In our world of potential “information overload”, in which attention spans are supposedly becoming ever shorter, and the tendency in some quarters to misrepresent, distort or simply repeatedly lie seems ever more prevalent, there is a danger that one’s mind (the System 2 part in Kahneman terms) can suffer what amounts to processing paralysis.
Not only is there too much data masquerading as information, but one has to exercise great vigilance and maintain abundant skepticism in order to be able even to function. One has to practice a form of informational triage, deciding what matters and what does not in terms of the particular decision at hand- and one has to know when to stop. It is always possible to ask another question or examine another factor, but is it relevant or material? Does it supply new information or a different perspective?
Of course, much of the skill behind effective decision-making is a product of both experience and constant practice. Theory is all very well, but it is essential to have seen the outcome of one’s own decisions, as well as observing and learning from those of others.
In the (re)insurance underwriting context (as in others), there is the danger that familiarity can breed contempt, as well as complacency- both of which run the risk of causing decision errors- because, while some factors are largely unchanging (e.g., lack of cash kills companies), others may be new and unexpected. For example, the “Softbank effect”, in which an early stage, or even relatively mature business is essentially “forced” to accept far more money than its principals know what to do with or can deploy effectively may lead to them changing the very behaviours and processes which made the venture promising in the first place. Paradoxically, there can sometimes be something such as having too much cash.
Therefore, any underwriter has to be able to adapt his or her mental models when circumstances and new information dictate, including the heuristics which we all use, often subconsciously (System 1 behaviours in Kahneman terms.)
At the same time, as stated above, one has to be able to ensure that your System 2 thought processes are able to filter sources in terms of their accuracy, relevance and “weight”. Going back to primary sources is usually essential (i.e., reading the actual accounts; interview transcripts; and regulatory filings) is essential. Just reading pre-digested pablum such as presentations means that one is already dealing with someone else’s filter and motivations. Often those may be harmless, but equally they may deliberately distort or deflect. US GAAP or IFRS may be far from perfect, but “adjusted” numbers almost invariably only go one way in terms of their purpose, which is to make things look favourable- unless a new CEO is using the “kitchen sink” approach to clear the decks for his or her new regime.
The Awbury Team has by now getting on for a couple of centuries of relevant combined experience. However, that does not mean that we have succumbed to the “seen it all” fallacy. We know that there are, and always will be, new factors to take into account in our underwriting of the large, complex risks in which we specialize. Jaded we are not! As for being overwhelmed, our carefully focused approach enables us to filter out the informational dross and distraction that constitute an increasing problem.
The Awbury Team