The former top general in the Marine Corps, Gen. Jim Mattis, wrote in his memoirs, published last year, that “If you haven’t read hundreds of books, you are functionally illiterate, and you will be incompetent, because your personal experiences alone aren’t broad enough to sustain you.”
That’s bold. But given its source, it can’t be discounted.
“Thanks to my reading, I have never been caught flat-footed by any situation, never at a loss for how any problem has been addressed (successfully or unsuccessfully) before,” Mattis wrote in a 2003 email to a colleague. “It doesn’t give me all the answers, but it lights what is often a dark path ahead.”
In no industry is experience by proxy as important as it is in banking, thanks to a pair of peculiar dynamics. Banks use three or more times as much leverage as the typical company. They’re also exposed to the unforgiving vicissitudes of the credit cycle.
It follows that in banking, as in the military, though in an obviously less lethal context, there is little margin for error. To be a high-performing bank, your credit decisions must be right 99% of the time — a high bar to clear.
With this in mind, here are three concepts from three books that can help sharpen one’s decision-making and reduce the incidence of error.
The study of behavioral finance gained traction after the financial crisis of 2008-09, which eroded confidence in the efficient market hypothesis — the assumption that markets operate best when they are most unfettered by rules and regulation.
Behavioral finance is predicated on the general rule that markets tend to produce rational outcome. More important than this rule, however, are multiple exceptions to it, called “behavioral biases,” which are so powerful that they can swallow the general rule.
The granddaddy of behavioral biases is cognitive dissonance. This is the “state of tension that occurs whenever a person holds two cognitions (ideas, attitudes, beliefs, opinions) that are psychologically inconsistent,” explained Carol Tavris and Elliot Aronson in “Mistakes Were Made (but not by me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts.”
An example is the belief that “‘Smoking is a dumb thing to do because it could kill me’ and ‘I smoke two packs a day,’” Tavris and Aronson wrote.
People don’t like hearing information that they disagree with. It’s why so many of the banks that got into trouble in the financial crisis of 2008-09 tended to minimize the ominous warnings from the risk managers, preferring instead to believe the lofty predictions of their revenue generators.
If you want to get better at something, it helps to practice. But not all practice is equally effective.
“There are various sorts of practice that can be effective to one degree or another, but one particular form — which I named ‘deliberate practice’ back in the early 1990s — is the gold standard,” wrote Anders Ericsson in “Peak: Secrets From the New Science of Expertise.”
There is an assumption that after reaching a satisfactory skill level at something, the more you do that thing, the better you’ll be at it. But this isn’t necessarily true.
“Research has shown that, generally speaking, once a person reaches that level of ‘acceptable’ performance and automaticity, the additional years of ‘practice’ don’t lead to improvement,” Ericsson explained. “If anything, the doctor or the teacher or the driver who’s been at it for twenty years is likely to be a bit worse than the one who’s been doing it for only five, and the reason is that these automated abilities generally deteriorate in the absence of deliberate efforts to improve.”
Deliberate practice has several characteristics that distinguish it from what Ericsson calls “naïve practice.” These include specific, well-defined goals; focused and intentional effort; regular feedback; and the willingness to get out of one’s comfort zone.
Level 5 Leadership
A central paradox lies at the heart of effective leadership: while leadership calls for confidence, it also demands humility.
Jim Collins encapsulates in the concept of Level 5 Leadership, which he developed in his book, “Good to Great: Why Some Companies Make the Leap and Others Don’t.”
“Level 5 leaders display a powerful mixture of personal humility and indomitable will,” Collins explained. “They’re incredibly ambitious, but their ambition is first and foremost for the cause, for the organization and its purpose, not themselves.”
“The good-to-great executives were all cut from the same cloth,” he continued. “It didn’t matter whether the company was consumer or industrial, in crisis or steady state, offered services or products. It didn’t matter when the transition took place or how big the company. All the good-to-great companies had Level 5 leadership at the time of transition.”
Ultimately, there are no silver bullets to achieve exceptional performance — in banking or elsewhere — but concepts like these are fundamental building blocks that will accelerate one’s progress toward that goal.