinkers point to "domain expertise" as an enduring source of advantage in today's competitive environment. The logic is straightforward: learn more about your function, acquire "expert" status, and you'll go further in your career.

But what if this approach is no longer valid? Corporations around the world have come to value expertise, and in so doing, have created a collection of individuals studying bark. There are many who have deeply studied its nooks, grooves, coloration, and texture. Few have developed the understanding that the bark is merely the outermost layer of a tree. Fewer still understand the tree is embedded in a forest.

Approximately 2,700 years ago, the Greek poet Archilochus wrote that "The fox knows many things, but the hedgehog knows one big thing." Isaiah Berlin's 1953 essay "The Fox and the Hedgehog" contrasts hedgehogs that "relate everything to a single, central vision" with foxes who "pursue many ends connected...if at all, only in some de facto way." It's really a story of specialists vs. generalists.

In the six decades since Berlin's essay was published, hedgehogs have come to dominate academia, medicine, finance, law, and many other professional domains. Specialists with deep expertise have ruled the roost, climbing to higher and higher positions. To advance in one's career, it was most efficient to specialize.

For various reasons, though, the specialist era is waning. The future may belong to the generalist. Why's that? To begin, our highly interconnected and global economy means that seemingly unrelated developments can affect each other. Consider the Miami condo market, which has rebounded quite nicely since 2008 on the back of strong demand from Latin American buyers. But perhaps a slowdown in China, which can take away the "bid" for certain industrial commodities, might adversely affect many of the Latin American extraction-based companies, countries, and economies. How many real estate professionals in Miami are closely watching Chinese economic developments?

Secondly, specialists toil within a singular tradition and apply formulaic solutions to situations that are rarely well-defined. This often results in intellectual acrobatics to justify one's perspective in the face of conflicting data. Think about Alan Greenspan's public admission of "finding a flaw" in his worldview. Academics and serious economists were dogmatically dedicated to the efficient market hypothesis — contributing to the inflation of an unprecedented credit bubble between 2001 and 2007.

Finally, there appears to be reasonable and robust data suggesting that generalists are better at navigating uncertainty. Professor Phillip Tetlock conducted a 20+ year study of 284 professional forecasters. He asked them to predict the probability of various occurrences both within and outside of their areas of expertise. Analysis of the 80,000+ forecasts found that experts are less accurate predictors than non-experts in their area of expertise. Tetlock's conclusion: when seeking accuracy of predictions, it is better to turn to those like "Berlin's prototypical fox, those who know many little things, draw from an eclectic array of traditions, and accept ambiguity and contradictions." Ideological reliance on a single perspective appears detrimental to one's ability to successfully navigate vague or poorly-defined situations (which are more prevalent today than ever before).

The future has always been uncertain, but our ability to navigate it has been impaired by an increasing focus on studying bark. The closer you are to the material, the more likely you are to believe it. In psychology jargon, you anchor on your own beliefs and insufficiently adjust from them. In more straightforward language, a man with a hammer is more likely to see nails than one without a hammer. Expertise means being closer to the bark, and less likely to see ways in which your perspective may warrant adjustment. In today's uncertain environment, breadth of perspective trumps depth of knowledge.

The declining returns to expertise have implications at the national, company, and even individual level. A collection of specialists creates a less flexible labor force, one that requires "retraining" with technological developments creating constantly shifting human resource needs. In this regard, the recent emphasis in American education on "job-specific" skills is disturbing. Within a company, employees skilled in numerous functions are more valuable as management can dynamically adjust their roles. Many forward-looking companies are specifically mandating multi-functional experience as a requirement for career progress. Finally, individuals should manage their careers around obtaining a diversity of geographic and functional experiences. Professionals armed with the analytical capabilities (e.g. basic statistical skills, critical reasoning, etc.) developed via these experiences will fare particularly well when competing against others more focused on domain-specific skill development.

The time has come to acknowledge expertise as overvalued. There is no question that expertise and hedgehog logic are appropriate in certain domains (i.e. hard sciences), but they certainly appear less fitting for domains plagued with uncertainty, ambiguity, and poorly-defined dynamics (i.e. social sciences, business, etc.). The time has come for leaders to embrace the power of foxy thinking.

Vikram Mansharamani is a lecturer at Yale University, a Tiger21 Scholar, and author of Boombustology: Spotting Financial Bubbles Before They Burst (Wiley, 2011). Follow him on Twitter @mansharamani.

CNBC: Bullish on Books

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(originally posted to CNBC.com March 2011; http://www.cnbc.com/id/42343583)

Spotting Bubbles Before They Burst

Published: Thursday, 31 Mar 2011 | 9:34 AM ET
By: Vikram Mansharamani, author of BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst”
Boombustology

Financial booms and busts are, particularly from an a priori perspective, probabilistic events for which multidisciplinary analysis is essential. Addressing financial booms and busts through a single lens may in fact have negative impacts and lead to gross misunderstandings.

Adopting a singular perspective will lead to an emphasis on depth of data versus breadth of information. It leads to deeper and more thorough understanding of particular information, but it misses the point that information is not the essential element.

There are plenty of “dots” but the connections between them are lacking.

Conceiving of financial booms and busts as uncertain ambiguities necessitates the application of different lenses to develop a probabilistic interpretation of scenarios to better understand how they may evolve. Economists, political scientists, psychologists, and even hard scientists have much to learn from each other. What we need today are analysts who employ a multidisciplinary perspective to connect the dots.

With this in mind, I designed a course to teach such a methodology about three years ago. Since 2009, I have taught this course at Yale University to undergraduates studying economics, psychology, political science, art history, American studies, history, East Asian studies, English, physics, and even molecular biochemistry and biophysics. Last fall, my class comprised students from Singapore, Greece, China, India, and several other countries.

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The class is structured in three parts.

The first presents several theoretical lenses that have proven useful over time in the study of booms and busts.

These lenses include microeconomics, macroeconomics, psychology, politics, and biology. The second part then applies these lenses to historical booms and busts ranging from Tulipomania to the current crisis, and the final section asks students to develop a framework for identifying bubbles before they burst. The final class is focused on student presentations of current bubbles, with an emphasis on the believability of their story.

To help students focus on moving beyond the ivory tower, I invite a market commentator or working professional to serve as the “bubble judge” and to help me grade their presentations. Past judges have included David Swensen from the Yale Investments Office and Jim Grant from Grant’s Interest Rate Observer.

These presentations are a highlight of the course, and serve as wonderful insight into what those with fresh eyes and free of Wall Street propaganda think are likely bubbles. So, what looks bubbly to those trained to use multiple lenses?

1) China, or more specifically, Chinese property. A handful of students suggested that the real estate boom in China appeared unsustainable. The rise of organized “speculator groups” was noted alongside rapidly rising credit levels, lofty property valuations (relative to income), and a forthcoming explosion in inventory levels.

2) Gold. Described by several students as the “ultimate greater fool” asset, the bubbly nature was also evident in student analysis of financial innovation (ETFs, leveraged ETFs, etc.) that has helped increase amateur investor participation. Ubiquitous commercials about buying and selling gold provided further support for their case.

3) Credit. Highlighting that US Treasuries were trading at historically low yields, or that municipal bonds seemed to be trading on a “too big to fail” assumption, students noted that the universal belief that moral hazard and extrapolation of past trends were likely to create “return-free risk.”

4) Social Networking. A group of my students in 2009 highlighted that the lack of appropriate valuation anchors enabled an Internet-era like approach to pricing these assets. Parallels were drawn with other historical innovations (canals, railways, telegraph, radio, automobiles, etc.) and the fancy valuations received by “new era” companies.

5) Emerging Markets. The universal belief that emerging markets were the sole source of growth in the world today led various students to suggest that the scarcity of believable growth stories would drive emerging markets to unsustainable levels. Within this theme, negative real rates were considered a culprit and one that would eventually be addressed through restrictive policies. India was highlighted as particularly expensive and vulnerable to this inflation-driven tightening.

Numerous other ideas have arisen, many of which appear to have well-analyzed, believable logics to them, ranging from the rare earth mining industry (multi-billion dollar valuations with little financial support), alternative energies (change the world, new era beliefs), and even garlic (medicinal purposes rising, Chinese demand, etc.).

To date, the multi-disciplinary framework developed in the class has proven useful on numerous fronts. It has helped those adopting it to take a step back and acknowledge that the bark they have studied is a part of a tree, and that the tree is in a forest…and most importantly, it creates a healthy skepticism of the alluring and seductive “it’s different this time” rationalizations which can be so hazardous to one’s wealth.

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