Insights
Can judgement be taught?
Over recent decades, the art of decision making has shifted away from personal judgement in favour of what is often called ‘evidence based’ analysis. Professionals and decision makers have been trained to ensure all relevant information is properly considered, often by means of an approved process which either delivers the answer or at least narrows the range of possible options.
Whilst this is a positive development, many would argue that the pendulum has now swung too far. Some people have become excessively reliant on processes and have consequently failed to develop the judgement skills of earlier generations. In a family office the need for sound judgement remains crucial to many of the decisions they have to make.
Running the affairs of wealthy families requires an exceptional breadth of knowledge, experience and skills across a range of different disciplines, from financial and business management to family dynamics and community relations. Decisions often involve reconciling apparent conflicts between factors which are measurable, such as investment risk, and other factors which are unquantifiable, such as family cohesion.
Many families are adopting structured processes to support such decisions, but however well designed the processes, they cannot always give a clear answer and at some point the exercise of judgement is unavoidable.
This paper addresses the proper role of judgement in making decisions, both large and small, not for by-passing due process, but where the outcome of relevant analysis is inconclusive, or where the cost of such analysis is prohibitive.
DEFINING JUDGEMENT
The importance of exercising good judgement is often recognised, but seldom defined. We sometimes know when a colleague has made a ‘good call’ and, sadly, more often when it is a ‘bad call’, because it often has consequences: with hindsight, errors of judgement frequently look negligent.
Judgement is often about the instinctive evaluation of risk, and the reason its role needs to be defined is that we sometimes behave as though risk can be eliminated by following prescribed processes. When things go wrong, we tend to review the process to make sure it can ‘never happen again’. The reality is where judgement is involved, there is always a risk.
Judgement is often based on experience, taking account of factors which simply cannot be expressed in tangible data. But those with experience don’t necessarily develop good judgement, as it also depends on the character, intelligence, insight and skills of the individual. Many people lack the necessary confidence. They don’t like being pulled out of their comfort zones, preferring to fall back on the processes which give them a definitive answer, for which they cannot be criticised. Most families want an adviser who adds a clear opinion and recommendation, supported by a convincing argument.
For families with a diversity of interests, judgements must not only reflect the financial appraisal, but the impact of any decision on the family itself and the broader legacy, which we often refer to as the family’s ‘cultural, social and intellectual capital’. These ‘intangible’ aspects of the family legacy have been shown to be of crucial importance, and are critical factors in key decisions, but they can rarely be quantified. Furthermore, the lessons of past experience may no longer apply in a new set of circumstances.
EXAMPLES OF JUDGEMENT
Judgement is required in many different circumstances, from making major decisions to handling people or situations:
Bridging the analysis gap:
Once all the relevant processes have been followed, a decision may, for example, rest on a judgement of behavioural changes which cannot be tested in advance. In business this may be the reaction of customers to a corporate decision, such as when to own up to a significant error and whether to volunteer compensation to those affected. In a family, it might be the reaction of a family member to being overlooked for a particular role or seeing decisions made which he or she fundamentally opposes.
Business owning families have to decide whether and in what circumstances to keep their business in family ownership, or whether to diversify the family assets, as a conventional risk analysis would often suggest. On the one hand, a purely financial appraisal may suggest one course of action, but taking account of the broader family legacy might suggest the complete opposite, without the benefit of reliable data or a comparable methodology.
One of the most important decisions facing a wealthy family is how to select and prepare the next generation of leaders, which may have more far reaching and lasting consequences than any financial decision, but for which there is no clear route map leading to definitive conclusion.
The absence of full information
In the real world, we often don’t have all the information we ideally need and the cost of obtaining it may be prohibitive. Nor can we subject every decision to endless analysis and process. The question is at what point are we sufficiently satisfied that we know enough, relative to the scale of the matter under consideration. The world would grind to a halt, if we didn’t make judgements of this kind on a daily basis (paralysis through analysis), yet we also know that if we get it wrong it may be suggested we could have avoided a serious problem had we sought more information and followed more processes.
Again, it takes a degree of judgement, courage and confidence to decide when enough is enough.
Handling different personalities
Within families there may be different individuals whose views are difficult to reconcile and for whom discussion of a particular issue is itself inflammatory. Someone creative will look beyond the processes and try to find an imaginative solution which includes a way of reducing the hurt of those who lose out. At some point, however, a choice has to be made.
Handling such sensitivities often demands skilled communication and sound judgement. The timing and manner of raising the subject may be crucial, as is the sensitivity to gauge the reaction and adjust the approach as necessary. It may be the difference between diffusing a problem and causing it to escalate into a damaging family row.
Actively managing risk
Most studies of risks in wealthy families suggest that the only risks which are actively managed are those which are tangible and quantifiable, and for which there are well established processes. This includes, for instance, the volatility of investment portfolios, which can be measured and monitored to ensure the portfolios are managed to fit the family’s ‘risk appetite’.
But the reality is that very few families lose all or most of their wealth through the poor performance of a professionally managed investment portfolio. Stonehage Fleming’s recent study ‘The Four Pillars of Capital’ suggests that, in the longer term, by far the greater risk lies in passing on the wealth to subsequent generations, failure to adapt the leadership approach to the modern world, the quality of family communications and the absence of an agreed purpose and strategy.
Most of these risks are extremely difficult to measure and although they can be mitigated by family governance and other processes, many of the major decisions require the exercise of significant judgement. We often hear about the demand for ‘evidence based’ decisions, but analysis and process can only take you so far.
Deciding who to trust
Sometimes there are few more important judgements than deciding who to trust. The successful management of a family’s wealth often depends of a range of different advisors, suppliers, and business partners, whose honesty, competence and ability to deliver has to be assessed. There are many examples where misplaced trust, even in highly reputable organisations, has proved seriously damaging. Committee decisions Judgements are frequently made by groups, rather than individuals, whether in a formal meeting or through a consultative process. Each individual may have something different to contribute, in terms of their knowledge, their experience and their judgemental skills and it is the job of a good chairman to bring together all these different inputs, to reach an agreed position.
However, the majority position is not always right and those who are best informed, with the most relevant expertise, are not necessarily those with the soundest judgement.
Perhaps counter-intuitively, there is strong evidence that groups sometimes take much greater risks than individuals and are too easily influenced by the wish to agree and to avoid confrontation.
Many businesses and families therefore have cause to be grateful to those with both the wisdom and the courage to stand up to the majority view.
THE ROLE OF EXPERIENCE IN GOOD JUDGEMENT
Most obviously, good judgement and wisdom come from practical experience, but there are many individuals with great experience who are notoriously poor at making sound decisions and many who are deeply uncomfortable in putting their own reputation and relationships on the line.
Experience clearly helps us make decisions, and a family office will draw on extensive practical experience of similar situations as well as on expert technical knowledge. Clients will always want to know what other families do in similar circumstances and what lessons have been learnt. But experience is not always the same as judgement. In some cases, experience provides such compelling evidence to support one course over another, that the need for judgement is almost eliminated.
The combination of practical experience and judgement is what we refer to as ‘practical wisdom’, a key necessity in the management of family arrangements.
Sound judgement is more commonly developed by those who have broadly based experience on which to draw, learning lessons from one sphere and applying them to another.
Generalists are thus more likely than specialists to acquire wisdom and the trend towards ever increasing specialisation may erode our capacity to develop judgement. For this and other reasons, family offices benefit greatly from individuals with broad experience, but they are increasingly hard to find.
Why is it that a few people seem to gain so much more wisdom than others from the same technical knowledge and practical experience?
TYPICAL CHARACTERISTICS OF PEOPLE WITH SOUND JUDGEMENT
Thoughtfulness
Some people are doers, others thinkers and most a combination of the two. At one end of the spectrum are those who are very task orientated and get on with the job without stopping to ask why they are doing it. At the other end of the spectrum are those who are mainly thinkers, but often quite theoretical, with too little practical experience to shape their analysis.
It is often those who are practical but also continually questioning and challenging conventional views and learning lessons from every experience, who tend to develop consistently sound judgement.
Self-confidence and courage Many people with good judgement are confident in themselves, comfortable in their own skin, with nothing to prove and nothing to lose, hence their thought processes genuinely explore the evidence and the circumstances, unconstrained by other pressures. They have the courage to say what they think appropriate (not what the recipient wants to hear) and are purely focused on the issue under consideration, from the perspective of the people affected. A famous French philosopher said “I am at my best when I dare to tell the truth and the older I get the more I dare!”
Strangely enough, the absolute reverse can also apply. People who lack confidence, but feel a huge duty or responsibility, will spend many hours exploring every possible angle before reaching a decision. Over the years they can acquire a depth of experience and wisdom which far surpasses those who take a more superficial view.
Communication skills
Sound judgement has limited value without the communication skills firstly to listen effectively and then to help family members make a decision. A skilled communicator will give considerable thought to the presentation of the arguments, perhaps from a variety of different perspectives, in order to help arrive at a solution which all can accept.
But skilled communication itself depends on having good judgement, particularly the judgement to understand fully the perspective of others, to assess whether there are underlying factors which are undisclosed, and to predict the impact of ideas or arguments which might lead to a change of view.
There is hence a very strong reciprocal link and overlap between judgement and communication skills, but this link needs to be viewed with caution, as there are many brilliant communicators who can argue any case and would make an equally superb job of arguing the exact opposite!
CAN JUDGEMENT BE TAUGHT?
Given the value of good judgement, the obvious question is whether it can be taught, and if so why there are no exams and qualifications overseen by a professional association or institute?
Well perhaps there should be and perhaps decision making and judgement would be greatly improved if it was recognised as a skill which is complementary to, but quite distinct from, technical knowledge and experience? Most of us learn from experience, but some learn much more than others. As matters stand we tend to leave it mainly to chance.
Greater training and development is particularly necessary because of specialisation. In the past, those destined for very senior roles in banks, for example, had a broadly based training, moving from one division to another, which is rarely possible in a world where specialist knowledge is so highly rewarded.
Wealthy families may need to focus more specifically on how to encourage the development of good judgement both in their future leaders and their support staff in the family office.
CONCLUSION
Looking back thirty years or more, it is hard to believe that decisions of enormous magnitude and importance could be made on the basis of very slender evidence, with little by way of structured analysis. The presumption was that those making such decisions were very experienced and capable individuals, whose judgement was respected and could be relied upon.
In recent decades, the emphasis has shifted substantially in the interests of ‘professionalising’ the decision-making process. Business managers and advisers have been trained to make decisions on the basis of data, evidence and analysis, as opposed to intuition and experience.
As in all things, it is a question of balance and perhaps the pendulum has swung too far. We have come to believe so strongly in the process that we expect it to deliver the answer and have too often become scared of backing our own instincts, or even common sense. The reality is that however much data we assemble and however many processes we put in place, it is impossible to avoid the need for individual and collective judgement. It is a vital part of a family office to provide that practical wisdom, based on extensive experience.