So, it was great to see that you had more work coming out and more work specifically towards risk and decision making and uncertainty. And those are topics that we enjoy talking about quite regularly. And often, in the areas that are most, what I would say, Gordian-knot-like where sometimes there’s just not a lot of good solutions. And so, we sort of revel in those types of conversations. Those are the ones worth having, I think. So, I wonder maybe if you might do a little bit better of a job giving your history and the development of ‘The Gray Rhino’ and then how that’s led into ‘You Are What You Risk’, and why you decided that this next book was required to help fill in some of the flesh on the skeleton, if you will.

Backgrounder

Michele:00:01:41Absolutely. And thank you so much for the kind words. I think that there really have been so many people looking for something to help them to talk about these things where there’s something coming, you know, something’s coming, but how do you talk about it? And you saw these armchair Black Swan spotters, saying, “What’s the next Black Swan? What’s the next Black Swan?” Which is of course not what the concept was meant to be useful at all. I mean, I think it was intended to get people to think more broadly about the idea of what could happen or not. But really, it became used for something that wasn’t really meant for.

I started my career in Latin America, and as a financial journalist, writing about all the defaulted debt from the 1980s, that in the 1990s was being restructured and repackaged and chopped up and restructured again and sent all over the place. So, throughout the 90s, that was really what I was focused on. In 2000, we started seeing problems in Argentina, which had been the darling of the emerging markets for quite some time. But at this point, the debt was going up, the economy was going down, reserves were going down. The math was really pretty simple. Friends who were writing about that in Latin America would get hate mails for saying, “Hey, this is a problem.” And, you know, the banks were doing one expensive restructuring after another, basically just kicking the can down the road, pushing the problem out into the future, adding hundreds of millions of dollars of underwriting costs to the problem. And, you know, it wasn’t solving things.

And so, early on in 2000, there was a proposal that went around Wall Street that suggested that Argentina and its creditors sit down and write the debt down by about 30%. Because they said if you don’t do this now, it’s going to be a lot more later. And of course, Argentina didn’t want to lose face, and the banks didn’t want to lose their underwriting fees. And so, nobody did it. At the end of the year, you see this huge collapse. And creditors, 16 years later, after many, many, many years of legal battles, most of them have lost 70% instead of 30%, which is not great math.

So, I left financial journalism. I went into the think tank world. I wrote another book. In 2011, when we were in the middle of the euro crisis, I was running a think tank in New York. We had a project called the World Economic Roundtable where I presented a paper saying, “Hey, look at Greece. Debt’s going up, growth is going down. At this point, the consequences wouldn’t be just for Greece, but for all of Europe and the Euro itself, which is a whole other discussion. But, you know, Greece actually sat down with its creditors. In spring of 2011, I wrote a paper basically saying, “Hey, Greece learned from Argentina. You see this big, scary thing coming at you. It’s time to do something about it. Let’s do it instead of letting it trample you.” And so, it’s really one of the early voices on the Greek debt restructuring.

And so, that was spring 2011. And by late winter, early spring, the following year, Greece and its creditors had come to an agreement. And at that time, I had been dealing sort of with a more of a personal than career ‘Gray Rhino’. I’d been putting unsustainable amounts of effort into my job for quite a while and was really trying to figure out what the next thing was. So, the World Economic Forum had arranged an executive education course at Harvard, at the Kennedy School. So, I did that, took a couple of weeks for a reset button to step back, and I decided that I needed to be writing again. I needed to really be a voice on some of the issues I cared about. And this was the question that came up. Greece and Argentina, why do some people or countries or companies see a big scary thing coming at them and deal with it? And why do some of them not deal with it?

So, it’s really the question that ‘The Gray Rhino’ set out to answer. I came up with the metaphor, that summer, “big scary thing with the horn”. That was a rhino. And I was talking with a friend, corporate lawyer, who made sort of like a Black Swan joke. He’s like, “Oh, you call it the black rhino.” And I thought, “Wait a minute, I went to the zoo when I was, you know, in grade school, and I think there actually is something called the black rhino. Let me go to Wikipedia and figure it out.” And there’s also something called the white rhino. And the funny thing was that the black rhino is not black. The white rhino is not white. They’re both gray. So, it seemed to me to be a wonderful metaphor for things that are obvious that we look away from and don’t pay attention to. So, that’s how it became ‘The Gray Rhino’.

I introduced it at Davos in 2013 in January at the annual meeting, the World Economic Forum. The book came out in April of 2016. Not just the metaphor, but a whole framework to help people to understand why they’re dealing with something or not, and how they can deal with it better. Because it seemed to me that there are different stages of a Gray Rhino crisis. And depending on which stage you’re at, there are different reasons you’re not dealing with it. And there are different strategies for dealing with it. So, I broke it down into these 5 stages to help people to do this analysis of these obvious things, and how they can better recognize, stand up to it, and do something about it. So, that’s really how the Gray Rhino concept came about.

Mike:00:06:42How did you find, in the Gray Rhino experience, what were some of the main reasons why decision makers sort of refuse or lack the ability to take action earlier on in the process, and then obviously have those consequences and potential… first of all, the consequences get larger, and the choices one can make to attenuate the consequences gets smaller? And so, we face this, all of a sudden, we’re a crisis necessity change, versus, you know, analysis, planning and execution. And so, what are the main reasons that people just avoid the decision making or avoid the realization, if you will?

Avoiding Decision Making

Michele:00:07:20So, with ‘The Gray Rhino’, I looked at a couple of factors that came really out of my experience with policy and finance. One of them was, you know, group decision making, whether it’s, you know, boards or CEO and teams, and the cognitive biases that play into that. One of them “groupthink”, that when you get a group of people around a table who went to the same schools and look the same and grew up in the same place under the same age and the same gender, when everybody’s just like each other, it makes it much harder for anyone to raise a red flag or to disagree with anyone. So, one person says something, automatically, everybody around the room agrees. And it shuts down the possibility for structured debate, really evaluating pros and cons, and looking at different perspectives, which is really what you need for good decision making. So, that’s… that’s one part of it.

Another one had to do with more structural factors, the sort of incentives that, you know, companies or policymakers have, in United States, you’ve got people running for set terms of office, 4 years, 6 years, and they’re going to bet that they’re going to do something to kind of patch things up in the short-term so that it all falls apart on the next person’s watch. And we have this bad habit of rewarding people who clean up messes. And obviously, that’s good to reward them for, but only once the mess has happened. And we tend to ignore people who make hard decisions to keep the mess from happening in the first place. And so, we just… we’re not paying enough attention to people who were doing really important things. And in fact, sometimes, if someone does something to head off a crisis, and of course, the crisis doesn’t happen, then they actually get punished for that. You just think, “Oh, you were a fool thinking that this was going to happen.”

So, there… and there a lot of short-term versus long-term incentives in businesses as well. Quarterly earnings. There’s a real disconnect between the fact that, you know, a lot of the scholars of business have said that the majority of company value really comes from the sort of long-term investments and long-term thinking and strategy and capital investment. But what happens is people are tracking the quarterly results, the short-term things. And so, they’re pursuing things that actually subtract from long-term value. And that’s a big problem as well. It’s a combination of sort of cognitive, psychological, underlying reasons of group dynamics and misaligned incentives.

Individual Cognitive Biases

Adam:00:09:50We have spent a lot of time on individual cognitive biases. We’ve given a lot of thought to it and how it impacts markets and how it impacts investors, and how we can design systems to help investors to avoid, and help us to avoid making obvious mistakes that people sort of repeat over and over again because of these known biases. But one of the interesting realizations early on as you study the decision-making literature and biases is that, understanding that you have biases doesn’t mean that you’re insulated from them. How do you resolve this in the framework that you’ve put forth?

Michele:00:10:28Well, there actually is some research showing that if you focus on the biases, and you create habits, to offset them, you can actually avoid them to some extent. I mean, we’re human, we’re not perfect. And that’s actually one of the messages of ‘Gray Rhino’ is that there’s no shame in not being perfect. Yes, you’re going to ignore something obvious, and that’s not just because you’re a loser, it’s because you’re human. But when you recognize that vulnerability, that gives you an incredible amount of power.

The other thing is to set up systems and processes that will help to offset those biases, setting up in your Board and your team a decision-making process that makes the devil’s advocate part of it, where you systematically look at the pros and cons. And when you’re aware that you are much more likely to underestimate how probable something is, then you can compensate for that.

But, you know, in building on ‘The Gray Rhino’ and working on ‘You Are What You Risk’, I found that there’s some things in the behavioral science that haven’t gotten as much attention as they need. One is that a lot of people assume that everybody is affected by biases in the same way. And that’s actually not true at all. Different people have very different levels of loss aversion, people have very, very different levels of risk tolerance. But, you know, some people are more independent, who were much more likely to be swayed by the group than others. And there are all sorts of other factors that affect each person. And those altogether really help you to understand where you’re coming from when you’re making a risk decision.

And I think, you know, finance and business is really in the early stages of putting this knowledge to work, whether it’s as a financial advisor, or whether, as an investor yourself, whether it’s as a CEO, or a Board member. Incredibly rich body of research, and also anecdotal evidence, stories from people who’ve applied different risk principles in their own unique ways. And these set of influences come together to create what I call a risk fingerprint, which is something that defines you as clearly as any of the other things that you might use to define who you are.

But the decisions that you make, and the influences that go into that, you ask what those are, and you really understand who you are, or who the people around you are. And it’s absolutely fascinating to see. We don’t pay any attention to this at all. So, I’m hoping to really open a whole new conversation that leads to a lot of self-awareness of, you know, individuals, for organizations, and even at the broader society level.

The Risk Compass

Mike00:13:14I wonder if you might actually take us through a brief description of the risk compass. And the sort of the risk framework archetype that you outlined in the book, because I thought that was really fascinating to enhance that self-awareness of where people are given a little taste for what that is. I thought it was really interesting to, not surprisingly, certain personality types lead to different career choices and different choices. So, I wonder if you just might give us a broad overview of that, a bit of a description, and some of your findings in there, because I think that segues beautifully into what you were just saying.

Michele:00:13:51I became obsessed with this risk type compass. As I was doing the research for the new book, I stumbled on it. Geoff Trickey, the founder of Psychological Consultancy (which is the company that developed this), responded to UK regulators who came out and said, “Hey, you know, financial advisors, you need to really understand the risk tolerance and the risk attitudes of your clients.”

And so, Geoff had had many, many, many years of experience working with psychometric tests and understanding personalities. So, he came up with basically 2 polls. And he was so excited when he was telling me about this. He says, “It really… it’s just like a compass.” And that the polls are, (1), how anxious or calm you are in face of a risk, and the other one is how impulsive or methodical. It’s about, you know, how your response… was kind of, you know, your habits and your innate personality. So, he’s broken this down into, you know, 4 main points of a compass, and then the additional 4 sub points. And it’s just fascinating. This is caught on much more in Europe than in North America. And I’m hoping that once people find out about it here, they’re going to go nuts for it as I have. But, you know, for heavy industries and for boards and for finance. This sort of understanding is so powerful.

One of the things that Geoff told me that I found fascinating was, they would do these analyses for all the members of a board of directors. And they would find that people with similar risk type compass personalities, with similar risk types would end up sitting next to each other in the room, just by complete chance. So, it’s just absolutely fascinating that, you know, there’s certain careers where, you know, air traffic controllers are very similar in personality. He talks about actors who are both in a very, very sensitive to risks in a very emotional, but also are just like, absolutely determined, they’re going to do what it takes. So, they actually kind of feed on this emotional friction that results from taking a risk, like say going up on a big stage in front of a whole bunch of people and trying to remember… make sure you haven’t forgotten your lines. But it’s a fascinating tool. We’ve seen other versions of this.

A lot of the tools tend to be more quantitative. In the States, you have like, say, Riskalyze, where, you know, you’ll answer a bunch of questions, and it’ll spit out a number saying, “This is what your risk tolerance is. And we’re going to create a portfolio that matches that.” That’s something that is being put into use right now, that speaks also to the different ways in which people talk about risk. And a lot of risk professionals tend to look at things in a very quantitative way, figuring out how to assign a number to something, and how to measure it. Sometimes, like insurance actuaries in many cases have a lot of data that gives them a good argument for why they’re assigning the number that they are. But we’re seeing a lot of qualitative factors that are changing that.

The 100-year storm that’s happening annually is no longer 100-year storm. And then there are other qualitative analyses that supposedly have some empirical evidence behind them. Bond ratings, for example. But you know, as we saw during the subprime crisis, some of those were pulled straight out of the air and didn’t have anything to do with reality. So, when we are supposedly, you know, measuring risks, and assigning values to those, I think, sometimes just the process of assigning a value to it may make us overconfident about our ability to deal with it. So, we really need to look, not just at the quote/unquote ‘risk’ itself and our assessment, but what are the psychological, the cultural, the organizational dynamics factors that are going into us assigning that value? And on the other hand, how are those factors affecting the way we respond to things, what we do about it?

Mike:00:17:43It’s interesting on the 100-year storm, idea or concept, it sort of brings back your earlier comment about short-term decision making or long-term decision making. We reside in Grand Cayman, and if you move here for a short period of time, you probably are just going to live on the beach and hope that, you know, over the next 3 years, you’re not going to get hit by a storm. But if you decide that you’re going to stay here permanently and you’re going to be here for a long time, your heirs are going to be here and you’re going to be here for 100 years, then the 100-year storm is a virtual guarantee.

And so, how you think about where you might live and how you construct your life changes dramatically when you start to think about the risks of 100-year storm, the magnitude of the outcomes and things like that. It is really interesting, that long-termism versus short-termism can be quite a… it’s a balance to strike because you can’t… when you’re dealing in the world of, whether it’s investing or on boards, there is some tension in the short-term. And those who are taking short-term shortcuts may be at a bit of an advantage. In the short-term. Is there any idea? How do we deal with that as long-term thinkers who are trying to do the right thing over decades and competing with maybe more short-term thinkers that can be dominated by luck? And if there’s enough players, there’s always someone getting lucky.

Michele:00:19:04I think about it a lot looking at these frothy financial markets right now, and the, you know, saying, “While the music’s play, you got to keep dancing.” And, you know, I look that people are saying, “Okay, well, how long are prices going to keep going up?” Because everybody knows they’re going to come down, but nobody really knows how long. And that becomes a very interesting question of agency. Because you’re… there’s the individual investor, who, as an individual, doesn’t have a whole lot of power to shape where the markets are going. Then you have like the institutional investors who are often moving large enough amounts of money that their decisions are actually going to affect the outcome. And then you have the direction of the markets. And now as we’ve seen with this boom in retail investing over the past year, you’re seeing that tweets and social media trends can move markets in ways that have absolutely nothing to do with fundamentals. And you get into a certain ‘tragedy of the commons’ dilemma, in that, here are people who they can do something that benefits themselves in the short-term, even though it’s going to end up hurting everybody in the long-term. And then you have the policy angle of it. What we have, you know, in many places, you’ve got different levels of taxes, or companies and businesses that are actually out there creating jobs and making the economy run. And, you know, the ones that are publicly listed, eventually are generating dividends and possible capital gains for people.

But then you’ve got the markets, which, increasingly, when you get these wild mood shifts that are driven by social media, you get a value that’s just on paper that doesn’t necessarily have much to do with the value of the… you know, the underlying value of the company itself. With capital gains tax structures in the United States, right now, for example, if you hold something longer than a year, you’re actually being subsidized by government tax policy to put your money into this casino.

So, there are all these different levels of decisions that are affecting the outcome of things. And it goes back to Gray-Rhino thinking, you know, what are you going to do? Are you going to get out of the way? Are you going to get yourself trampled? Or are you going to use the strength of this for yourself?” And I think the people who are using the strength of this are the ones who’ve got deeper pockets, and who can afford to leave some money aside so that they can jump on things when it does crash. And it’s going to. It’s a matter of when, it’s not a matter of “if”. It’s also a matter of, you know, diversifying your portfolio and looking at how much of your portfolio is going to be in short-term versus long-term. And, you know, I get asked sometimes, “Okay, well, what’s the investment strategy as a result of this?” and I say, “Well, you know, depends on whether you go long, or you go short, or what your whole philosophy is.” And there are big, big questions around that.

ESG and Board Diversification

But, you know, the other part of it involving financial decisions and long-term thinking has to do with this whole ESG trend, which is fascinating to me over the last year. So, much money has poured into companies that pay attention to environmental, social, and governance issues. You know, companies that have good governance, there’s research showing that companies that have diverse boards, particularly women on boards outperform.

And then you’re seeing when it comes to fossil fuels and clean energy and things like that, you’re seeing investors controlling trillions and trillions of dollars’ worth of money, looking at their portfolios from a systems perspective, saying, “Hey, you know, if we’re putting our money in fossil fuels, then what does that mean for the part of our portfolio that is invested in, say, coastal real estate, or cities, municipal finance, and you know, real estate financing that’s… that’s both very, very vulnerable to climate shocks?”

And so, in that case, if you’re putting your money into fossil fuels, you are actually hurting the other parts of your portfolio. And it also involves looking at your investment horizon. People of different ages are going to have very, very different horizons. People with specific financial goals. You’re sending your kids to college in 10 years, are going to have a different time calculation from people who are… don’t have kids that are looking at retirement 40 years down the road. So, again, you know, it becomes very granular. It’s a very different decision for each person. But I do think that we need to look at this feedback loop between individual investment decisions, between group investment decisions and policy decisions, because those all affect each other. And you can’t look at anyone in isolation.

Mike:00:23:47It seems to me that the, coming to the board discussion, it seems to me, actually, the gender decision on board membership is really sort of less important… not to be controversial, but really what you’re looking for is that risk archetype diversification on the board, and the empowerment for those diverse voices to be expressed on the board in order to get a sort of 360 view of the landscape as you’re looking at risk versus reward opportunities. It just so happens that a different gender (and I’ll probably get in trouble for this as well), there is a gender difference. There is a risk archetype difference in gender, I think that you found to be true. I don’t want to get you in trouble either. But…

Michele:00:24:35Yes. No, what’s interesting, I found something but it’s not what people think it is. And that’s fascinating. A number of economists have challenged this notion that now I’ve got a bit of a dilemma, like taking the risk of repeating the bad notion, which actually reinforces it, even if I’m saying that’s not what it is. I’m a little bit of sorts. But anyway, so here’s what I am going to say is that Julie Nelson at University Boston has done some fantastic work on women and risk taking. And she says that when you apply her new statistical techniques to some of these older studies, the conclusion that comes out is that there’s a 95% overlap between men and women in their risk.

And so, on a certain level, men and women are not necessarily as different as the stereotype holds it to be. The stereotypes are very, very strong and actually doing quite a bit of damage. A lot of venture capitalists say, “Oh, we don’t want to invest in women because we, quote/unquote, ‘don’t think that they take enough risk’.” I quote, Genevieve Thiers, the co-founder of Sittercity here in Chicago, who said she was in a room with a bunch of very, very senior women who were sort of commiserating that they would go in raising money. And they knew that they had to bring a man in the room with them, so that the VCs would think that they would take quote/unquote ‘enough risk’. And then there’s also been some really good work, which I quote in the book, showing that all of these preconceptions that VCs have about women and risk are completely bogus.
That said, there are differences between men and women, but that also depends on how much experience you have, depends on you how honest you are in evaluating yourself. You have studies showing men and women making decisions, bad decisions under stress. And in hindsight, the women recognize that it was a bad decision. And the men were just… they had their blinders on. They didn’t want to recognize that they messed up. Or in stressful situations, men were more likely to take riskier and riskier and riskier decisions.

Mike:00:26:37Risk seeking, I guess, in certain circumstances.

Michele:00:26:39Not necessarily the good risk, because that’s one of the things I talked about as well is that risk is value neutral. It can either be an opportunity or danger, and how you see it is something else, but that under stressful situations, women make better decisions. So, there are differences. There are consequences for the way that we think right now about the differences between men and women, which in many cases aren’t as big as we think. So, it’s a fascinating topic.

Assessing Individual Risk Tolerance

Adam:00:27:05It seems to me observationally, and not just sort of anecdotally, but in lots of different data sources, for example, on like trading turnover, for example, men turn over portfolios a lot more aggressively, a lot more men have trading accounts than women, and the beta of male portfolios tends to be higher than the beta of women’s portfolios. Like, this is all just sort of observations, clear observations and literature. But I’m wondering, because I think in order for you to assess a person’s risk tolerance, you’re sort of presuming that they are seeing the risk distribution consistently. If one class of people is systematically overconfident. So, I think of 2 people with the exact same risk-aversion parameter, so to speak, right, but one of them assesses the risk to be much lower than the other one does. It’s a miscalibration of the risk assessment more than it is a difference in the risk tolerance, I think, that we may be measuring or we may be observing or misclassifying as differences in risk aversion. Does that resonate for you?

Michele:00:28:05Absolutely. You can have 2 people take the exact same amount of risk, you know, make the same bet financially. But if one person actually sees the same bet, as being much riskier than… then actually, the person who sees it as being riskier has a higher risk tolerance than the other person who doesn’t see the risk, which is a bit paradoxical.

Adam:00:28:28That’s the inverse of that same theme.

Michele:00:28:31What’s interesting too is that like the same risk is not the same for everyone. I mean, we’re seeing that with COVID. I developed asthma after 911. So, I’m in a higher risk group than someone who doesn’t have this experience with asthma and people seeing, you know, different ages and different professions. Or the example I like to use is, walking down a dark alley at 3:00 AM, the risk is quantifiably different for a 6’2” tall man versus a 5’4” woman. This whole question of risk tolerance is a very squishy one. It’s very hard to measure. And, you know, professionally also, you look at the ‘glass cliff phenomenon’, that when companies are troubled, that boards are more likely to pick women to lead the company out of the crisis. And there are lots and lots of theories why.

But what’s interesting is there’s some other research that shows that if you have a man and a woman and each one of them is placed in a non-gender traditional job, like a woman is a police chief. If the woman makes a mistake, she’s going to be penalized more than the man in the quote/unquote ‘gender traditional job’. And what’s also very interesting is it’s very hard to find good examples of men in quote/unquote ‘non-gender traditional jobs’, because those would switch over. You look at the Hidden Figures, that movie, all these, you know, women programmers, but you look at the field’s now, it’s like all men. Or you even look at say fashion or hair, which stereotypically might be considered female jobs, what are the names that come up? Ralph Lauren, Giorgio Armani, Vidal Sassoon, in these traditionally women’s fields.

You have to get into the anecdotes and a lot of these, because in some cases, the numbers just don’t tell the whole story. And the harder you try to get the numbers to tell the whole story, the more frustrated you get, and you finally just give up and throw your hands up in the air on it.

Adam:00:30:24The real information is in the nuance. So, just thinking through the police chief example, I find this very fascinating. So, indulge if you’ll indulge me. But this is really neat, because if a woman is in a non-traditional role, so in a traditionally kind of male-dominated role, and her experience is that she is going to be penalized to a greater extent, than a male peer in the same position, then she will appear to be more risk averse in her decision making, because she knows that her risk is larger than an equivalent male’s risk for the same type of decision. They have the same risk tolerance, but the assessed level of risk is very different.

Michele:00:31:07Possibly, although you also have to look at the level of experience of the person who’s making the decision. Because risk taking is like a muscle. You build it up, or you let it get weak. And women, in a lot of cases, have experienced taking a lot more risks than men. And so, there are things, you know, social risks, certain things where they’re like calculating their… all the little wheels are running in your head, and you have a lot more experience making risk decisions. And a lot of the research also shows that the higher education, the higher the experience level, the better you get at it. So, there’s a whole other level of complication in there.

Adam:00:31:45So, from a ‘risk compass’ perspective then, you can’t expect to create extra diversification on a board in terms of risk compass diversity by using kind of more simple heuristics, like adding more women to the board, because there’s just not that much of a correlation between or division or variation between the sexes. You’ve got to really dive deeper, I guess, in terms of trying to find or engineer true diversity on the board, I guess, not just in terms of risk compass, but in terms of all of the other variables that go into more effective decision making in a group setting?

Michele:00:32:23There’s some other very interesting group dynamics that come into this. One of them is that the research actually does show when it comes to like drinking, or risky sex or speeding or drunk driving, things like that, men actually, in that area, do take much higher risks than women. But there’s also research shows that if there’s a woman in car with a man, he’s actually going to drive more conservatively, more sensibly, whatever the right word is that you want to use. So, there is evidence that, when there’s a gender mix in the room, that dynamic itself actually changes the way people take risks. So, that’s very, very interesting.

And then also, I’m not trying, I have to ask Geoff this, but the risk type distribution among men or among women, I’m not sure if there’s a difference there or not. And so, that’s also… you know, it’s not necessarily correlated that women are on this particular part of the compass and men aren’t. It’s a personality thing. So, I think what you need to do is really not just look at gender, or age or other demographic factors, but you know, look at professions, look at experience level. And having those demographic changes is really good risk mitigation in other ways. Because if you’re a company, like you look at all these tech companies, or say, like social media companies, one I have in mind, I don’t have the numbers now, but at one point, 60 something percent of their users were women, but they didn’t have a single woman on the board. And so, if you don’t have people on the board and management team who are in touch with your customers and your users, that’s not a great idea either.

And you’ll also see that there is evidence that, across generations, you see very, very different risk attitudes. And some of that has to do with just where you are in life. I mean, obviously, if you’ve got kids, you’re going to take very different kinds of risks from if you don’t. But also, from your experience growing up. Gen Z, Millennials are going to have very, very different experiences from my generation and from generations that came before me. And as Millennials become a bigger part of the workforce, bigger part of the consumers, you really want people who know what those Millennials are thinking. Having a good eye on things, having a good and clear lens is, in and of itself, a great risk mitigation strategy.

Adam:00:34:48 From a diversity perspective in terms of either governance or decision making in general in… with groups, you want to emphasize diversity to the greatest extent possible. I’m hearing gender is a one axis. Age, or like demographics is another axis. Sort of thinking more tactically, or thinking tactically in general, how might companies think about constructing teams, boards, etc., to maximize the diversity, and therefore maximize the probability of staring down a Gray Rhino, so to speak?

Staring Down a Gray Rhino

Michele:00:35:21Well, I think it involves not just looking at demographic factors as proxies for other things, but specifically looking at risk attitudes. Using tools like the ‘risk type compass’, getting a sense as to what people around the room think about risk. You know, for some people, the biggest risk is dealing with risk. It feels riskier to stand up and talk about something you don’t want to talk about than actually dealing with it. And in some cases, some of this will be super obvious. I mean, if you got a law firm and like all the partners are kind of by definition, lawyers, well, a lot of lawyers want to take certain kinds of risks all the way down to zero, and forget that by focusing so narrowly, they’re actually dramatically increasing all kinds of other risks.

Profession, on a certain level, is a fairly good proxy for risk attitudes, as Geoff’s research has shown in that a lot of careers have a big concentration of a particular set of risk attitudes. But the other part is, when you’re speaking about it with your team, be aware of each person’s risk attitude. Really practice risk empathy. Understand that the reason somebody disagrees with you might not be that they’re smarter or dumber, or just a general difficult person, it might be that your risk attitudes are simply different. And when you acknowledge those, it creates this path forward that you didn’t even know that door was closed. And all of a sudden, you’re blowing the door out of the way.

Being able to talk about that. As I was researching the book, I was speaking with a friend who’s in his 40s, who had recently become the CEO of a family conglomerate in Latin America. And there were huge generational differences in risk taking. You know, the earlier generations wanted to preserve capital and family harmony, and blah, blah, blah. But they were so extreme on that, that the younger generation was freaking out, because they were thinking, “This company is going to become obsolete, and we’re going to lose everything.” And the older generations were like, “Well, the government took 75% of our property during Civil War.”

And so, I asked this friend, I’m like, “Well, have you guys actually talked about why each generation, each group of you sees these risks differently?” And I can almost see this light bulb go on over his head. And he told me that they actually did have those conversations, and it really helped with their strategic planning, going forward, made a huge difference. And I think about, you know, family offices, in particular family companies, where you’ve got generational dynamics, you’ve got also weird inter family dynamics on so many levels. But when you just break it down to, “We have different attitudes about risks. Here’s something that can make this risk-anxious person more comfortable, that’s not necessarily a big cost to the person who’s more comfortable taking more of those risks.” And then the truth is that, as the more conservative or risk-shy people take more risks, they actually become more comfortable in the process. So, you start getting to a point where you can move forward together.

Mike:00:38:29I really like the way you categorize that, Michele, in sort of being risk maybe was agnostic, I forget the word you use, but each risk is an opportunity. There are risks… and doing nothing is a risk. Status quo is a risk. And some people perceive that, “If I do nothing, it’s not risk.” And you go through that. And then there are left-tail risks on the distribution, but there are also right tail risks, the older generation, primarily concerned with the left-tail risk, and the younger generation, primarily thinking about, “Well, there’s huge opportunity here. There’s a right tail opportunity. We need to have that discussion about how we’re going to come to terms together as a family on how we’re going to balance those 2 dynamics. Is that a fair representation of that?

Michele:00:39:11Absolutely. And it’s not just a generational thing. But you know, within each generation, all of the siblings are going to have their own risk fingerprint. But one of the things that I asked people to think about is that, you know, when you see something, when you see a change coming or a big decision, do you automatically think it’s a danger or an opportunity? Or are you value neutral? And once you know that about yourself, you can correct for that. You can get your friend who you know will go bungee jumping or skydiving and not even bat an eyelash. Or you know, if you’re the person who takes big risks, you know, find someone who’s a little bit conservative will say, “Hey, cool down. Let’s just think about this for a minute.” You surround yourself with people who can complement your risk attitudes, who can say the things that you might not necessarily want to hear, but that reduce your risks, help you make better decisions. But it really requires being open to that. And that’s hard for a lot of people.

Mike:00:40:16We’ve got a diverse board, in the board case. We’ve got a diverse group of friends to help us navigate our risk experience, to be risk value neutral, as you mentioned. I thought chapter 2 was great. It speaks to me. So, that’s fine. But the idea of generally speaking, thought processes for individuals is more deterministic than probabilistic. And so, you go through risk versus uncertainty, the differences there. And then how can we think more probabilistically? Or what are the tools and tricks that we might be able to embrace to enhance our probabilistic thinking and encounter encompassing the magnitude of outcomes in order to think less deterministically and more in probabilistic outcomes, so that maybe that allows you to engage with a Gray Rhino more often or more reasonably, because you can say, “Well, here’s an outcome. It’s not though it’s going to happen. But there’s a chance that this happens, and how do we want to deal with that chance of said thing happening?”

Michele:00:41:15It’s a matter of being comfortable with, if you will, gray areas. People talk to me about all that, like, I don’t mean to repeat it. But a lot of people will say, “On exactly what day is the stock market going to crash? And by how many points? And what’s the exact trigger going to be?” And if you don’t know that, well, then you can’t predict. And you’d require such a level of precision in the prediction that it basically blows every single possible prediction out of water. And people need to be more comfortable with this idea that there’s a pretty good chance that if we don’t do something to deal with this, we’re going to be sorry. And that’s a lot of uncertainty. Like, people are not good at that. There’s some little exercises you can do. You know, you get yourself out of your comfort zone.

There’s a guy in the book ‘A Life Coach’, Benjamin Ritter, who talked about being an athlete and not having a lot of social experience, because he was always practicing soccer, and then going out and taking these odd jobs that purposely put him in uncomfortable situations. For each of us, you don’t have to be as extreme as he was, but is that it might be something as simple as like ordering something different for dinner, putting on different clothes. Like, going up and, once we’re allowed to go to bars again, going up and talking to someone that you don’t know. You know, ask yourself actually, being aware, “What are the things that make me uncomfortable?” And actually, the process of just assessing that, is going to make you feel more powerful and more confident.

In the process of measuring, you know, “What’s my Gray Rhino? What’s the big thing that’s in front of me that I’m not dealing with?” Just the process of listing things, of putting them down on paper, of quantifying them, you know, we talked about before the search for the ability to quantify risk, that’s an exercise that can help you feel more confident about things that are uncertain, even if you’re just creating the illusion of certainty. But creating also this diverse group of people around you, controlling as much of your surroundings as you can, but also really assessing your surroundings.

Hacks

And then there are little hacks that you can do, for example, by changing the temperature of the room, it’s going to change how many risks you take. Spicy food. I was fascinated by this. There are lots of national stereotypes about people who eat spicy food actually being big risk takers. And there’s actually some truth to that. Because there are studies that say, if you eat spicy food, for the next few hours, you’re actually going to be more risk seeking than otherwise. And this is whether you actually like spicy food or don’t. And perhaps there’s a correlation between people who like spicy food and who like taking risks. That’s a whole other set of research that’s probably very complicated to do.

Adam:00:43:58The capsicum, I think, that makes food spicy also triggers the dopamine reaction.

Michele:00:44:02And the other part of it is the hot peppers in countries with very hot weather, and often very poor refrigeration, and the spices, on the one hand, there’s some evidence that they kill some of the little nasty bacteria that will upset your stomach, but on the other hand, they mask some of those. So, I don’t know if that’s actually increasing your risk or decreasing it, or if it all just cancels each other out. But things like mindfulness and meditation, changing your heart rate, biofeedback, being aware of the state that your body is in, can also change your relationship with risk.

There’s a lot of work being done with traders or athletes who use biofeedback to be very aware of their neurobiological, neuro-physical state to help them to take smarter risks. And this is not a matter of like risk seeking or risk averse. This is risk savvy, risk smart, that involves awareness. And I think that’s really the most important part of the conversation that I’m trying to generate which is that there’s so many decisions. Every single decision you make during the day, in essence, is a risk decision. We don’t think about it that way.

So, just being aware of our risk decisions, of how our culture, how our society, how the people in the room are affecting things. So, a huge difference between Asian risk conversations and Western risk conversations, for example, and in certain ways, Europe and the Middle East, somewhere in between. But there are all of these factors that shape your decisions, and most of us aren’t even aware of them enough to know that we’re not aware of them. And changing that gives us so much power. And that’s really what I’m trying to get across and trying to facilitate that conversation.

Adam:00:45:48I’d love to invite you to share some anecdotes of where coaching in this way has made a difference in organizations or… or families or people’s lives. You’ve shared a few of them along the way. Do any others really stand out as object lessons?

Object Lessons

 Michele:00:46:04There was that great story that Cindy McGovern shared in the book. She wrote a book last year, it was a Wall Street Journal bestseller called ‘Every Job is a Sales Job’. And maybe this is many industry of reductionism, centralism. She was talking about coaching some of her clients about decisions that they were make about clients. There was one client that this client of hers (a medic client, I guess), her client was really torn about what to do about a client who was… it wasn’t a very big account, and they were really high-maintenance. And this person was so afraid of losing that client. And so, Cindy said, “Well, okay, what are you really risking here? What’s the worst thing that could happen if you lose this client, if you push them and say, ‘If you don’t increase your account, we’re going to say goodbye,’ what’s the worst could happen? All of this time that you’re spending on this incredibly high-maintenance client, you can use to find clients who are a lot easier to work with, and who are going to be a lot more profitable in the end.”

So, she really helped her client to think differently about what the risks were. It’s something I get a lot with Gray Rhino theory, because people say, “Is this a Gray Rhino? Is that a Gray Rhino?” I’m like, “Don’t… don’t ask me. It really works best when you see it for yourself. And everybody’s going to see it from a different perspective.” So, that process of, you know, defining what the risk is, you know, Kodak, one of my favorite examples. Is the risk that this new technology is going to cannibalize your existing legacy products? Or is the risk that you’re not going to seize on this fast enough, and that your competitors are going to do it, and you’re going to go bankrupt? So, defining the risk properly is so important, and realizing that somebody might not see the risk the same way that you do. So, important for team dynamics.

Mike:00:47:57I wonder if you might also complement that by the new risk vocabulary that you talked about in the book. Maybe you can give us a high-level overview of that, and how that will help readers of the book and participants in markets and on boards and running businesses, how that can help them.

Michele:00:48:16The big one is really this idea of a risk fingerprint. Your actual fingerprint, is the genetic material. There’s the shape of the arcs and whirls, and all of that. But there’s your experience. If you cut your finger, there’s the thing that’s going to be going across your fingerprint. There’s the how good a job you do taking care of it? Do you put lotion on your hands? Or are you you’re doing manual labor all day? Are they all calloused? I didn’t know this until I did some research on it, but you know, you actually sweat slightly through your fingerprint. So, there’s a physiological element to that. And the patterns on your finger, it’s really like a maze.

And so, to me, this idea of making choices, “Which way are you going to go? Which way you’re going to turn? Are you going to end up in a dead end?” I mean, everything is a risk. So, that’s what I mean by talking about a risk fingerprint, which identifies you. It defines you as much as anything else. So, understanding all of those elements that go into your risk fingerprint, the culture around you, your innate personality, the way you were raised, whether you’re eating spicy food or not, whether you are nurturing good risk habits or not. Just like the physical fingerprint, your risk fingerprint is something that has a certain element that’s determined and genetic that you can’t change. But there are so many other things that you can change. And so, that’s why we put the fingerprint on the cover. It’s a sort of maze. It’s a really powerful image, once you start thinking about it. And it’s… your fingerprint defines you.

Adam:00:49:47And there’s a framework in the book for how to figure out your own risk fingerprint and document it, and maybe once there’s a framework and you’re able to document things, then there’s usually some language around this framework that allows you to communicate with others who are familiar with it and therefore maximize the value of it in an efficient way. So, how does the conversation go between 2 people who have done the work and who have their own personal fingerprints? And how can you maximize the usefulness of those types of conversations?

Helping Risk Fingerprints Work Together

Michele:00:50:21It’s interesting actually. I’m developing a workbook that’s going to go along with this book. The book is very narrative and that was a deliberate choice. But the workbook that’s going to go with it, will I think, give people a little bit more specific, systematic way of talking about that. But it really involves things like, you know, what was the risk environment in your family? I interviewed so many entrepreneurs and risk takers of all kinds. One of the first questions I asked each one of them was, “Okay, what were your parents, how were they dealing with risk?” Because in my own family, my parents could not be more diametrically opposed in the way that they deal with risk. I think that’s probably why I’m so obsessed with the topic. I think I’ve probably inherited a little bit of element of both. But what’s your family environment? What are your experiences?

I ask people a lot, “What’s the biggest risk you’ve ever taken?” In the book, I talked about in a room of millennials in Chicago, and people started thinking about it. And this is one guy raised his hand, he says, “I quit medical school to become a stand-up comic”. That pretty much shut the conversation, because these are big risk takers. They were, you know, entrepreneurs. That question, you know, “What’s the biggest risk that you’ve taken?” I asked my Facebook friends that actually, and the answers I got were all over the place. I probably have a more risk-taking group of friends than most people, I mean, it’s very, very global. And there are lots of entrepreneurs and people who have big, crazy ideas that they pursue.

But that question also, you know, “What were your parents? What’s the biggest risk you’ve taken? Do you see risk as positive or negative or value neutral? Who are your peers? Who’s around you? And does everyone look and act the same way as you do? Or do you have a diverse set of people around you? What kind of company are you working at?” I met with a group of Gen Z people, there’s a workshop that somebody was putting on, and I asked them all, “What kind of job do you see yourself taking? Do you want to work for a big corporation, or you know, do you want to be an entrepreneur, or…?” When I was their age, I don’t think I knew what the word startup was. I don’t think that was really a thing. Maybe I’m dating myself. But I was really surprised at how few people wanted to go work for big corporations, so that, you know, the kind of job that you’re doing, and you know, what do you do for fun?

So, some of those questions are actually just really simple ones that say a lot about who you are. But another one of my favorites is, “How long do you leave to go to the airport?” People love that one, oh my goodness.

Adam:00:52:46That’s a constant source of conflict, I think, in most marriages.

Michele:00:52:50I asked that to a national group of people for an insurance company, and the whole room, people love that question. But that one questions says so much about who you are. And I remember as a kid, when it was time to go somewhere, my parents were on completely different poles when it came to that question. So, there was a lot of tension around that when I was growing up, as I think is probably the case in… in lots of families. But if you break that down to, you know, being aware that the other person, the other person really does need you to leave 10 minutes earlier, can you split the difference?

And so, that brings us actually to risk empathy, which is the other thing that I think is very important to ask is, what’s the risk fingerprint of the people around you? And how does that relate to yours? And once you’re aware of that, can you find paths towards an agreement?

Adam:00:53:39 And do you go into some of the ways that you can close gaps, especially large ones, I guess? We talked about a few sort of creative brainstorming or making sure that you’re evaluating all of the different types of risks, any other specific recommendations on how to manage that?

Michele:00:53:56I did go into a fair amount of detail on a lot of different words for them, but you know, leadership circles, mastermind groups, things like that, where you can systematically discuss some of the things on your mind. That’s hugely important. And one of the most powerful stories in the book, for me, it’s actually the closing anecdote was Mark Pollack, who’s an adventure explorer, he has the sort of hereditary eye problem. But he, when he was 22, he lost his vision, he became the first blind person to cross the south pole in a race. And when he was 29, about a month before he was supposed to get married, he fell out of a window, ended up in a wheelchair.

He’s now on this crazy mission to cure paralysis in his lifetime, and he’s actually made surprisingly large strides. I mean, literally with the help of an exoskeleton. But his fiancé is a lawyer. I spoke with the 2 of them. They’ve both been friends of mine for some time. And in the hospital after this accident, he tried to break up with her because he was thinking about the risk that she was taking by being with him. And he wanted to give her the opportunity to not take that risk. And obviously, they’re… they’re still together. It’s quite some time later. But it was fascinating for me, because they both said it was the first time that they had thought about the relationship in terms of risk calculation, and this radical risk empathy that they were showing towards each other. And they’re both incredible, incredible human beings. At the end of the conversation, we were all crying, literally it was something else. But that just, really trying so hard to see what someone else’s risk attitude is.

And you may make a guess about it. I mean, Mark did about Simone. And his calculation of her risk calculation ended up not being quite right. But the fact that he was making that effort and creating an opening there was so powerful. And the fact that she was able to come back and say, “Hey, no, it’s a risk that I’m willing to take. You know, the bigger risk for me is not pursuing this.”

Mike:00:56:05Any final thoughts for folks that are looking into reading your work or obviously the workbook’s going to come so that you can draw from the narrative, some more practical usage, any parting thoughts you have?

Michele:00:56:18If people want to find out more, they can find me on my website, thegrayrhino.com, gray with an ‘a’; although with an ‘e’ will get you there too. In hindsight, I wish I’d done it with an ‘e’. The ‘e’ is the international English and gray is… I just… I used it with the gray, so that’s what it ended up being with the ‘a’. So, in hindsight, I wish I had gone with the ‘e’ if I’d known how global the book would become. But anyway, definitely, you know, invite people to visit the website and to contact me through there. I also have a column on LinkedIn so you can reach me there as well. So, thegrayrhino.com.

Mike:00:56:49That’s the way you do a website, folks.

Adam:00:56:50Michele, thank you for being so generous with your time and with your sharing. And definitely, it makes sense to go out and check out the new book. Thanks so much for giving such a powerful introduction to it.

Michele:00:57:01Thanks for such a great conversation. It’s really been a pleasure.