What we learnt about wilful blindness at the Imagine Conference

Kicking off the conference, Margaret Heffernan, told us that she first came across the concept of wilful blindness when reading the transcript of the Enron trial.
 

Wilful blindness

Kicking off the conference, Margaret Heffernan, told us that she first came across the concept of wilful blindness when reading the transcript of the Enron trial. Both the Chairman and the CEO were found guilty, based on the legal principle that they could have known, and should have known, what was going on. People outside the business were captivated by the seductive narratives and sky-rocketing share prices. The signs were there, and the fraud could have been discovered earlier by investors and regulators. An even more dangerous variant of wilful blindness is premised on good intent and occurs when a particular model of the reality evolves into an ideology. Philosophical and economic models are merely crude simplifications of reality, which support the mental triage of determining which pieces of information are most important in a continuous flow of information. However, by design, models reduce ambiguity and provide us with a sense of control, making them particularly seductive to the human mind. Paul Krugman, the economist and Nobel laureate, once said that the factors which matter most were probably not captured by his economic models. Blindly following a model can, therefore, be dangerous and risks making us wilfully blind to the risks not captured by a model’s scope or assumptions. Heffernan mentioned the illuminating example of former Federal Reserve Chair, Alan Greenspan, who, in a congress hearing post the global financial crisis, referred to his view of the financial markets as an ideology. He acknowledged that there was a flaw in his ideology but would not admit that it was wrong. Greenspan believed that unregulated markets were the safest and that regulation only increased risks. Based on this conviction, Greenspan was wilfully blind to the warning signs of repeat market failures in the unregulated derivatives markets through the ten years leading up to the 2008 global financial crisis. The future is uncertain and is not possible to predict using a model. We need to have an open mindset and try to see the world for what it is, instead of what we want it to be. Heffernan’s recommendation was to remain prepared for the unexpected and to avoid deliberately deceiving ourselves through detailed planning on the basis of a single model or ideology. According to Heffernan, the biggest wilful blindness in our society is climate change. We are generally certain that something is happening, but we are uncertain about what the consequences will be. As pension professionals, we need to consider the impact that climate change may have on the investments and the businesses of scheme sponsors. To deal with wilful blindness in general, the sobering recommendation from the 17-year old Greta Thunberg is spot on. Her message to the leaders of the world is simple – “please look at the facts!”

The elephants in the pension industry

Many societal institutions, including the pensions system, were designed to respond to the challenges emerging from the Industrial Revolution. Modern society has changed drastically since the post-industrial era, driven principally by demographic change and, more recently, by the rapid rise of technology. Young people today are expected to live over 100 years and career paths have changed dramatically, but governments, policymakers and the pensions industry have done little to prepare for this. To create awareness around this particular wilful blindness, Theo Kocken, founder of Cardano, showed clips from his upcoming documentary ‘Your 100-year life’. As a society, we may well be forced to retire the very concept of retirement itself, but such a move does not necessarily have to be a negative development. We learned that working later in life can help to keep us mentally sharp, by reducing social isolation and loneliness. The message is clear, we need to change our mindset and prepare for the different stages of our life career. At age 50 we need to start thinking about what type of work we could do at age 70 and what skills we need to develop for that. Current and increasing levels of old age poverty, particularly among women, must be another core focus for policymakers. According to Joanne Segars, chair of NOW: Pensions trustees, women retire today with average pension pots of roughly one third the size of men’s. This inequity can be explained to a large extent by the fact that women typically take time off from work to care for children or elderly relatives, or choose to work part time. Going forward, old age poverty is a risk for all those who do not have a lifetime career of full-time employment. Given the increasing number of self-employed people in the gig economy, this problem is likely to increase for both men and women. Partial solutions such as the removal of the lower income threshold in Auto Enrolment, or the introduction of a family carer top-up were identified as potential tools to tackle this growing issue.

Wilful blindness in our daily work

Our panel discussion raised the point that many trustees in the industry remain optimistic about the future viability of their sponsoring business. Both member-nominated and corporate trustees are often emotionally invested in the business backing their scheme. In practice, this can mean that trustees are not sufficiently critical in their approach, influenced by their belief that the best will happen. To offset this, trustee boards should make use of constructive conflicts to improve their understanding of the risks to their sponsor. Group dynamics and the human tendency to adopt a herd mentality were identified as key obstacles for dealing with wilful blindness. The safest place to hide is in the middle of a herd, which holds for both trustees as well as their various advisors. Diversity of thought was identified as key to breaking down wilful blindness, although historically, our industry has not been welcoming of mavericks choosing to stand out from the herd. To break the status quo, one panel member said that instead of formulating the answers, trustees should focus on asking our advisors the right questions. Regulation focusing on process rather than outcomes should not be used as an excuse for following the herd. One panel member argued that trustees should plan for a wide range of potential scenarios. “We know that we won’t get the actuarial forecasts right, we know that we will not get the investment outlook right, but if there are scenarios where the risk is too big for the sponsor then we are probably doing something wrong…” Good governance boils down to the quality of the decision process and the people involved, rather than the governance model. Trustees should focus on bringing together a group of people with a diverse set of views that can challenge the decisions in a constructive way, rather than simply nodding decisions through together.

Tools for dealing with wilful blindness

Unless we become aware of our own wilful blindness, it is difficult to do something about it. Our speakers emphasised the critical importance of cognitive diversity within collective decision-making, recognising that all too often, people are reluctant to challenge ideologies or risk conflict. It is therefore no surprise that the elephants in the room often fail to make it onto the meeting agenda. Heffernan suggested that turning the meeting agenda upside down and beginning with the last point, AOB, can be a useful tool in shaking up conversations. Dealing with our human biases and the group dynamics at the decision table, we need a framework and tools, such as playing Devil’s Advocate, to create constructive conflicts. Scenario Thinking is very helpful in exploring diverse views on how the future may develop. Challenging our ideologies in a structured way will help us address wilful blindness. In theory, this seems straightforward, but as Yogi Berra famously said “In theory there is no difference between theory and practice. In practice there is.” In the next few months we will be running wilful blindness workshops focused on helping schemes, trustees and their advisors get climate change ready. To analyse the potential consequences of climate change, we will apply a framework and use different tools to reach a better understanding of how prepared a scheme and its sponsor really are for tackling the challenges ahead.  

We learned that wilful blindness can become a systemic risk, when our ideologies make us collectively blind to contradicting data and information. Dealing with this does not require expensive tools, but we need to use our brain and imagination to challenge our models and ideologies. To be prepared for what the future might bring, we need to be bold and dare to step away from the herd. As Pasteur once said, “chance favours only the prepared mind”.

Author

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Stefan Lundbergh

Stefan, Director of Cardano Imagine, is the author of this piece. He regularly speaks at conferences and writes pieces about the pensions industry.

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