Retirement Crisis Part III: A Portfolio Checklist
Time is like a river that carries us forward into encounters with reality that require us to make decisions. We can’t stop our movement down this river and we can’t avoid those encounters. We can only approach them in the best possible way.
-Ray Dalio
In Part II of this series I introduced frameworks designed to help address the retirement crisis. My idea for Part III: explore each framework; but that plan skipped a vital investment tool. That being a well-structured checklist.
Before you decide a post on checklists is too obvious, know checklists are more powerful when are discussed explicitly and with care. That’s what I learned from Antul Gawande, author of the best selling book, The Checklist Manifesto: How to get things right.
Dr. Gawande tells us the challenge today isn’t a lack of access to knowledge; it’s the inability to manage and apply increasing know-how. Gawande knows know-how. He is a professor at Harvard Medical School, author of four bestsellers, and recently became the CEO of Haven, the healthcare company recently formed by Berkshire Hathaway, Amazon, and JP Morgan that is focusing on making the US healthcare system both better and cheaper...big job(s)!
The Checklist Manifesto looks at many situations where checklists made a massive difference, even for leading experts in their respective fields.
Two examples:
Following the 1935 pilot-error crash of what was known as Boeing's “Flying Fortress” by a highly experienced pilot during an airshow, Boeing lost a bid to sell planes to the Army due to questions around whether the “the bomber was too much plane for one man to fly”. Rather than implement more training, Boeing engineers created an index-card-sized checklist of critical tasks which was so effective the test plane went on to fly 1.8 million miles without one accident. The US military went on to order thirteen thousand of the aircraft which gave the US a decisive air advantage in the Second World War.
A five-point checklist (created by Gawnde) implemented at John Hopkins Hospital in 2001 virtually eradicated central line infections in the intensive care unit. When the checklist was implemented in ICU’s in Michigan, infections decreased by 66% within three months and likely saved more than 1,500 lives within eighteen months.
These improved outcomes were the result of operating more effectively due to having a better system for dealing with avoidable failure. Gawande tells us, “there are substantial realms in which control is within our reach…yet we fail to apply them correctly.” Today’s retirement crisis mostly comes down to the flaws in our approach to dealing with avoidable failure.
Why is it that avoiding avoidable failure has proved to be so difficult? Gawande explains with an example of what doctors must work through:
In a complex environment, experts are up against two main difficulties. The first is the fallibility of human memory and attention, especially when it comes to mundane, routine matters that are easily overlooked under the strain of more pressing events. Example: When you’ve got a
patient throwing up and an upset family member asking you what’s going on, it can be easy to forget that you have not checked her pulse. Faulty memory and distraction are a particular danger in what engineers call all-or-none processes whether one is running to the store to buy ingredients for a cake, preparing an airplane for takeoff, or evaluating a sick person in the hospital. If you miss just one key thing, you might as well not have made the effort at all.
We rightly consider keeping many balls in the air a circus stunt. Yet even a juggler works only for ten minutes or so. If they were to try to go much longer the balls would soon drop. Checklists safeguard us from unintentionally running off with the circus.
So what makes a good checklist? Gawande says:
[Checklists] are precise. They are efficient, to the point, and easy to use even in the most difficult situations. They do not try to spell out everything—a checklist cannot fly a plane. Instead, they provide reminders of only the most critical and important steps—the ones that even the highly skilled professionals using them could miss. Good checklists are, above all, practical.
Gawnde cautions, however, if checklist implementation isn’t taken seriously it is not worth the effort. With that in mind, here are my two rules for implementing a portfolio checklist, learned from The Checklist Manifesto.
Account for complexity by dealing with uncertainty
Elaborate with high-quality stories
Rule one: Account for complexity by dealing with uncertainty
There are three problems checklists can help us with:
Simple problems, like baking a cake: There is a recipe.
Complicated problems, like sending a rocket to the moon: No straightforward recipe. Needs expertise. But sometimes steps can be broken down into a series of simple problems.
Complex problems: like raising children
Gawande writes:
Indeed, the next child may require an entirely different approach from the previous one. And this brings up another feature of complex problems: their outcomes remain highly uncertain. Yet we all know that it is possible to raise a child well. It’s complex, that’s all.
When uncertainty is a factor, the unexpected is the only thing one can confidently expect. Not planning for the unexpected is to pass over key factors that determine our future results. Here is an uncertainty example from each of the previously introduced (but yet discussed) frameworks:
This brings me to the main takeaway of rule one: to address uncertainty, a checklist must be designed to allow for each checklist point to both communicate and coordinate with other points. If an investor does this well they should avoid a good deal of trouble that has contributed to the retirement crisis. Here are two examples of potential trouble that a checklist would help avoid:
After years of surveying the US public, the Society of Actuaries came to the following conclusion; The cumulative research makes it clear that it would be better for many people to have tools for longer-term and more comprehensive evaluation of their retirement strategies. It appears that many people plan for spending on the basis that nothing goes wrong, rather than building risk into their planning.
In a detailed report on Morningstar recently pointed out, individuals often fail to identify as many as half of the goals that they later recognize to be central to their plan.
Rule Two: Elaborate with high-quality stories
Dr. Gawande rolled out a voluntary checklist system for the South Carolina Hospital system which saw a 22% reduction in patient deaths. Fantastic! Contrast that with what happened in the capital of Canada, Ottawa, where they deployed a mandatory checklist system by making it law, and saw a 0% reduction.
Why the difference? Ottawa’s approach was too mechanical. They provided the checklist without communicating the stories that Gawande warned were key to making checklists useful. Data and facts do not convince people - even for professionals in their respective fields, it’s stories that make the difference.This outcome fits with multiple research studies which show people often disregard even the most obvious facts in favor of more vivid stories.
The story-technique for checklists worked well for the pilots during World War II, who were required to use them. Before checklists were widely used, the aviation community had a hard time getting pilots to adopt them. Pilots, especially experienced ones, felt they were too simple, obvious, and below their skill level. When the aviation industry developed a culture by implementing checklists through training, simulations and storytelling, the use of checklists improved dramatically. During World War II, the US military invested heavily in training videos in the form of stories. This led to better trained pilots and a reputation for the US having the best trained airmen in the world, along with the British.
Finally, because stories can sway us in powerful ways it's important to stay alert of the quality of the information we draw upon to build them. That’s why the rule number is: Elaborate with high-quality stories. High-quality stories must have high-quality information. The more information available to us, the more we must necessarily understand to extract useful information from the noise. With that in mind I’ll end this post with Ray Dalio’s very useful shorthand rules for filtering in high-quality information.
From Principles: Life and Work, by Ray Dalio:
Every day you are faced with an infinite number of things that come at you. Let’s call them “dots.” To be effective, you need to be able to tell which dots are important and which dots are not. Some people go through life collecting all kinds of observations and opinions like pocket lint, instead of just keeping what they need. They have “detail anxiety,” worrying about unimportant things.
Sometimes small things can be important—for example, that little rattle in your car’s engine could just be a loose piece of plastic or it could be a sign your timing belt is about to snap. The key is having the higher-level perspective to make fast and accurate judgments on what the real risks are without getting bogged down in details.
Remember:
a. One of the most important decisions you can make is who you ask questions of. Make sure they’re fully informed and believable. Find out who is responsible for whatever you are seeking to understand and then ask them. Listening to uninformed people is worse than having no answers at all.
b. Don’t believe everything you hear. Opinions are a dime a dozen and nearly everyone will share theirs with you. Many will state them as if they are facts. Don’t mistake opinions for facts.
c. Everything looks bigger up close. In all aspects of life, what’s happening today seems like a much bigger deal than it will appear in retrospect. That’s why it helps to step back to gain perspective and sometimes defer a decision until some time passes.
d. New is overvalued relative to great. For example, when choosing which movie to watch or what book to read, are you drawn to proven classics or the newest big thing? In my opinion, it is smarter to choose the great over the new.
e. Don’t oversqueeze dots. A dot is just one piece of data from one moment in time; keep that in perspective as you synthesize. Just as you need to sort big from small, and what’s happening in the moment from overall patterns, you need to know how much learning you can get out of any one dot without overweighing it.
Note: In the last post in this series I mentioned my plan write on each of the individual investment frameworks over the ensuing weeks. Given time constraints I instead opted to spend that time turning my five frameworks into a presentation. Not that anyone will notice but my next post in this series will likely be for to six weeks out, thanks for reading!
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