Aaron and Spencer draw the line between uncertainty, which the brain treats like a game, and ambiguity, which it treats like a threat, then introduce DICAO, the five failure modes ambiguity can produce in leaders and teams.
Uncertainty vs. Ambiguity and the Five Ways They Derail Leaders
In this episode, Spencer and Aaron expand on the Leadership Economics framework. Spencer opens by reviewing the show so far: scarcity, the production function, the AIME framework of allocation, information, motivation, and execution, and the six-principle playbook. This episode is the next layer down, what happens when you try to run the playbook and it does not work the way it should.
The core distinction is between uncertainty and ambiguity. Uncertainty is a die you know: six sides, equal odds, you just do not know this roll. Ambiguity is a bag of dice you do not know: you cannot even say what the distribution of outcomes is, so you cannot connect what you do to what you get. Aaron walks through what two decades of neuroscience since the MRI has shown, that the two are processed by different systems in the brain. Uncertainty can raise dopamine and motivate, the anticipation of a piano competition where you know how you prepared but not where you will place. Ambiguity does the opposite: it suppresses dopamine, raises cortisol, and reads as threat, and a high intolerance for it shows up alongside anxiety, depression, and OCD.
The good news is that tolerance for ambiguity is trainable. Spencer takes it to special operations, where you train across enough scenarios that whatever comes through the door has an answer, and where a great teammate is the best insurance policy against ambiguity. Aaron takes it to ordinary life, the first busted car door you ever have to get repaired versus the tenth.
From there the episode lays out the three layers of the Leadership Economics model. AIME is what you are always already doing. The playbook is the principles that make those tasks go well. DICAO is why we do not run the playbook even when we know it. Along the way they name marginal value uncertainty, the mathematical way of defining ambiguity, and Spencer tells the story of the boat he and Jill bought for the Great Loop, a marginal analysis that looked right, turned out wrong, and ended the right way because they were willing to experiment and willing to pull the plug.
Then they walk through DICAO, symptom by symptom. Discord: allocations drift toward the low-ambiguity option, the way teachers under high-stakes test incentives drill test problems instead of using the teaching methods they trained in, or the way whole Army companies train for the fitness test by only practicing the fitness test. Inconsequence: effort collapses when people cannot see how their input connects to any outcome, from a daughter who cannot study for a test with no defined material, to academia, to the soldiers of Black Hearts. Complexity: paralysis by analysis, decoy pricing, 187 salad dressings, and why the military always briefs three courses of action. Absence: failing to keep learning the production function as the world changes, from Blockbuster and Kodak to Uber watching Waymo, and the harder version closer to home, aging parents who are not aware that they are not aware. Overconfidence: the one failure mode that sometimes pays, because acting under ambiguity generates information, until refusing to look back turns confidence into bias.
They close on the point of the whole exercise: you cannot eliminate ambiguity, but you can always reduce it and raise your tolerance for it. These are principles for diagnosing why the playbook is not working, not another task list.
Mentioned in this episode
Spencer Clouatre: You have to be willing to fight whatever comes through the door, you know? And you try to train for all this stuff, but some people are better at reducing that anxiety, that stress hormone, because they feel so confident in themselves. we've hosted a few people now, some talented folks, and we've got a great bullpen of folks that we're we're gonna continue to, host. But today, it's me and you, and I want the world to know that as we started with, is that we're just trying to explain the world. recently we've been talking, we've been talking about facts, things that are, and we can all agree that those are facts, and things that aren't, and then we have these principles, trying to figure out the world, right? And what we're saying here is that economics has a place in describing, in a scarce environment, how we allocate those scarce resources to their highest valued use. I want to start there, with scarcity. Now, where we're going is gonna be uncertainty and ambiguity. What we see in, in using economics as a framework, that we're constantly faced with an allocation problem, we have information and motivation that are driving those allocations, and then we have a execution, um, iteration, that has to d- you have to execute well. And we've, buttressed that up against a production function, where we have some scarce resources, where leaders are allocating them, and they have some shared common goal. So at the largest level of what we're trying to provide, um, in explaining how the world works and how human beings interact, how we lead ourselves, how we lead in our personal relationships, how we lead in our professional relationships, we're trying to use this economic framework to at least provide a roadmap of sorts. Understanding that psychology, anthropology, sociology, neuroscience, all of that has so much to say within this idea of how we explain the world. But what we believe, is that economics is a good skeleton to build this body of work. So we have scarcity, production function, the framework, allocation, information, motivation, execution. Then we have these principles, and we're calling it the playbook, right? These are first principles that are always at play. We can't tell you exactly how much to use. You're gonna have to diagnose and figure out. In that playbook, the first thing is you gotta frame the trade-off well, and you're probably gonna do that with some bit of marginal analysis, and you gotta figure out what the incentives and motivations of your team and y- yourself are, right? The second three are us interacting with each other, okay? So then we trade. When we go into this trade, our assumption is that there's gonna be a win-win, that you're gonna have a W and I'm gonna have a W So that's the fourth one. Trade is a win-win. The fifth one is about information, and inside of information, prices in regular markets, in free markets, do a very good job signaling and incentivizing allocation of effort for producers and for consumers. Adam Smith called it the invisible hand, where everybody can work to their own benefit but also benefit the larger whole. That visible trade-off of priorities is information, The last one is centralized, decentralized. What kind of organization are you running? what are the rules of the game? How have you set those up? What are the policies? Those policies are turned into culture. They're kind of defining the trade-offs and priorities that you are trying to establish in the market that you are setting up, Today, and Aaron is the expert here. What I'm happy about Aaron is that, you see the world in a very clean way. We had a previous guest, Rob Shaw, he said, you know, randomness is a lack of information about the system. Uncertainty, in some sense, is a lack of information about some future outcome. You have said that leaders create, and if it's being created, it means we don't know exactly what that future is. There is some uncertainty in there. The guys, the le- the guys and gals that lead well reduce uncertainty and, and create a vision that before did not exist, moving towards something better.
Aaron: Well, I would say that the playbook, I see it as like these are the, fundamental principles of how to optimize the tasks that you're already doing, right? Like when we-- The fact that we are already allocating and we're collecting information, and we're motivated for certain things, and then we're, we're trying to implement these plans we're making in our head, right? We're already doing all of that, and the playbook gives you, the underlying principles as to how you can do those things best,
Spencer Clouatre: Yeah
Aaron: right? a metaphor I think we're probably gonna carry throughout this episode is, that of a football coach But y- your playbook is sort of your plan going into the game. It's the different plays you have ready to go, right? it is the underlying principles of what you know you're capable of doing and sort of what you plan on doing based off of what you know about the, opponent.
Spencer Clouatre: Mm-hmm.
Aaron: So today, what we want to really dive into is the fact that we don't always do very well, with just the playbook. and when we go about trying to implement some of this stuff, we may have these ideas or these best intentions, but stuff happens. And so you had said earlier, that people reduce uncertainty, right? more effective people un- reduce uncertainty, and, and that's absolutely true that, reducing uncertainty sort of provides clarity in your predictions of the future. but the other thing, and
Spencer Clouatre: I
Aaron: know we've said this before, but I'm gonna harp on it forever, is that we really need to disentangle uncertainty and ambiguity.
Spencer Clouatre: Mm-hmm.
Aaron: and of course, if you look through different definitions, even different fields of study, sometimes this gets weird. Um, some people distinguish between risk and uncertainty, so we have picked how we're gonna define these, and it's
Spencer Clouatre: Yeah
Aaron: in line, I'd say, best with the neuroscience and how, neuroscientists try to understand people's, brain function. And so uncertainty is that, we, we may understand how, weather works by and large. We understand, changes in temperature and shifts in, in wind and, all, all this stuff. But there's still
Spencer Clouatre: Yeah
Aaron: always going to be quite a bit of uncertainty of exactly how it's gonna turn out, right? Of exactly how much rain we're gonna get, right? There we would say that there's definitely this uncertainty. Ambiguity would be more about how well do we know- Um, a change in the ocean's temperatures affects the weather cycle, right? Like we, again, we actually do have a pretty good understanding of how those connect. But in real life, we don't always have that same level of understanding between what we're going to do or what we want someone else to do and how it's going to lead to an outcome. And so that's the ambiguity. It's a little, more subtle, I'd say, but it's everywhere. uh, you can think of a metaphor where it's like uncertainty is that you're gonna roll a die and you know exactly how many sides it has. It has six,
Spencer Clouatre: Mm-hmm.
Aaron: it's got equal odds of landing on any of those numbers. Whereas ambiguity would be something more like you have a bag of dice, and they're different, sided dice, and you're essentially going to pull one out and r- roll it at random. And at that point, not just that it's random, it's that you don't actually know the distribution of the dice within the bag, So in other words, you can't even predict how, your actions are going to lead to at least some distribution of outcomes. Okay. so I want you to hold onto that metaphor a little bit here, because uncertainty and ambiguity cause different problems in us. Like, we can actually draw on, quite a bit of good neuroscience that's occurred since MRIs came out. So over the last 20 years, we've been able to really... And, and by we, I mean the neuroscientists. They've been able to show that our brain responds differently to these two, problems, where uncertainty can often have this effect of even increasing our dopamine, where the anticipation of what could happen, when I was a kid, I did piano competitions, and you could know how well you prepared, you could know how well you did, but you didn't know exactly where you were gonna fall on that scale in the end. So there was this sort of like anticipation, this excitement of like, "Man, you know, where is this gonna end up?" And, and so that's normal. And by normal, I mean, it's motivating, by and large. Whereas ambiguity, is the opposite. When there is more ambiguity, what we mean is that it would be like me trying to practice piano for a competition, having no idea how my practice every day would prepare me for the competition. so it would be like not knowing even how the judges are going to evaluate you. are they gonna evaluate you on your accuracy in terms of your notes? Are they gonna evaluate you on, how musical you are or how, different your interpretation is or something like that, right? If you have no idea what any of that's gonna look like, then it doesn't m- really matter what you do for practice because you have no way of connecting what you're doing to what the outcome's gonna be. And so that's very demotivating. It reduces the dopamine, it increases cortisol, and it, it triggers more of this fear, more of this, anxiety. and in fact, ambiguity, it's tied to a lot of those increases in cortisol.
Spencer Clouatre: Yeah
Aaron: But the other part of this is that, ambiguity and uncertainty are processed in different parts of the brain, and it also turns out that people have different levels of tolerance for ambiguity. and so a higher intolerance for ambiguity, often shows up in, people with anxiety or depression or even OCD, where that in- that intolerance for ambiguity is really leading to a lot of these, anxiety-ridden disorders. Okay? and so that's why I, I really wanna harp on this issue of there's a difference between the two, and it matters because how your body and your brain respond to them is different.
Spencer Clouatre: Yeah just to capture what you just put in front 'cause, like, it, I mean, you've seen DraftKings, right? This, betting website? Yeah. It's going through the roof right now. there's some risk-seeking people in the world that love the uncertainty. They get a dopamine hit. It's very motivating. But there are certain outcomes that are there. if it was a die, and I'm rolling one of six, your assumption is it's a fair die, right? And when I say a fair die, is that there's a one in six chance that any one of those sides would, would go, right? But if you grabbed into your bag of dice, like you have, you know, got a whole bag of dice, and we're trying to apply this idea of ambiguity where it creates cortisol and that's demotivating. It's the stress hormone, right? and it creates this intolerance. We have intolerance for ambiguity. It'd be, what if I had 50% of those are fair die and 50% of them were weighted dice. Is that a fair example? Like, you don't know where the weighted dice... So, like, if I were to even take it to the production, the production function. Let me just pull it back to the production function. I'm allocating scarce resources. Given some information, there is some uncertainty about the outcome, but in the case you're talking about for ambiguity, is that I can't understand the production function because I can't make the connections if it's an ambiguous world, right? That I'm rolling unfair die at times. And I think the world is full of both of these, right? it's very full of, of uncertainty and it's very full of ambiguity. so I would tell you this, like in special operations that, in the military sense, right? Is that, You have to be willing to fight whatever comes through the door, you know? And you try to train for all this stuff, but some people are better at reducing that anxiety, that stress hormone, because they feel so confident in themselves. You know what I mean? I, I think I've seen that in my life. I've been around a lot of competitions too, in all kinds of different sports, where there is some uncertainty in the outcomes, but you're generally making a bet on yourself But if I can't explain, if there's no causality, there aren't even correlations on my inputs and the outputs, it's ambiguous. Is that right?
Aaron: Yeah. And so, the Special Forces example, the ways that you reduce the ambiguity and reduce your intolerance of it is sort of twofold, right? first, you train for a whole variety of scenarios,
Spencer Clouatre: Mm-hmm
Aaron: and so that reduces your ambiguity about, "If this happens, then I do this, and that happens." Whereas if you are faced with a completely unexplored scenario, there's a part of you that's going to struggle with that decision-making from the start. But the other part is that you can also reduce this, intolerance of ambiguity, of like what you were saying, is that some people have trained and prepared enough of this confidence in their ability to handle new contexts or new scenarios. like a muscle, you really can, improve your, confidence that whatever comes through the door, you're going to be able to handle it.
Spencer Clouatre: Yeah
Aaron: mean that just in Special Forces, but I mean also in life
Spencer Clouatre: Yeah
Aaron: as you get older. I remember when, we were first married, we had our cars, and I remember the first time that I had to get a repair done, I'd dented up my door so bad that it didn't even open properly, and so I had to go get it fixed.
Spencer Clouatre: Yeah
Aaron: and I was just petrified of this whole process because I'd never done it. I had never really thought about, what does it take when, when you bust up your door? How much is it gonna cost you? How hard is it gonna be in terms of insurance and all this other stuff? But now, I've done this long enough now and enough times where I know how this is gonna play out. But even if it's something different that I've never faced, at least I know that it's going to be fine and that I'm going to be able to handle it, so that's reducing my intolerance for the ambiguity in terms of these life scenarios. And so, professionally this happens. In our teams, this happens. You can just gain enough experience to where you have that confidence and that ability
Spencer Clouatre: Yeah
Aaron: to tolerate these ambiguous situations
Spencer Clouatre: Yeah. even like the Marine Corps, I used to joke around, I don't know, you might remember this old commercial the Marine Corps had, but it's like a young Marine and that dude's wearing the, the uniform right. You know, the Marines have always won the uniform battle. But when what he's attacking in his really nice uniform, looking really good, with a saber, is like this lava monster. and I'm like, "This is the Marines." they're so proud of, uh, of their institution. so much so they say, "I'm a former Marine." There are no ex-Marines. They're former Marines, you know? And that they're willing to fight any kind of ambiguity. Whatever comes through that door, if it's a lava monster, I'm gonna look right and I'm gonna kill that thing with my saber. it's a mantra, you know? when you were just talking about it, I think one of the best insurance plans out there to face ambiguity is a great teammate, and I think that's what I experienced in Special Operations is that, you know, we've inserted our Special Operations Forces in, in all kinds of crazy scenarios, and a lot of times you're flying away from these things going, "I can't believe those guys are on that specific mission right now. There's so much could go wr-..." You know, like, but because they believe in each other, because they believe in us, we're gonna get them, I'd rather die than quit. This is Night Stalker motto. and it's been proven over and over. The granite memorials that we've built have names on them, it's happening. They're making that trade-off. it makes us more willing to face ambiguity, because we have each other, and we've trained to face all these different scenarios. the mechanics of that are a lot cleaner when you think about it in life and death scenarios in Special Operations community, in a military aspect. But the mechanism is the exact same for the daily decisions we make, If, if there's some bit of ambiguity that you're facing, it may create some bit of dissonance in your life and, that may result in anxiety and, this intolerance, for ambiguity, And, and there's some causes, there's some problems when that happens. you may make bad decisions. If I go all the way back up to the framework, allocation, information, and motivation, and then execution, it's inside of that information and motivation that could influence a bad allocation decision because of these two scenarios, this uncertainty versus ambiguity, And I don't know if there's a clean separation. I don't know if we can say, "I'm in an uncertain environment, I'm in an ambiguous environment." Do you think that is a clean line between these two?
Aaron: No.
Spencer Clouatre: It's a rheostat.
Aaron: yeah, I, I think, in any situation there's going to be at least a little bit of both. I think the real question is, is there too much for you to tolerate of, ambiguity? and of the uncertainty that's there, can you reduce it, usually you just wanna reduce both, but I would say especially you want to reduce the ambiguity where possible. And so that's kind of what we're gonna get into today
Spencer Clouatre: Yeah. Yeah
Aaron: is what are the results of having more ambiguous environments.
Spencer Clouatre: Yeah
Aaron: the different layers that we've talked about are sort of the why questions,
Spencer Clouatre: Yeah
Aaron: AIME is what you're always already doing, okay? The playbook, these are the six principles that govern, what makes those allocations and how you're gathering information. It, it makes those good, right
Spencer Clouatre: Yeah.
Aaron: And then DICAO these are the principles behind why we don't run the playbook, even when we know it, or, or why we try to run it, it sort of falls apart a little bit.
Spencer Clouatre: Yeah
Aaron: That's what we're gonna talk about today, the,
Spencer Clouatre: Wait
Aaron: why of how implementing this becomes difficult. and the reason this matters a lot more, I guess, for me, from a philosophical sense is that, if we naturally ran the, the playbook well, you know
Spencer Clouatre: Yeah
Aaron: if we functioned in a world that was, lacking in this ambiguity and we operated more like machines, then there would be no, issues in terms of we would always allocate as best as is possible, and we would
Spencer Clouatre: Mm-hmm
Aaron: get and use the information, as best as is possible.
Spencer Clouatre: but
Aaron: the truth is that, that we don't do that. In fact, there's a lot of cases where we don't do those things well. the leader's job really comes down to figuring out, one, what are the baseline ways that we should implement the playbook? And then as we do so and find that things aren't working out as well as, they ought to, that's when we need to go into a diagnosis mode of trying to figure out, the underlying problems that are leading to our failure to implement the playbook,
Spencer Clouatre: Yeah.
Aaron: And-
Spencer Clouatre: I feel like if I go back to, we've talked about physics a little bit, but if you ran it in a vacuum, if you talked about projectile motion in a vacuum, that becomes really clean. that problem is easy to solve. But when you start to involve friction and heat and noise, it becomes a little bit different problem. Right? So the closer you bring it to reality and when you're talking about the playbook, that playbook in a vacuum, this is generally how it works, but the friction and noise, it's working. The playbook I, I believe in. The, the six principles I believe in, but you're not in a vacuum. within information and motivation into the playbook, is that where we make the marginal analysis, which is number two in the playbook, we do marginal benefit versus marginal cost. The term marginal value uncertainty, I don't know if it's being used elsewhere, but the uncertainty part of it, I think... Did we come up... Is it, is this your term, marginal value uncertainty?
Aaron: Yeah, we've come up with
Spencer Clouatre: I love it.
Aaron: is
Spencer Clouatre: So-
Aaron: this is the mathematical way of defining ambiguity, so that's why it needs a name. So
Spencer Clouatre: But it's the right way to think about it. We enter into decisions sometimes. Here, I'll use it real quick. Jill and I, my wife and I, we were in the Army. I was in uniform for just under 35 years, and I- then was gonna retire from the Army. And now Jill and I dated for probably Just over seven years before we got married. Now we reduced the uncertainties. I would call it we've reduced the asymmetries of information in our life, for seven years before we got married. It was a good allocation of my life to her, and for her to me, because we knew each other for seven years. We reduced the asymmetries of information about who we were and what we were committing to. One clean example, and that's been really good. Okay? We have had a similar shared outcome, and we've done it. So the marginal benefits and marginal costs of that, the marginal value uncertainty, we tried to reduce, This has been a success story. When I retired from the Army, you were a part of this. It was happening in front of you, Aaron. I said I wanted to do the Great Loop, and Jill said she wanted to do the Great Loop. Now, at this point in our lives, we've been together for 30 some, over 30 some odd years, And, um, we said we're gonna buy a boat, and the marginal benefit seemed greater than the marginal cost to us. We did. We dumped money in the boat. We dumped all kind of effort into the boat. And then when we got to doing it, what we realized is that the marginal benefits we expected were not greater than the marginal cost that we totally underplayed. so the marginal value uncertainty was alive and well, and we made a allocation decision that was a poor decision. And down that pathway, when you realize that you've gone the wrong pathway, it, it feels wrong. The dissonance just starts to get greater and greater, and then you recognize your marginal analysis was bad. You made it in a vacuum. You thought you knew everything. But guess what? It's not all dolphins, rainbows, and margaritas. It's a broken fuel pump. It's a, you know, a leak, not at the bottom of the boat, but a leak on top of the boat that I can't find anywhere, and it keeps dripping on our bed. there's so many things that go wrong, and it wasn't what you expected. But I made this allocation decision. Now the question becomes, is sunk costs, am I willing to suffer the transaction costs? Do I have the courage to look in the mirror and go, "All right, this has got to stop." You know? So one just small example in my life of marginal value uncertainty being way greater, and me thinking that the marginal benefit was greater than the marginal cost. So for me, this is alive and well in the fact that there are companies out there, there are relationships out there where you think it's gonna be good, and then it starts to go bad. And I'll stop there and just say this: If you don't execute well, and you don't learn quickly, and g- reduce these uncertainties and reshape your life and your allocation decisions in that BIG framework, then you're gonna be misallocating resource your whole life, and it's not gonna be great.
Aaron: what I like about this though is that even though you may not have known the marginal benefit and the marginal cost exactly, you were willing to experiment on it, and you were also willing to pull the plug
Spencer Clouatre: Yeah.
Aaron: If it turned out not to be, the right fit.
Spencer Clouatre: That's right
Aaron: And I can imagine, you know, myself, if I was looking at this decision, I would spend forever researching and learning all the things about owning a boat and the complications and the benefits and all this stuff. But until you, you actually try it, you're not gonna know. and for me, I can see myself being hesitant to even try because I just wouldn't know, right? Like you'd see some people love this, and some people hate this, and I would have a hard time just pulling the trigger on this, mainly because I wouldn't know exactly what those marginal benefit and marginal costs are. But in your case, you could tolerate the fact that maybe there are some parts of this that you can't predict right now.
Spencer Clouatre: Had a good teammate. She was a good teammate, so yeah
Aaron: I would call that even a success story, even though it turned out not to be the right, path. The fact that you tried it and also are willing to pull out when it's clearly not working,
Spencer Clouatre: Yeah
Aaron: I would say that is sort of like the optimal way to try to allocate 'cause there's always going to be some of this ambiguity.
Spencer Clouatre: Yeah
Aaron: so that seems like, you know, th- that seems like a right approach at least to trying, you know, when we tell people that you don't know till you try kind of stuff.
Spencer Clouatre: Right
Aaron: it's sort of capturing this idea that you can't hold yourself hostage to the fact that you don't know exactly w- how your decision is going to play out,
Spencer Clouatre: Yeah.
Aaron: right?
Spencer Clouatre: Yeah. There were some good memories. There's good memories out of that. You're right. So I'm not gonna call it a total failure, but,
Aaron: Well, I mean, like you can, you can call boat ownership a failure, but in terms of your decision-making,
Spencer Clouatre: Yeah.
Aaron: I'm not sure I would call that a complete failure,
Spencer Clouatre: Right
Aaron: I would call that a, you know, a bold, courageous, experiment that you were also courageous enough to say, "Nah, this doesn't work."
Spencer Clouatre: Yeah. Well, Ben Sommers, also one of our former guests, and I've had similar experiences where you allocate to the point of failure, and then you're just trying to diagnose. And you can do this with the, with the playbook and the framework, to see where it went wrong, And that, that's the beauty, I think, of what we're putting together, is this framework is that the mechanisms continue to work, right? Ben was talking about the missions that were so successful on these rat lines from Afghanistan into Pakistan. It's happened to me, too, and then you get baited into something that is not the right thing, You think the benefits are greater than the cost, and then you realize they've booby-trapped something, and you've been put into this thing. So, like, how do you diagnose where the problems were? You were walking us towards DICAO, which is our acronym for this thing,
Aaron: Yeah,
Spencer Clouatre: I think those mechanisms are always the same.
Aaron: What I, what I also want, people to understand is The more you pay attention to the, playbook, the more you're gonna pay attention to the fact that y- you're not able to do it all the time, or at least your teammates aren't able to do it all the time. You might say, "In this company, we're gonna try to implement this culture and this policy of keeping clear information visible for each other." And you might go about doing this, and you realize that either it's not working out the way you expected, the information's difficult to aggregate, or it's difficult to convince people that they should take the time. maybe people hate the bureaucracy, or there's some other frictions that are coming up here that making this work less well
Spencer Clouatre: Yeah
Aaron: than you'd hoped. And so really what this is now about is diagnosing where those frictions are coming up. the first thing that we, discuss is we have this acronym, acronym. it's not the most, beautiful acronym, but it's DICAO, which is D-I-C-A-O. and the first one that functions as a very common symptom of ambiguity is discord. And so when we think of discord, or at least when I think of discord, I think about, strings on an instrument that are not tuned well to each other. And so when you play this note, it's got some weird issues that maybe you can't put your finger exactly on which of those notes is tuned poorly, but they're not working well together. this shows up a lot when you have, put in place this effort to
Spencer Clouatre: correctly
Aaron: allocate things, but you find that people on your team or yourself aren't actually allocating well
Spencer Clouatre: well.
Aaron: And there's some, aversion to allocating towards avenues that have more ambiguity in them. So- A good example of this, really just comes from investment markets where, you invest in the safer bet or even invest in the, the risky bet instead of allocating sort of correctly across these things to minimize your overall exposure.
Spencer Clouatre: Yeah
Aaron: sometimes the short run, I think I see this, and I think I saw it yesterday, honestly. you lose an employee who's making a decision because, another company has offered him a little bit more in pay for a single job that's gonna last for like three months. So it's more certain in the short run, but actually the long run decision doesn't, agree with that,
Spencer Clouatre: So it sometimes brings us to the more certain but less beneficial outcomes. Is that a fair statement?
Aaron: I would be careful with saying more certain outcomes and, and focus a bit more on the thing that has the more certain marginal value.
Spencer Clouatre: Yeah, that's right
Aaron: and so if you're thinking about somebody who's not very forward-looking and is only really thinking about the next couple months, making sure that they have enough money, that's where that, comes into play, is that they know for a fact that this is going to provide more money for the next three months. But they should also be able to think beyond that, and so the, the long run becomes more ambiguous. It's very unclear how my daily efforts today are gonna play out 10 years from now, and so the long run is quite ambigu- ambiguous. And
Spencer Clouatre: Yeah
Aaron: so yeah, I think this is a very good example of discord, where they may have a long-run plan in their head of the lifestyle they want to live
Spencer Clouatre: Mm-hmm. Yeah
Aaron: but this decision seems to only emphasize the short run.
Spencer Clouatre: Right. Right
Aaron: so that's definitely discord. So a good example of this also comes from education. my wife's a teacher, and she goes through a lot of school to learn very effective, methods for teaching. And in fact, these are well-studied and well-known. there was this, whole effort in Washington, DC to implement these very high-stakes performance, incentives. And part of the incentive came from, just improving student test scores, and part of the incentive came from actually doing well on these in-class evaluations where they'd actually mark, you know, how well you're doing on these nine different, behaviors and approaches and techniques for teaching. And using this information, I was able to show that oddly enough, when people aren't incentivized to use the correct inputs, which would be these teaching techniques, and their only remaining incentive was to really jack up their students' test scores, they would engage in, I think, what most of us would expect, and that is to just really try to improve student test scores through drills and re-emphasizing stuff that was gonna be on the test. And the strange thing is that this had the effect of sort of narrowing the distribution of student test scores, but it didn't have the effect of actually moving up the average test score, if that makes sense,
Spencer Clouatre: Mm-hmm.
Aaron: right? Or at least it didn't do so as well as it would have if they'd actually stuck with the higher quality or, or I should say the sort of well-studied approaches to teaching. And so this is a really good example of discord because by really emphasizing just the outcome, the students' test scores, teachers are focused on that outcome
Spencer Clouatre: Right
Aaron: and there's a very strong sense that by just drilling and drilling into these specific types of problems, that they're going to be able to move that at least some, right? Like there definitely feels a stronger connection to what's going to happen in terms of the students' tests. Whereas, the connection between, you know, performing these sort of, live experiments in class to talk about science or giving students a bit more free reign to exercise with or explore the mathematical concepts that they're supposed to be able to do, that does not feel nearly as connected to their test scores.
Spencer Clouatre: Yeah
Aaron: And so, what happens then is that you're gonna focus on the, on the drills and in the end what happens is those higher performing students don't actually excel as much anymore, but the lower performing students get brought up, right? that's how this shrinks that distribution of students' test scores. So this is for
Spencer Clouatre: Yeah
Aaron: me a really good example of poorly allocating, those resources where they're not quite in alignment with your goal. And this is where it comes back to the, the chords or the music,
Spencer Clouatre: Yeah
Aaron: where you're trying to play this particularly beautiful chord but, you're hitting it and it comes out kind of weird, you're not quite in sync with what your goal was.
Spencer Clouatre: Yeah.
Aaron: So that's discord
Spencer Clouatre: And it's amazing how, when you hit a chord wrong, we all know it. You know what I mean? it's almost always the case. in this one, the misallocation, I feel like, the measurable output is hard. Education's hard to measure. you put in a resource and then you put a metric on it, then you've created unintended consequence, and it all results into like you don't really trust the teacher, you know? you see this same iteration of discord happening in many, many avenues in your life. the teaching one's a very good example. our daughter's a third grade teacher right now, and I see it, all the time.
Aaron: I mean, the funny thing, I shouldn't say it's funny, but teachers themselves hate the, emphasis on standardized
Spencer Clouatre: yeah, yeah
Aaron: and there's this very justifiable reason that it is encouraging in their minds teaching strategies that they already have been taught and feel aren't very good.
Spencer Clouatre: Yeah
Aaron: even, you know, the district itself or the schools themselves will start pushing so hard on a lot of this test prep and teachers themselves feel like it's really distracting from the work that they already try so hard to put in, for their students
Spencer Clouatre: Right
Aaron: And so even the best of teachers, still really dislike this sort of an incentive. and they'll give you different reasons why,
Spencer Clouatre: Yeah
Aaron: but in my opinion, it seems very justified to feel like this is pushing you towards the kind of teaching that you don't feel is right.
Spencer Clouatre: Mm-hmm.
Aaron: and so that's the other part of allocatio- uh, uh, these, these misallocations.
Spencer Clouatre: Yes
Aaron: Another good example, just real quick, is like in the Army, you have the, physical tests that they perform
Spencer Clouatre: Yes
Aaron: and in the past, it was very much just running and pushups
Spencer Clouatre: Situps.
Aaron: Sit-ups, right?
Spencer Clouatre: Yeah. Yeah
Aaron: I mean, they've actually changed it in the last few years,
Spencer Clouatre: A few times.
Aaron: And that seems great. But, the thing that was interesting is everybody, I think if you're even marginally aware of how to develop muscles and how to improve your endurance,
Spencer Clouatre: Mm-hmm.
Aaron: there are a variety of techniques like high intensity training. there's also, weightlifting. All these other things that are actually going to be very effective in terms of the amount of time you put in and the outcomes you're gonna get, right? Weight training's gonna improve your pushups potentially much faster than just doing a bunch of pushups. that, that I can't say for sure, because I actually enjoy doing pushups. But the thing that happens, though, is that all the companies then end up training for these tests by just doing runs and just doing sit-ups and just doing pushups,
Spencer Clouatre: Right
Aaron: even though there's this whole world of other approaches that are much more effective at, at preparing.
Spencer Clouatre: Right
Aaron: And so that's just another example of like, in your mind it seems very feasible or it seems very reasonable that by practicing the thing you're gonna be doing, you're going to improve at best,
Spencer Clouatre: Right
Aaron: but that doesn't turn out to be true
Spencer Clouatre: Right. But if the enemy ever wanted to do a two-mile run, pushup, sit-up contest, we'd kick their butts.
Aaron: Well, that's what I'm saying is I don't know.
Spencer Clouatre: Just joking.
Aaron: yeah, that's, that Like,
Spencer Clouatre: Yeah, the, it-
Aaron: you'd kick their butts more if people were doing their weight training, right?
Spencer Clouatre: Yeah. Yeah. This functional test that they're after and, the allocation decision and sometimes the unintended consequences that just create discord, th- it's alive and well everywhere in your life, And the thing about it is, is that, sometimes the best way to describe something is to say what it's not," and that would be resonance, or in your case, the chord that just is music to my ears versus the, the discord, which is just, ugh, that didn't sound right. Things that are hard to measure, and a lot of things in life that we're allocating towards are hard to measure, this is something you really gotta be aware of, that in your diagnosis of the playbook and using the framework, look out for discord. Yes
Aaron: Yeah, I mean, like you're putting in all this effort. You guys have this plan that you're sticking to, and you've really implemented this plan well, and in the end it doesn't make the kinds of improvements, that you think it should,
Spencer Clouatre: Yeah.
Aaron: right?
Spencer Clouatre: Yeah
Aaron: the discord, where it's like you're busting your butt and you're still feeling like this isn't going anywhere.
Spencer Clouatre: Yeah. Yeah
Aaron: I mean, there's plenty of examples of this also from, from even our own professional lives, where you are exhausting yourself working on things that turn out not to matter,
Spencer Clouatre: that's right
Aaron: right? it's not moving, moving the things that matter the most.
Spencer Clouatre: Yeah.
Aaron: so, the second letter was I,
Spencer Clouatre: Yes.
Aaron: which is inconsequence.
Spencer Clouatre: Mm-hmm
Aaron: And I think my best homey example of this, would be, my daughter when she was preparing for a test. she just was so frustrated because she had no idea how to prepare for this test because she didn't know what kind of questions That, would be on the test. She didn't have a textbook that clearly outlined the material that she needed to know for this test. there just wasn't any clear connection between how she should spend her time and how it was going to help her, help her improve, So that's fraught with ambiguity.
Spencer Clouatre: Yes
Aaron: There's no clear connection between what her inputs are and what the output's going to be. And what she ended up doing was essentially just not studying because it... Yeah, it was just... A- and I was like, "Well, you could have done something." Right? Like, you could just, I don't know, go back through the, the lessons you did, right
Spencer Clouatre: Mm-hmm.
Aaron: at least just review them and make sure you understand them. You could try to make some flashcards.
Spencer Clouatre: Yeah
Aaron: even if, you know, this isn't a vocabulary test, at least you'll have understood some of the material, right? Like, there are things that she could have at least tried. And so this is inconsequence, where you just sort of shut down or you, fall back on your default behavior in, in whatever context this
Spencer Clouatre: Yeah.
Aaron: And that's what inconsequence looks like. When you see people just shutting down a little bit and failing to actually, try to move the ball, a lot of the times this isn't a motivation issue. A lot of the times it's an inconsequence issue, where they just don't really see the connection between what, they're doing and the outcome, and so they're just kind of feeling as though this just doesn't matter
Spencer Clouatre: Yeah. If I were to flip the, the script on that one, you can feel inconsequential, and that's gonna result in less effort. But the other word I had for it, what it's not, is if you're empowered. Is that, is that a good word for it? Empowerment?
Aaron: Yeah.
Spencer Clouatre: empowered to, with the information that if I apply this marginal effort, it's gonna result in this marginal benefit. You know? Like, every time I apply something, I see how it affects the outcome
Aaron: Yeah, I mean, we use empowered very vaguely, I think today
Spencer Clouatre: Yeah. Yeah
Aaron: but in this sense, really what we mean is that you feel like you have consequence or you feel like you have influence, that the effort you put in leads to some outcome that matters.
Spencer Clouatre: Yeah
Aaron: to combat inconsequence, it's a matter of making sure people in your team understand the connection between what you're asking them to do and the result that it's going to contribute to it. And the truth is in a lot of cases, your daily effort moves the ball so little. if you're thinking about academia,
Spencer Clouatre: Mm-hmm
Aaron: I will work for years and years and years and years on a single paper
Spencer Clouatre: that
Aaron: I am nearly certain about maybe at most 60 people in the world will read. And that makes you feel very inconsequential that you're dedicating so much effort to something that appears to not matter at all. But
Spencer Clouatre: Yeah
Aaron: But if someone is able to put this in context where it's like there's just this big ball of knowledge, and every one of these scientists and researchers is sort of slowly expanding it, right?
Spencer Clouatre: Mm-hmm.
Aaron: That even though you can't really expand that ball yourself,
Spencer Clouatre: Yeah.
Aaron: each and every one of you is contributing to that growth.
Spencer Clouatre: Right
Aaron: and when you start to see, you know, over the years now since my original papers were published, starting to see h- this chain of growth from the papers I cited to now the papers citing me, and then the papers citing those papers, right? You start to see this chain of knowledge growing. And so if you can focus on that, it's, it's valuable. so academics come up with all sorts of different metrics, you know. Like, they can look at citations, which I don't, I don't like.
Spencer Clouatre: Yeah
Aaron: But they can also look at, for me, it's what's that chain of growth
Spencer Clouatre: Yeah.
Aaron: that I now see?
Spencer Clouatre: Yeah. You
Aaron: some people focus on their CV, You know, every time you finish a paper, boom, it's another line on your CV
Spencer Clouatre: Right.
Aaron: And
Spencer Clouatre: Right
Aaron: really, like, what your goal is, perfect.
Spencer Clouatre: Yeah
Aaron: That gives you some visual cue that all this effort paid off in some sense
Spencer Clouatre: Yeah. It's partly the why. like, I know when we first started talking about this, we were at West Point together teaching leadership economics. We went to the mission command, conference they had, and the cadets were reading that book Black Hearts. at the lowest level, at one of the forward operating bases in Iraq, there were some really bad things uh, happened. I mean, murderous, kind of just really bad stuff that happened at the fringe, at the lowest level with our youngest soldiers. And when we were unraveling how does that come about, how does this happen? 'Cause these kids did not join our military to end up in that scenario. You know what I mean? They, they, those kids joined with all the right reasons, and somehow or another, at that point in their, experience in Iraq, in this, in this extremely adverse combat tour, I think we came up with this word inconsequential. They felt inconsequence. they could not explain how they were affecting anything, nor what their futures looked like, how they would exist. And,
Aaron: I mean,
Spencer Clouatre: They, that, I think that's where we s- where we got inconsequence, yeah
Aaron: I also thought a lot about it from, stories of Vietnam and stuff.
Spencer Clouatre: Yeah
Aaron: but that particular example is i- it's, it's heartbreaking.
Spencer Clouatre: Yes
Aaron: and the other part of it is that you're, you know, you think about these young soldiers, they had watched, a couple of their commanders actually,
Spencer Clouatre: Yeah.
Aaron: die from IEDs and other things.
Spencer Clouatre: Yeah
Aaron: and because of their position, there seemed to be nothing they could do or were doing
Spencer Clouatre: Mm-hmm.
Aaron: to change that. And so it leads to this sense of, "I have to do something,"
Spencer Clouatre: Yeah
Aaron: and it's going, it's going to burst out in this, horrific, consequence, right
Spencer Clouatre: Yeah
Aaron: so that's, that's what happens, right? Is you can see, if you view it from this lens of inconsequence and ambiguity, if you see it from the sense that they were watching all these things continue to happen, people dying, and yet there was nothing that what they were doing on a day-to-day basis that could, that seemed to be able to prevent it, And, they didn't seem to connect what they were doing by holding this base,
Spencer Clouatre: Yeah.
Aaron: was connecting to a much larger mission.
Spencer Clouatre: Right
Aaron: Because of that, it leads to this, this inconsequence of, what is the point of this? right? And so anyway, I, I love also how those young men also seem to have dealt with it afterwards, as we've said in the past
Spencer Clouatre: Yeah.
Aaron: in other examples,
Spencer Clouatre: Yeah
Aaron: Where they're, they're courageously actually using this as an example of, "Here's what we think went wrong," and trying to teach people how to, be better at, at preventing it. So,
Spencer Clouatre: Yeah, yeah, serious.
Aaron: that's inconsequence.
Spencer Clouatre: The people, the people that took the stage, amazing, yeah. There was a young man, Ben Britt, I went through Ranger School, and I graduated in the summer of '05, and Ben was one of our econ students at West Point. He was in my, platoon in Ranger School, and he was one of those leaders you're talking about. He was killed on, December 22nd, 2005, so about six months after Ranger School in this unit. And, um, I'm sure it was somebody that those younger soldiers looked up to, and they just couldn't explain. They were not empowered they ended up feeling inconsequential, and I think that's when bad things can fall out of that, for sure.
Aaron: yeah, and, and I would just say that empowerment can be tricky, when you're part of such a large effort
Spencer Clouatre: Yeah
Aaron: Empowerment is tricky, and so that's where it's necessary to create A clear connection between what you're doing and this larger effort. That's why I say, like with academics, it is very difficult to keep in mind that what you're working towards is a very large goal that's been going on hundreds of
Spencer Clouatre: Yeah, that's...
Aaron: years. and so your contribution to that is very easy to lose sight of.
Spencer Clouatre: Yeah, seriously. In a army, in an army, that's so right. You're right, so right. And Ben Britt was a, an absolute joy to be around. And, every flag that we've turned over, uh, if you've ever done that, when we have a, a soldier lost and you provide that flag to the family, it is just a marginal expansion of what we thought, but it absolutely brings out the cost and the value of service. So we have to believe in that as a country, and it's way bigger than any one of us, just like your academic, example. So there, there's a lot of similarities in that
Aaron: it's painful to sit here and compare my frustrations
Spencer Clouatre: You know,
Aaron: with academia to like
Spencer Clouatre: yeah.
Aaron: uh, so I, I
Spencer Clouatre: But the mechanics...
Aaron: these aren't apples to apples.
Spencer Clouatre: No, no, they're not, it, the mechanisms are the same, and that's another good point. I mean, the mechanisms are the same almost always. so all right, inconsequence. The C, let's go to DICAO C, yeah
Aaron: Complexity, this one I think is actually a little easier for people to recognize. it's often referred to as something like, paralysis by analysis. A- and in fact, we talked about it with Ben Summers as well, where as you, try to take in and consider all the different dimensions of a decision, we can actually show, you're making worse choices than if
Spencer Clouatre: Yeah.
Aaron: the set of options had already been reduced. i- in the underlying mathematical model of all of this, there's a really natural way that this falls out. But the point is that complexity is, part of the problems of ambiguity, that if you have a lot of different, options, and it's not just options, if you're considering a decision that has, you know, 20 different dimensions that you're trying to hold in your head all at once,
Spencer Clouatre: Yes.
Aaron: this becomes a problem. When you're buying
Spencer Clouatre: Yeah
Aaron: a new computer-- I mean, now it's not so bad because most of the computers are actually quite similar. But I mean, back in the, late '90s, early 2000s, I was obsessed with trying to figure out, what is the best price for what you were getting out of a computer. And, and I was building a computer, and you would just sit there and you'd look at all these different things and you're like, "Okay, how much additional value am I getting from this, more expensive video processor, based on the dollars? and could I actually get more personal value if I'd actually just increased the RAM on my computer?" Right? Like that kind of a comparison, if you're considering all the 10 different dimensions of a computer
Spencer Clouatre: Yeah.
Aaron: that becomes very complicated.
Spencer Clouatre: Right, right
Aaron: and so if someone had just said, "Aaron, guess what? It doesn't really matter. All, all you need is a good processor, a good video card, and then a sufficient amount of RAM, and find the cheapest one." Okay,
Spencer Clouatre: Mm-hmm.
Aaron: that would have helped, right? It's like three things that matter, go.
Spencer Clouatre: Yeah
Aaron: so the leader's job in this case is also to help reduce the ambiguity. Each new dimension is invariably creating more ambiguity. the more dimensions or the more options you're providing invariably creates ambiguity. in the book Thinking Fast and Slow, they talk about how they have like decoy
Spencer Clouatre: Mm-hmm.
Aaron: products
Spencer Clouatre: Yep
Aaron: are poorer quality and higher cost, right? what that does is it shifts everybody perception, and they end up buying, a TV that's, higher quality but also more expensive than it really needed to be. and that's because of this complexity issue where you're able to essentially trick the brain into feeling more certain about different things. Like, oh, this is a really good deal. if you look at like the marginal gain I'm getting for the price of this thing, that's taking advantage of this complexity issue. And so the leader's job is to reduce that complexity to the most important dimensions. And the way you think about the most important dimensions is dimensions that have High marginal value, not relative to their cost, but the ones that matter, right? They have high marginal value, and low ambiguity, right? Like,
Spencer Clouatre: Yeah
Aaron: that you need to focus on. and you can think of this as the ones with low ambiguity are the dimensions that are most within your control
Spencer Clouatre: Mm-hmm.
Aaron: often, and the dimensions that are going to have the largest impact in either direction. Okay? So those, you narrow it down to the most important dimensions like that
Spencer Clouatre: Yeah. And I think we try to do this naturally. Well, first of all, we know we're worse whenever we have too many decisions. I think Barry Schwartz wrote this book, The Paradox of Choice, and that it's how nowadays because you have so much choice it's resulting in more anxiety, more regret. he talks about salad dressings. there was only three salad dressings when I was growing up and when he was growing up, And I never remember feeling regretful about a salad that I had, you know? now he says there's like 187 salad dressings in his grocery store, and he's still waiting to get to the right one. Like, every time he tries one, like, "Oh, it could've been better," you know? So getting it into the right set allows us to make, better decisions. And, you know, Thaler and behavioral econ stuff have talked about nudge, nudging people or decreasing the choices to get them in the right decision. But that can also be seen as, kind of too paternalistic. Like, you, you lose your freedom when we do that. but this thing is, it's a leader's responsibility. It's your responsibility as you allocate, these resources and try to get to the right information. If I had to flip it and I go from complexity, if I want to de- decrease the dimensionality of it, I'm thinking simplicity. I'm gonna make it simple, When you go to simple, it doesn't mean that it's any less effective. It means that they've done exactly what you said. They went to the ones that are weighted the greatest with the least amount of ambiguity. I think that's what the flip side of it. what is not complexity is that it's, simple and I've gotten the right three choices. Every military in the world, every... The military decision-making process, we always go to three courses of action. It's almost always three courses of action. We got two that we're really deciding on, and we got a throwaway. Like, the third one is almost always a throwaway.
Aaron: It's always obvious what the throw away is
Spencer Clouatre: and there's reason for that. The staff is trying to get that into a feasible option that the commander can choose and you're framing a trade-off. Again, back to the playbook, right? We're framing a trade-off, and we're doing that by trying to reduce complexity and, increase our understanding on this next marginal input.
Aaron: you know, as always, keeping track of the point of all this is to say that you've got the playbook, you understand allocation's important, you understand that you should be optimizing marginal value versus marginal cost, but this is going to impede that process,
Spencer Clouatre: Yes. Right
Aaron: right? so the A in DICAO is absence. I, I think your, and Ben's example in our previous episode, Is a good one of, absence, where they were having these successful missions and it was working
Spencer Clouatre: Mm-hmm.
Aaron: really well right up until the point where it really didn't
Spencer Clouatre: Yeah
Aaron: And we had talked about more about this with him, but part of the problem is what we would call absence, and that is failing to recognize that the production function is dynamic.
Spencer Clouatre: Yeah
Aaron: The production function itself is changing. The world is changing. we, we often talk about you just get comfortable in the success, but this really is a problem of the world is changing. It's not that your formula for success was wrong.
Spencer Clouatre: Mm-hmm.
Aaron: It's that the world is changing, your enemy is adapting, or your competition is adapting. and so it becomes, a requirement to actively and purposefully try to gain the information and testing and trying out f- trying to figure out how that production function is evolving over time. the example, that I love and, and the younger listeners won't get this, but, you and I do, where we used to go to the video store and rent movies from Blockbuster,
Spencer Clouatre: Mm-hmm.
Aaron: and that was, that was the way you did it. That was the way you always did it, and it seemed like that was the way you were always going to do it, is that you would go to the store, you would, rent the movie, and then you'd pay a bunch of late fees, and then you'd get the next one.
Spencer Clouatre: Yeah
Aaron: A- and of course, I don't know the inside scoop. I don't have information on exactly how the meetings at Blockbuster went. But as Netflix started showing up, where you could, get your movies by mail. Now, again, a lot of you probably only know Netflix as, Netflix as an online streaming, but
Spencer Clouatre: Yeah.
Aaron: started off as mailing you DVDs.
Spencer Clouatre: that's right
Aaron: so they'd removed that main part of friction of getting to the store and also returning it and paying all these late fees. They'd removed a lot of these things that frustrated people with renting movies in person. it seems as though Blockbuster might have been sort of trapped 'cause it had all these brick and mortar stores. In fact Blockbuster
Spencer Clouatre: Right
Aaron: even had some sort of a subscription thing, kinda like Netflix.
Spencer Clouatre: Yeah
Aaron: point is that for whatever reason, they were unable to adapt sufficiently to compete with Netflix on this mail service where you could mail your
Spencer Clouatre: Yeah
Aaron: DVDs in and out. And it seems to me like, and again this is like sort of armchair economist where I'm just looking back, but it seems to me that the real value of Netflix came from not having these late fees. You could keep it as long as you wanted. There was no friction of going to the store. So if Blockbuster had figured out a way to remove those frictions, then they might've been able to, to stay in touch. But again, I don't actually know. I was
Spencer Clouatre: I mean,
Aaron: quite young when this happened
Spencer Clouatre: I think Kodak developed digital photography.
Aaron: Yeah, in like the seventies.
Spencer Clouatre: Kodak developed they were the ones that started the thing that was gonna kill them. and they just kinda missed the boat on it, you know? didn't realize the environment had changed. I mean, right now Uber's stock has been going down. I rode in a Waymo, Aaron, maybe two weeks ago out near UCLA. I think, Uber right now maybe may be absent to what's happening around them in the market. Now, maybe I'm wrong. I don't know. We'll see what happens. But I know the stock has been falling because people feel like They're the next Blockbuster. They're not changing. will it be a driver for longer? I don't know. Will Waymo take over, have driverless? I felt pretty safe driving in the Waymo I was in the other day, so,
Aaron: Well, I think a lot of that's coming from also how the culture around Uber has changed.
Spencer Clouatre: Yeah
Aaron: I mean, I used to drive for Lyft back in grad school,
Spencer Clouatre: All right
Aaron: it was a very different experience back then from what it is now. Back then, it really was ride share, where it was just sort of the thing I did in the evenings to make a few extra dollars for my family.
Spencer Clouatre: Yeah
Aaron: And now more and more, every time, every time you take an Uber, it's more like having a professional taxi driver whose full-time job is to drive for Uber.
Spencer Clouatre: Mm-hmm.
Aaron: that creates changes in the environment as to h- how people's expectations are of how Uber's supposed to feel, right? I guess, again, I'm not a market analyst in this sphere, but I can say that the dynamic, or the culture and the context around Uber has definitely changed in the last 10 years.
Spencer Clouatre: Yeah.
Aaron: It's changed a lot, and so I don't know what they're doing to plan on fixing
Spencer Clouatre: Yeah
Aaron: that or adapting to it. But that would be a very good example,
Spencer Clouatre: Yeah.
Aaron: That you can't fall asleep at the wheel
Spencer Clouatre: No
Aaron: on what's happening in the environment around you and how it's changing
Spencer Clouatre: Yeah, before you know it, you're sitting in the back seat and there's nobody at the wheel, and it's called Waymo.
Aaron: That's right.
Spencer Clouatre: And, and Tesla's got a whole game plan coming, man, I'm telling you. But it's not only, it's not only valid, this idea, and all these first principles, it's not only valid in that big... We've talked about big companies. What's, what it's called in the cockpit is called situational awareness, and you can't be unaware in a dynamic world. When you're flying, I mean, a helicopter, we can go backwards, sideways, up, down, you pick it, right? The best pilots in the world maintain great situational awareness of the cockpit they're in, what's in front of them, what's aside of them. Like, this, the opposite of absence is being present. I think the best pilots, the best leaders in the world, they're present. They're aware of the surroundings and the changing context that exist, not only in the big, you know, the big I, the information, but also in the motivations and possible unintended consequences which we've referenced in a few of these already. So, this one is about information, and it's also about motivation. And, in terms of ambiguity, that's what we're talking about, you know, decreasing it. So I like this one a lot. Situational awareness is, I think very critical. You gotta have good radar, receive good information, and also transmit good information. If you're absent, it's gonna go bad. Yeah.
Aaron: and in particular, it's, its absence to the production function. by not being present, it's almost as though you enter autopilot and you're allowing this thing to just keep going and running and running. It's like you're leaving this, this machine to just keep running without realizing that it's either getting old
Spencer Clouatre: Yeah.
Aaron: or it's breaking down
Spencer Clouatre: Right
Aaron: no longer the right machine, right? Like, it's not just that you're, not learning, it's that you're not learning specifically about the production function,
Spencer Clouatre: Right
Aaron: and how it needs to change to adapt
Spencer Clouatre: Yeah. There's real lack of humility if you don't do this, I, I think. you have to be humble to know, yeah, okay
Aaron: another example of this would be like, watching, as my dad ages, watching the way his driving has changed.
Spencer Clouatre: Yeah.
Aaron: I'm wondering how aware he is. Oh man, I hope he's not listening.
Spencer Clouatre: That's a hard... I'm telling you, it's hard because the person who's gotta turn those keys over, we're fighting it right now with, Jill's parents and my parents is they have to turn those keys over, and you gotta somehow shape them to do that. But yeah, my mom ran over a curb the other day in a brand-new car. I know she's not listening. I don't think she is. Lord, yeah, we're troubled. J- Jill's dad turned into a ditch. They are more absent than they are present. Dangerous.
Aaron: by absent, I, yeah, they're not aware of the fact that, that things are changing, right?
Spencer Clouatre: Yes
Aaron: Like their capacity, to, receive and interpret the necessary signals
Spencer Clouatre: Yeah.
Aaron: is deteriorating.
Spencer Clouatre: Right, right
Aaron: that's what I mean is that it's not just that they can't see that they run into a ditch or that they're not paying attention while they're driving, it's that they're not paying attention to the fact that they can't do it as well as they used to
Spencer Clouatre: That's right. And that's what I mean
Aaron: Um-
Spencer Clouatre: when they gotta give us the keys, not us take the keys. Now we may have to take the keys. They don't have the presence to give away the keys 'cause they're not aware that they're not aware.
Aaron: Right.
Spencer Clouatre: God
Aaron: I don't wanna harbor on this too much, but I, I really, I've broken absence out in the past between, prospective absence and retrospective abs- absence,
Spencer Clouatre: Yeah
Aaron: Where you're not, paying attention to what's coming in the future or, the changes in your environment, but you're also not paying attention to what worked in the past and what didn't work in the past. and this is where I just say the most important way to combat absence seems to be to make gathering environmental information, not just the information that's necessary to run your operation. I mean, gathering information on the changes in the environment and gathering information on what worked. That sort of information gathering has to be part of what you allocate towards. You have to allocate towards experimenting. You have to allocate towards
Spencer Clouatre: Yeah
Aaron: maintaining that situational awareness. That has to be a conscientious choice. It can't just Yes be something you allow to happen automatically
Spencer Clouatre: And that's where the BIG framework, the four big letters, allocation, information, motivation, execution. The execution in the after action review and being a learned system has to pass its way back through. You have to recollect the data learned to make the next best allocation decision. You know? Exactly what, what you were just saying
Aaron: So, the last one here I, I, um, I've struggled with this one a lot in the past because, 'cause unlike the others, which are very clear, symptoms, right? Like the symptom of absence is that you're going to notice, suddenly your competition is outperforming you.
Spencer Clouatre: Yeah
Aaron: Or you know, I, I, I mean, even right now I'm watching Anthropic go through this where, you know, for the last, I don't know, seven months, they seem to be very clearly the dominant ones in terms of the quality of their models and, also like
Spencer Clouatre: Yeah
Aaron: the products they were producing. And in the last two or three months, or really, the last month, you've watched that edge slip. And so I am very interested in watching how they deal with it. anyway, the symptoms of, inconsequence, it's pretty clear you have this low motivation. the symptoms of complexity, you see people struggling to just make decisions. There's a lot of this like hesitation, and there's a lot of, no decision, right? Like a lot of times we just default to no decision and just letting things unfold the way that they're gonna unfold. But this last one, the O, is for the overconfidence bias.
Spencer Clouatre: Yeah
Aaron: And, the reason it's hard for me is that, again, you know, all of these things are actually popping up out of the math. This isn't like, oh, you know, we just sat down and pontificated for a long time about like, you know, what are the... No, it's like there's an actual model underlying this, and if you go through and try to figure out, okay, what are all the ways we can mess up people's ability to allocate or make their decisions or to motivate each other, if you, if you really look at this model and trying to figure out like, how can we break this? One of the ones that comes out here is if people are overconfident, what it means is that they, refuse to deviate from what they perceive to be the marginal value. In other words, it's as though you refuse to accept that you may not actually know what the marginal value is of a particular dimension of a choice. And the reason this is frustrating for me is that sometimes this is actually quite-- sometimes this can be helpful. it's helpful because it, removes that ambiguity in your decision-making because you've just essentially ignored it, right? And so that's why sometimes this can be beneficial. Like a lot of times we see this idea of, this confidence of, being empowered almost, where we see leaders who are quite confident, and sometimes they're wrong, but when they're right, it just hammers through. And so it's a trickier one because, again, sometimes there's value in just setting aside the fact that you don't know the production function perfectly and just deciding what it is
Spencer Clouatre: yeah,
Aaron: and running with it. The problem is when it comes to two things. The first is if you run that and you just go, you fail to recognize that maybe it didn't quite work out or that you were wrong, that's this overconfidence where, where you really fail to recognize that, Yeah. you, you just ran with this, but you sort of run with it with your eyes closed. You're just like, "We're just gonna bolt through this," and you refuse to recognize that, oh, this actually wasn't, like, the best path. and then the other thing is that it inherently has bias, where if you have, the effect of a certain input has on your outcome, if it naturally has this sort of, fuzziness to it, but you decide to just pick one, right? Like, in other words, the, the additional value of, an extra, you know, eight gigabytes of RAM in your computer, it's very difficult to put down an exact number on the value of that for yourself. And so there's sort of like this range of possible ways. It could make you happier by one or it could make you happier by 10, and it's like, well, I don't really know. If you just say, "It's gonna make me happier by seven," that's naturally going to have bias. again, this is just some of the consequences of having this confidence. uh, like I said from the start, this one's difficult for me because there's a level of confidence that is valuable and necessary, but it becomes bias and frankly s-stupidity you don't look back and say, "I'm glad I made that choice, and I'm glad we just ran with it. But in this case, I could have done it better by shifting in this direction." this is why, like, your example of the boat is, is one that I like because I wouldn't say that you were overconfident, but certainly you just said, "This is what we're gonna try,
Spencer Clouatre: Yeah.
Aaron: it, and we're gonna go." Right? And that sort of, like, clears out the paralyzing effects of the ambiguity. But if you had forced your-yourself and Jill to just stick with it, right?
Spencer Clouatre: Yeah. "
Aaron: No, we knew this is what we wanted. We knew this is what we were gonna have, and you just refuse to look back and just say, "Oh, okay." like maybe maybe we were off by a little bit here. then that just becomes stupidity, and it becomes sort of this persistent bias, which you don't wanna have.
Spencer Clouatre: Yeah. I would've been seriously absent. I would've been seriously absent because,
Aaron: Right
Spencer Clouatre: part of that is receiving the signals from your teammate, and she's pretty tough. She wouldn't... She never said, "Let's not do this." But it it required me to say, "This is a sunk cost. We're gonna get out of this thing." So yeah. I think what, the, when you're talking overconfidence, and by the way, for the world out there, there is a very impressive textbook that Aaron been teaching this leadership economics class at West Point for a while, and the model, that we have built, I'm amazed when you play the piano in front of me, I'm amazed when you sit up there and do the math for me. I, I just want everyone to know is that there is a strong, mathematical model that sits underneath all this. And, these are the big logs in the fire. specifically for overconfidence, to me, it becomes a lack of humility that can be detrimental to the outcomes. the unit, the team, no one should have to suffer through your lack of humility. Because what it does is it puts the you in front of the mission, the overall shared outcome. And, if you're not learning from mistakes, if you're not exploring and exploiting, if you're failing to recognize nuances, then you're not building good information. And, a lot of times, this trade-off, you're right. I mean, General Dempsey used to say it, that we have a bias to act. And sometimes you, you hear people say, "In the absence of further orders, what do we do? We attack." Now that may be the wrong thing, but generally, leaders are willing to act on information that may not be complete, and I think there's a lot of good in that. and all this is nuanced, and all of it has an equilibrium. But you, you need to understand that you could bleed for it."Yeah, you can bleed for it, but your soldiers expect you to use them efficiently." You don't need to do the frontal assault if you can just take this another way, you know? So I think what happens a lot of times in an overconfidence, world is that you can always just bleed for it, but that's not the right way to get this done. The right way to get things done is to efficiently use the scarce resources you have and allocate them well, and that's connecting the execution with the allocation and then also feeding the right information and motivation out of that thing. Now, the flip side of this, this is a hard one on the flip side, because it's definitely not underconfidence. We're talking about overconfidence bias. What we are talking about, in my words, as I tried to describe this, Aaron, is that we needed to have a balanced confidence, a, a confidence that comes with preparation and, that also knows that I have some biases, and I have some simplifying assumptions. If folks look at the playbook, that last paragraph, it's not one of the six, but it's just a final, like, disclaimer paragraph. It's talking about this, like that this is a messy reality, and it requires a balanced confidence, an informed confidence, from great leaders, not only in your professional relationships, but also in your personal relationships. so that's all of them, man.
Aaron: that's the DICAO
Spencer Clouatre: Yeah, discord, inconsequence, complexity, absence, and overconfidence, and we're saying these are the symptoms of, some ambiguity and uncertainty that is a rheostat of sorts, that, is a lack of information and maybe motivation that you're trying to increase so that you can create better win-wins. you can create a better shared outcome. do we believe that you can get rid of all these?
Aaron: Um, no.
Spencer Clouatre: Exactly.
Aaron: like ambiguity is always gonna be there, but, but I am 100% confident that you can always reduce your intolerance to it, and you can also, reduce the ambiguity through some of the things we've talked about. Like, you should always be able to reduce that ambiguity and improve your intolerance to it
Spencer Clouatre: Yes. Yes. I think that's, that's a critical thing now to, to talk about. And, the math has pointed us in this direction. the economic frameworks have pointed us in this direction. And, I love that we have this DICAO. And, I think our, next steps and, and something we've talked about is treating these symptoms. we don't have to get into it on this, episode, but, I would hope that our next newsletter that's coming out, we're gonna address some of this stuff, and folks should look forward to that. You'll have the transcript of this. You got this interview. But in the newsletter, that has come out, you saw why economics, you saw us explain the framework, allocation information, motivation, execution. You saw us explain the playbook, and then this should be, I think, if I'm not mistaken, Aaron, our next newsletter is gonna talk about uncertainty and ambiguity in the DICAO
Aaron: Yep,
Spencer Clouatre: Yeah.
Aaron: that's the plan.
Spencer Clouatre: That's
Aaron: I think what, what we're trying to establish now is sort of a clear process that uses these principles. we've started with the AIME framework, and now we just keep unfolding layers of how to do that best.
Spencer Clouatre: Yeah
Aaron: that's the task of leadership I think the right place to end this is with the confidence that, one, all of these are principles. These are not, a task list. They're not a laundry list. These are principles that you can draw on regardless of where you are, regardless of your context, regardless of your personality, and regardless of the personality of the people you're leading. If you want to be effective at creating something, at moving, the world to something new, you are always going to be faced with a lot of this ambiguity. And so the leader's job is to be able to spot where it is and understand it's consequences, and then also to prepare their team for it and reduce it as much as possible. And I'm 100% confident that that is always possible. There are always incremental gains to be had there
Spencer Clouatre: That's a great statement to, to end on.
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