Mental Models: Institutionalising a Questioning/Inquiry culture at VP

[Donald]

Over the course of last 2 years and more, I have often wondered why some our best ideas, sometimes - breakthrough insights, leaps of abstraction (from a slew of observations), systemic understanding of a business, and the like - never see widespread adoption

For the first time, there are tangible answers from a book - The Fifth Discipline - that resonate very strongly with our own findings. Will be liberally quoting from the book …

block quotes and in italics…

Chapter 9: Mental Models
Why the best ideas fail (to find widespread adoption)

We are coming increasingly to believe that this “slip 'twixt cup and lip” stems, not from weak intentions, wavering will, or even non-systemic understanding, but from mental models. More specifically, new insights fail to get put into practice because they conflict with deeply held internal images of how the world works, images that limit us to familiar ways of thinking and acting. That is why the discipline of managing mental models—surfacing, testing, and improving our internal pictures of how the world works promises to be a major breakthrough…

But if mental models can impede learning—freezing companies and industries (and investment learners) in outmoded practices—why can’t they also help accelerate learning? This simple question became, over time, the impetus for the discipline of bringing mental models to the surface, and challenging them so they can be improved.

Allow me some uninterrupted space to build up on how we can harness the same “Mental Models” conjunct to building the much needed Questioning/Inquiry culture at VP - Need of the Hour !!
[We no more have the luxury of finding easy pickings - 30% growers, with 30% Return on Capital, at 5-6 PEs]

[Donald]

Why are mental models so powerful in affecting what we do?

In part, because they affect what we see. Two people with different mental models can observe the same event and describe it differently, because they’ve focused at different details and made different interpretations.

We recently had a 1.5 hour meeting with a Senior Executive of a very respected firm in an industry that is doing well since two decades, and there seems to be enough runway to continue to harness opportunities for another two decades, at the least. This was a meeting (not to discuss the firm’s business prospects), but to understand deeper the industry dynamics, competitive positioning & intensity, strengths/weakness of different business models at play, customer engagement models, et al (from the Industry domain Insider perspective - who better?? )

As is our usual practice we next had another meeting with a very senior Technical Executive from the same industry. We got a chance to further hone the understanding (by using what we learnt from the last 1.5 hour intensely educative session) by debating and cross-questioning more. This time we led the discussions.

I thought our objective was nailed down - we had effectively separated the Wheat from the Chaff - in the industry. Our unsaid agenda was to be in a position of becoming better-informed investors on a couple of (seemingly) promising newer entrants to the industry.

To my surprise (and disbelief) - me and another colleague I respect (for his original thinking) had come to completely different conclusions. He was even more bullish now, and me, even more bearish !!

[Donald]

As there was no apparent meeting ground - we agreed on a logical next step - draw up a simple Business Canvas Model individually, and then again converge. Unfortunately, that agreement got shelved in another 10 days we slept over the issue - as one of us didn’t think it was necessary to do a deep dive (a quite familiar situation to me, nowadays)

The problems with mental models lie not in whether they are right or wrong - by definition, all models are simplifications. The problems with mental models arise when they are implicit - when they exist below the level of our awareness.… Failure to appreciate mental models has undermined many efforts to foster systems thinking. The inertia of deeply entrenched mental models can overwhelm even the best systemic insights….

The problem remains that we aren’t habituated to verbalise our implicit assumptions. They almost always remain under the surface. Its not an easy job to attempt to surface them even with the best of intentions - even when both of us are unabashed seekers of the Truth!

[Donald]

Peter M Senge (and research team at MIT) had extensive experience working with (fostering Systemic Thinking and bringing in) Mental Models in Practice for decades with large organisations like Shell, BP, Harley-Davidson. Here is what they summarise - as what emerged as necessary Tools and Skills - from such extensive decades-long experiences.

Though Shell, BP, Hanover, and Harley Davidson took very different approaches to developing capacity to work with mental models, their work involved developing skills in two broad categories: skills of reflection and skills of inquiry. Skills of reflection concern slowing down our own thinking processes so that we can become more aware of how we form our mental models and the ways they influence our actions. Inquiry skills concern how we operate in face-to-face interactions with others, especially in dealing with complex and conflictual issues. Together with the tools and methods used to develop these skills, following constitute the core of the discipline of mental models:

• Facing up to distinctions between espoused theories (what we say) and theories-in-use (the implied theory in what we do)

• Recognising “leaps of abstraction” (noticing our jumps from observation to generalization)

• Exposing the “left-hand column” (articulating what we normally do not say)

• Balancing inquiry and advocacy (skills for effective collaborative learning)

[Donald]

Balancing Inquiry and Advocacy (Skills for Effective Collaborative Learning)

While it is extremely interesting to delve deeper and understand each of the above 4 skills better, we are not here to do a book review :). Those interested will surely order the book to learn the much needed skills.

Reflecting on this section - showed me very very effectively what was missing - that while I was instinctively/intuitively right about Skills of Reflection: slowing down our thinking processes - doing deliberate System2 thinking by way of structured tools such as Business-Canvas-Models, I was painfully going wrong in Skills of Inquiry. This part is very important in VP Context today, and allow me to quote lengthily from the Authors

Most managers are trained to be advocates. In fact, in many companies, what it means to be a competent manager is to be able to solve problems - to figure out what needs to be done, and enlist whatever support is needed to get it done. Individuals became successful in part because of their abilities to debate forcefully and influence others.

Inquiry skills, meanwhile, go unrecognized and unrewarded. But as managers rise to senior positions, they confront issues more complex and diverse than their personal experience. Suddenly, they need to tap insights from other people. They need to learn.

Now the manager’s advocacy skills become counterproductive; they can close us off from actually learning from one another. What is needed is blending advocacy and inquiry to promote collaborative learning.

Too less Inquiry and Too much Inquiry - both prevalent situations

We often tape record meetings of management teams with whom we are working to develop learning skills. One indicator of a team in trouble is when in a several hour meeting there are few, if any, questions. This may seem amazing but I have seen meetings that went for three hours without a single question being asked. You don’t have to be an expert to know that there is not a lot of inquiry going on in such meetings.

But pure inquiry can also be limiting. Questioning can be crucial for breaking the spiral of reinforcing advocacy, but until a team or an individual learns to combine inquiry and advocacy, learning skills are very limited.

One reason that pure inquiry is limited is that we almost always do have a view, regardless of whether or not we believe that our view is the only correct one. Thus just asking lots of questions can also be a way of avoiding learning - by hiding our own view behind a wall of incessant questioning.

[Donald]

The Most Productive Learning
We are coming close to the crux of the matter now

The most productive learning usually occurs when managers combine skills in advocacy and inquiry. Another way to say this is “reciprocal inquiry.” By this we mean that everyone makes his or her thinking explicit and subject to public examination. This creates an atmosphere of genuine vulnerability. No one is hiding the evidence or reasoning behind his views - advancing the views, but not making them open to scrutiny.

For example, when inquiry and advocacy are balanced, I would not only be inquiring into the reasoning behind others’ views but would be stating my views in such a way as to reveal my own assumptions and reasoning and to invite others to inquire into them. I might say, “Here is my view and here is how I have arrived at it. How does it sound to you?

While this is the ideal situation, life however shows us it’s extremely difficult to bring in that culture - where everybody is willing to be that vulnerable - be willing to expose his/her reasoning & arguments (abstractions) and supporting data - be willing to be standing completely naked, that is!

When operating in pure advocacy, the goal is to win the argument. When inquiry and advocacy are combined, the goal is no longer “to win the argument” but to find the best argument. This shows in how we use data and in how we reveal the reasoning behind abstractions.

For example, when we operate in pure advocacy, we tend to use data selectively, presenting only the data that confirm our position. When we explain the reasoning behind our position, we expose only enough of our reasoning to “make our case,” avoiding areas where we feel our case might be weak.

By contrast, when both advocacy and inquiry are high, we are open to disconfirming data as well as confirming data—because we are genuinely interested in finding flaws in our views. Likewise, we expose our reasoning and look for flaws in it, and we try to understand others reasoning.

When we started out in 2010, we were genuinely operating in this way. When we wrote at length on a pet idea of ours, we were actually exposing more of what we “did not know” …we were genuinely interested in finding out why somebody holds a diametrically opposite view…asked questions and tried to understand the counter-reasonings. More importantly, there were no (real or imagined) “reputations” at stake!

Whatever may be the real underlying combination of reasons, that spirit of open-enquiry and being completely okay with 'standing naked" is sadly getting lost, even in smaller private groups and in one-to-few, one-to-one interactions among VP Members.

[Donald]

How to get the Magic Back!!
The author prescribes useful starting guidelines, as below

What has also become obvious on repeated occasions is that, when there is inquiry and advocacy, creative outcomes are much more likely. In a sense, when two people operate in pure advocacy, the outcomes are predetermined. Either person A will win, or person B will win, or more likely both will simply retain their views.

When there is both inquiry and advocacy, these limitations dissolve. Persons A and B, by being open to inquire into their own views, make possible discovering completely new views.

While mastering the discipline of balancing inquiry and advocacy, it helps to keep in mind the following guidelines:

When advocating your view: (probably obvious to strong Advocates like me )

• Make your own reasoning explicit (i.e., show how you arrived at your view and the “data” upon which it is based)

• Encourage others to explore your view (e.g., “Do you see gaps in my reasoning”?)

• Encourage others to provide different views (i.e., “Do you have either different data or different conclusions, or both?")

• Actively inquire into others’ views that differ from your own (i.e., “What are your views?, How did you arrive at your view?, Are you taking into account data that are different from what I have considered?”)

When inquiring into others’ views: (probably not so obvious to strong advocates like me )

* If you are making assumptions about others’ views, state your assumptions clearly and acknowledge that they are assumptions

* State the “data” upon which your assumptions are based

* Don’t bother asking questions if you are not genuinely interested in the others’ response (i.e., if you’re only trying to be polite or to show the others up)

When you arrive at an impasse (others no longer appear to be open to inquiring into their own views):

* Ask what data or logic might change their views

* Ask if there is any way you might together design an experiment (or some other inquiry) that might provide new information

[Donald]

The ideal of combining inquiry and advocacy well, is challenging.

Speaking as a veteran advocate, I can say finding patience and perseverance needed for a more balanced approach is vital for fast progress. Progress can come in stages.

For many, the first stage is learning how to inquire into others views - when we do not agree with them. Our habitual response to such disagreements is to advocate our view harder. Usually, this is done without malice, but with the genuine belief that we have thought things through and have a valid position.

Unfortunately, this often has the consequence of polarising or terminating discussions, and leave us without the “sense of partnership” we truly wanted!!

To summarise, the point I wanted to drill home into us Continuous Learners at VP
1.Let’s be completely willing to stand naked - Let us again be willing to be genuinely vulnerable. Let us not selectively hide the evidence or reasoning behind our views - i.e. advance our views, but not be willing to make our reasonings completely open to scrutiny. If we maintain complete integrity while trying to scrutinise a business - we will never shy away from “structured” System2 analysis, citing over-analysis/ deep dive concerns

2.Let’s all learn to conduct genuine Inquiry (balancing the genuine need for advocacy) - be genuinely curious to find out why someone holds a different view; while inquiring about others views, let us make sure to state our assumptions clearly, acknowledging that they are assumptions . Let us be able to genuinely ask what are your views? How did you arrive at your view? Encourage an open exchange back.

Most of us active practitioners do one or either of above two, better.
I am yet to see someone (completely honest about continuous Learning) who cares to practice both the above with equal felicity. I see folks who are great at Inquiry - but they are yet to be comfortable standing naked. While those like me who are always willing to stand naked, have a lot of ground to cover before becoming genuinely skilled at Inquiry.

Today, Margin of Safety is no more in the Price!!
Margin of Safety will have to come from superior understanding of the business.

If we are unwilling/unable to embrace both processes above, Mr Market I am sure will show us naked, soon!! (Whether we hold concentrated or diversified holdings is immaterial; position sizing cannot protect us)

[Donald]

Opening the floor now to all

Especially to my friends - that are good at finding one or the other excuse to side-step and/or negate attempts to (jointly) understand businesses deeper - to bring everyone on the same page quicker.

How do we get the magic back??

[adminph2]

This is an important, serious inquiry for VP Future.

Please make sure you think twice before posting - how am I adding value? how am I taking the discussion forward?

We will be actively monitoring the thread to avoid clutter; that doesn’t mean you are asked to keep quiet. Not at all - active participation makes a thread come alive - just let’s make sure we are conscious of keeping up a value-adding discussion.

Thx

[Mehnazfatima]

Today margin of safety will not be found in price but in better understanding of the business…

.if we are to question even our basic assumption, then i would like to express my dissent with the limited scope of the above premise…

For a late comer like me, who had missed the stunning rally from Sept 2013 onwards, the was precisely the question …now that quality stocks have gone up, how do i find margin of safety…

1. my reasoning about margin of safety was that it assumes a passive role for investors…all the big guys of value investing advise us to hold on to a stock even if there is a fall in price…infact as Buffett tells us, the lower it goes the more attractive it becomes…

But i failed to understand as to why i have to adopt a passive role in the whole process…since i am a retail investor who can get in and out easily…why should i not get out when the stock price starts breaking down…this led me to study of technical analysis quite extensively…i find that before there is a breakdown in stock price, most of the stocks display certain well recognized price patterns…

So why not try and find margin of safety in technical analysis…stay invested in not so good stocks as long as our assumptions about it are coming true and if the stock is going down, then obviously a better judge (the market) has disagreed with my initial assumption …and so i get out of the stock.

2. secondly, margin of safety can also come from a better unferstanding or atleast awareness of the macro environment. This is quite relevant when it comes to investing in cyclicals

For example, we had a back to back two years of drought…from Nov 2015 onwards there were problems of drinking water in the nain sugarcane growing area of Maharashtra. This awareness would have led us to conclude that there will be a fall in sugar production and a cyclical uptrend in sugar stocks.

Similarly, there was a crackdown by chinese authorities on pollution caused by chemical industries…those aware of this judged in advance that Indian chemical industries and dye makers would stand to benefit.

Similarly, the fall in oil / synthetic rubber prices and extreme distress of natural rubber plantations has benefitted tyre makers.

3. We can look for margin of safety even from news within the sectors in India…for example with the launch of Digital India / smart cities program by indian govt and roll out of 4G services by Telecom operators…the demand for fibre optical cables has shot up… It would now be safe to assume that sooner or later, there will be a huge rerating of the optical cable manufacturers.

In such a scenario, sector tailwinds provide us with margin of safety…

The above examples may appear to be just an elaboration of the theme…better understanding of the business…but traditionally value investors have been bottoms up people…where as i am now advocating a top down approach.

[prasad17j]

I think we need to go beyond the obvious. Traditional methods (High RoE, RoIC, PE, PEG, etc) based methods to find “Businesses that have been doing well and would continue to do well” have mostly been discovered and are relatively expensive. Key is to go beyond and look for companies/industries that are at inflection points/turning around. May be pick up skills that successful VCs possess.

[basumallick]

@Donald very well written series of posts. It is important to always question one’s own assumptions & point of view. Articulating them in a public forum enforces them further.

One important thing for me is that understanding the business or macro environment or market sentiments or valuations are not mutually exclusive. Its not that if you do one, you can ignore the others. To be a successful investor, one has to do all of these well. How well one can do each is based on their inherent strengths and motivations.

The two points you have made are very very important.

1.Let’s be completely willing to stand naked -
the way I try to implement this is by continuously re-looking at where I may be going wrong, or where something is changing dramatically from my thesis. If such a thing happens, I am prepared to change my views (as well as my allocations). I think anybody who has been in the markets long enough and has been bruised enough would be ready to change their opinion based on new insights. That actually leads to your second point.

2.Let’s all learn to conduct genuine Inquiry -
Here again I think Charlie Munger has captured this idea splendidly. The idea is to be able to actively look for dis-conforming evidence (which feeds back into point 1 above).

“I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.”

“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

“The ability to destroy your ideas rapidly instead of slowly when the occasion is right is one of the most valuable things. You have to work hard on it. Ask yourself what are the arguments on the other side. It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.”
— Charlie Munger

[Donald]

@basumallick

Ask yourself what are the arguments on the other side. It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.”— Charlie Munger

Abhishek,
Thanks for bringing this back in my investing psyche :).
I had read this 3-4 years back, but never internalised it as a discipline.
Ability to wear the “other” hat so well that you can argue better than all counter views raised, is a great way to do due diligence on my own ideas.

Time to get down to business on this simple, implementable work ethic!

[valuedude75]

This thread brings together some of my favorite topics - so thank you @Donald for the opportunity! In order to organise my thinking I decided to come up with a mental model. :). The framework I used is as below:

My rationale for coming up with this model:

“Over the course of last 2 years and more, I have often wondered why some our best ideas, sometimes - breakthrough insights, leaps of abstraction (from a slew of observations), systemic understanding of a business, and the like - never see widespread adoption”

I used the above statement as a guideline to start thinking on what are some of the most insidious roadblocks that stand in the way of adopting new ideas/ new ways of thinking? More often than not it is Culture and Mindset that stand in the way. Based on this I split the problem into two and decided to ask the following question:

1. What aspects of the VP culture potentially need tweaking in order to better align with the stated objective?
2. What changes in mindset (do its members need to adopt) to achieve this change?

With this in mind, I went about detailing the model.

Culture: I have used the HBR article (liberally) referenced below for the framework and para phrased it with my questions/ observations.

• Culture is a complex blend of several components.
• Key components are – Vision, Values, Practices, People, Narrative, Place
• Vision: The foundational VP Vision is to be

“Community engaged in Separating the Wheat from the Chaff - in Business Quality, Management Quality, Business Execution & Performance”

• How can the needs of the stated objective be articulated in the context of the VP vision? Can this be captured more vividly in the vision?

• Values: Articulate the set of values needed to meet that vision. What values does VP stand for? How do those values help in achieving the stated vision? Are those values sufficient in meeting the objective of (re)inculcating a learning and questioning culture? How can members live those values?

• Practices: Concrete practices are needed to live out the core values? They must be reinforced and baked into the daily operating principles of the forum. What are the common practices that are core to drilling the values? Given that the community is largely self-governed, how can members (new and established) (re)immerse in these practices

• People:

A community of members that share its core values or possess the willingness and ability to embrace those values. That’s why the greatest firms in the world also have some of the most stringent recruiting policies. Without this no coherent culture can be built.

It is beyond doubt that VP is attracting the right set of people. There is also a constant drive to add value i.e. “bar raisers”. However how can the community separate the “wheat from the chaff” and ensure that there is sufficient cross pollination of ideas to minimise “staleness”?

• Narrative: The story behind the history. There is enough of a legend behind the VP success. However the narrative (in recent times – in my opinion) has become lesser stronger. How can the “elders” of the community share their stories (not the Chintan presentations and discussions but a behind the scenes look of key moments, discoveries…we all love a good story ) to provide a more human interest aspect to the forum perhaps?

• Place: VP being an online forum already provides a common area for members to meet and share. Can this interaction be more customised to align with the objectives of instilling a learning and questioning culture?

Intangible: A Zen Mental Model

• A key Zen concept is to have a beginners mind. This is extremely difficult in real life. As you and Prof. Bakshi mentioned in another thread – this model is essentially an inversion of the “Curse of Knowledge”. To be able to look at something as though seeing it for the first time is hard for humans. It is to assume a childlike innocence and have the ability to ask stupid questions, expose oneself to criticism and be open to changing our minds – that is enlightenment whether in the personal domain or the investment domain

• Growth carries within it the inherent seeds of instability. As the VP forum has grown it is inevitable that there will be dilution of some of the core principles. We can think of the entire community as a Complex Adaptive System. In such a system, every action has consequences, intended and unintended

• The key to understanding higher order interactions is to take a whole system approach – actions and reactions, reactions to reactions with increasing entropy…With continual adaptation and evolution members have to get better just to survive (i.e. add value to the members at large on a regular basis). Does this mean that VP should look at an up or out philosophy so popularised by the Big 5 Consulting firms? Get better, learn and add value or you are LBW? Au contraire though - it is only the learners who are posting, interacting and exposing themselves more with a (vast?) silent majority watching…(reminds me of the Indian electorate for some reason )

• Also as a system grows and matures, there is a ruthless need to discard old ways of thinking and doing and a need to regenerate and rise phoenix like again. So it might be worthwhile to consider a course correction at some point in time.

Thanks once again for the opportunity to contribute. Hopefully I have not gone off on a complete rant and tangent. If so - my apologies in advance!

Sincerely
VD75

[Donald]

Dear Value Seeker

Thanks for caring to write at length. And raising many important issues/way forward.

This is a complex subject. Good part is this has been tackled before :). I find the 5th Discipline book providing a simple step-by-step guide for the 5 necessary disciplines to inculcate - which if implemented sincerely - should see any team stay ahead

• Shared Vision
• Mental Models
• Personal Mastery
• Team Learning (Collaboration)
• Systems Thinking

Not surprisingly these are the same lines as issues raised by you from the HBR article. I am away at a remote place till 12th.

Once back, we hope to tackle each one of these one by one - show why these are absolutely relevant to VP context - how it is vital that we adopt these as basic disciplines - for us to prosper -individually and as a community - in our quest for Continuous Learning.

Cheers

[varadharajanr]

i thought of documenting one mental model a month. Wrote this - trying to integrate mathematics, physics, investing and behavioural economics slowly.j curve in investing and in life.pdf (356.8 KB)

hopefully you will find it useful. criticisms always welcome.

[bheeshma]

Good writeup vardha. I think that working capital intensity is also a number that one needs to track closely. Working capital is of course closely related to the operating characteristics of the business and some businesses which have brutal economics better working capital mgt helps to sift the good apples from the bad ones. Many cos get into this working capital trap which after a point is difficult to come out of. Investing in working capital means you have to compromise on investing in other long term assets which is not good for the cos health. A lot of companies need to invest a lot in inventory and find it difficult to collect money from their customers before they pay their suppliers and sometimes they get into a working capital squeeze from both ends where customers wont pay their past dues unless you give them improved credit terms and the suppliers wont work with you until you clear their past dues. So a key number is how the co deals with this conundrum