Create smart checklists to bring your ‘A’ game every time in institutional investing

Checklists are a concept that doesn’t even need a definition. We all know what a checklist is. But things can be both simple and powerful. I still remember those days when I was a student, doing all kinds of exams. There were always one or two questions, normally towards the end, which were quite tricky for me. I would normally spend one or two minutes assessing whether there was any hope for me to answer them correctly. If not, I ditched them completely. Instead, I focused the rest of my time on double and triple checking that the answers to the questions I was capable of answering were the correct ones. I normally did pretty well on those exams compared to my peers, despite a few of them actually cracking the hardest questions. That’s a lesson I learned early on. To excel in life, you don’t always need to be the brightest or have answers for everything. You just need to make sure that you get things right in the area where you do know the right answers. Checklists help us do exactly that in both our professional and personal lives. In case you don’t believe me, Atul Gawande, in his book The Checklist Manifesto, explains two types of mistakes. Mistakes of ignorance happen when we don’t know enough to perform the tasks correctly. This type of mistake is unavoidable. Mistakes of ineptitude, however, are completely avoidable. We make these mistakes because we don’t make proper use of what we already know. Failures in the modern world, as Gawande argues, are often the result of this type of mistake. A checklist is a simple but often effective way to protect us from these failures. The function of a checklist is not to improve skill or expand knowledge. It is a mechanism to improve outcomes by applying existing skill/knowledge properly. It is about bringing your ‘A’ game consistently. This ought to be valuable to decision-makers in any investment organisations. Decisions made in a competitive landscape need to provide competitive edge. Skill is not the only source of that edge. The edge can also come from making fewer errors than your competitor does. So what does a good checklist look like? As with many things, a checklist doesn’t come with a manual. It involves understanding the specific context and the needs of the users. Justin Fox, in a Harvard Business Review article, talks about different types of checklists in different kinds of situations. A task list, for example, is a step-by-step guide of standard procedures that need to be followed in the correct order. It is suitable for tasks that involve a lot of detail to remember, but not a lot of judgement to make. A discipline list, on the other hand, lays down the procedures we want to follow, particularly for those moments when our judgements are likely to be swayed by emotions – be it excitement or fear. Good checklists don’t spell out every step of the process – they are NOT making the decisions or “flying the airplane” for you. Their primary purpose is to serve as a reminder of the critical steps that are often missed by even highly skilled decision-makers. My hunch, backed by many members in Thinking Ahead Institute, is that checklists are under-used in the investment industry. In fact there is a reason to believe that they are under-used in all industries. It is simply not very compatible with our ego. Experts can have a hard time admitting their own fallibility and struggle to believe something as simple as a checklist can help them make better decisions. There is therefore an argument to institutionalise the use of checklists as standard operating procedure. And that requires organisational buy-in. It would be a futile exercise if merely seen as a box-ticking exercise. Another pushback I have often heard is that checklists may introduce rigidity to the investment process that dampens creativity and adaptability in judgement, which is crucial to deal with a very uncertain and fast-changing environment. This is why I think it is important to understand that different types of checklists are used in different situations. Discipline lists, using Justin Fox’s taxonomy, are a more appropriate type of checklist in investment decision-making, as opposed to task lists. In this type of decision-making, the greatest value of a checklist comes from creating and embracing a culture of discipline, to protect us from overconfidence and emotion. Not to take us through a process step by step. And let’s not forget that an investment organisation makes a wide range of decisions, across the areas of business, investment, operations and people. I can clearly point to the value of intelligently using other types of checklists such as task lists in areas where there are a large number of routine tasks, eg due-diligence of an investment manager, managing counter-party risks or some HR decisions. I have a strong belief that using checklists properly makes us a better decision maker. We don’t suddenly become more knowledgeable; we just apply what we already know more consistently with the help of checklists. Sounds magical? Maybe. But that is the point of checklists.