Caution: Beware Joining the Dots

B2B International
 

Have you noticed how difficult it can be to predict things? For a couple of months your sales are pathetic and you become despondent, believing there is a downward trend. And then, mysteriously they bounce back and you suddenly think that the future looks rosy. Why is it that we get such strange reversals?

The answer is related to randomness. Let’s use the example of CEOs. A few years ago two economists, Ulrike Malmendier and Geoffrey Tate, compared the successes of CEOs who had won business accolades such as Business Week’s “Best Manager”, against CEOs who hadn’t been blessed with such titles. They all ran large profitable companies. However, after receiving their gongs, the CEOs who had received the awards performed far worse over the next 3 years than the CEOs who had not been recognised. The CEOs with the accolades had been riding on the crest of the random peaks of performance and inevitably these were followed by random troughs.

Ask Claudio Ranieri, manager of Leicester City soccer team who, against all odds, won the English Premier League last year. His winning streak came to an abrupt end in February of this year and he is now an ex manager.

A high performance is often just lucky and a poor performance is unlucky. Over time there is always regression to the mean.

What does this mean to us in our businesses? It means that we should always have the long term in mind. We live by the hour and the day and this can consume us. It deludes us into thinking that a couple of good months or bad months indicate our future. However, our future is determined by long-term strategies. We should agree our strategy, stick with it, and not get distracted by those monthly blips.

Show me:
  • Filter by Industries

  • Filter by People

  • Filter by Research Type