Best of Pre-Mortem Analysis: Gary Klein

I'm Ted Seides, and this is Capital Allocators. For the second year, our summer series will share some of the best episodes of the past, curated from our favorites and yours. You can pull down many of the great ones on our Spotify playlists. This series pushes them to your regular listening feed. Our 2026 summer series focuses on improving The investment process. Over the next 6 weeks, we'll share 10 gems from interdisciplinary skill sets that will help you level up your investing across decision-making, interviewing, storytelling, negotiations, and habit formation. This week's summer series covers the premortem analysis with its founder, Gary Klein. Gary discovered premortems while working with fighter pilots and wrote a white paper applying the tool to investment analysis alongside Paul Johnson and Paul Sonkin.

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Gentlemen, thanks for joining me. Nobody wants to respond. There's too many people in the room, huh?

He said it's always a pleasure.

Thank you for inviting us.

Gary, I know Paul and Paul have been on the show before, so I think it'd be fun given that they were bringing you to the table for this paper we're going to talk about. Why don't you go through your background and areas of interest?

Sure. So I'm a cognitive psychologist. My primary area of interest is expertise. How do people become highly skilled? And that started in the mid-'70s. And when all of a sudden the Arab oil embargo hit and you had all these pilots— I was working as a research psychologist for the Air Force at the time. All these pilots used to fly as much as they wanted. Now they couldn't because jet fuel was too expensive. And so they had to learn in simulators, which they always had considered considered as toys, but now they couldn't anymore. And so my job was to figure out what is expertise and how do you develop it, and how do you develop it most quickly.

How'd you first get interested in that field?

It was a requirement of the job. We had to help these pilots. They were— they were sort of desperate to find out how do we design simulators that are going to allow us to become as skilled as we used to, because we can't fly nearly as much.

And what did you find in that initial research?

So I'll tell you a story. I was doing a project and was down at Tyndall Air Force Base, and there were these two fighter pilots, F-106 pilots, and we were working on a simulator during the day. And at night, one of the evenings, we went to a bar because that's where they usually went after we finished in the day. And they said, "Can we ask you a tough question? We're supposed to be developing training, and there's a system called instructional system design, and it's very procedural and takes a task, break it down into the components, and that's the way you teach it." And I said, "Okay." And they said, "We're the ISD specialists for our group." And I said, "Okay, that's nice." "And we're building the IOD specs for how to perform a lot of our flying tasks." And I said, "Okay, so what's the problem?" And they looked around to make sure nobody was overhearing them, and they said, "Well, we've written all the specs, but we don't follow any of those rules. That's not the way we fly." So I said, "Okay, just write down the rules you follow." And they said, we don't follow any rules. We just know what to do. And that's what I've been hearing time and time again from firefighters and others, that there's a belief that you just follow rules and procedures. For complex tasks in ambiguous situations with lots of uncertainty, there's no set of rules that are sufficient. And expertise is not about just incorporating all the rules. Expertise is about building tacit knowledge. And that's the core. That's the primary thing that I've learned is is how to go after tacit knowledge.

We hear a lot about checklists and Atul Gawande's Checklist Manifesto. So how do you blend the necessary tasks with the intuition that comes on top of that?

Right. And that's an important part, is that it is a blend. And Gawande, you know, comes up with these great checklists, but in the book, he describes how much work it is to come up with a reasonable checklist. And you can't have too many items. You can't make it too complicated. And so there's a real art to coming up with a checklist. How do you blend the other You break people out of the mindset that my job is simply to learn the rules and learn the procedures. And a lot of people do have that belief, and you gotta get 'em out of that mindset and get 'em into accepting that life is too complicated and they're gonna be encountering situations that none of the checklists have prepared them for, and they better be adaptive and resilient in order to handle them.

If we go back then to— you're doing this research to try to distill, you know, how to help these fighter pilots in simulators, and then you're— you learn that, well, the real way that they do it, the real way they develop expertise is in their heads. What do you do with that as a conclusion to research?

Well, there was no conclusion for the work with the fighter pilots because we were building simulators. So we just had to make the simulators as effective as possible. Now, the fighter pilots and the whole community had the belief you had to make the simulator look as much as possible like the real thing. That was wrong. It doesn't have to look like the real thing, and you don't have to to waste a lot of money on that. You have to have really good training scenarios that put people through their paces. And so that was the big aha from that project. But where the expertise work came in was much later when I started studying decision-making. And up to that point, there was a belief that a rational decision-maker lays out all the options, lays out all the evaluation dimensions, rates each option on each dimension, and so forth. When's the last time you ever— I mean, people sometimes do it, but it's very rare and it's not an adaptive strategy. But that's what the field thought was the gold standard because the field had mostly studied college sophomores handling unfamiliar tasks in laboratory environments. And so the field hadn't studied experts. And so because of my interest in expertise, I was able to look at decision-making and say, where's the expertise here? And that was the formulation for my Recognition Prime Decision model and the discovery we made is that people don't generate lots of options and use lots of standard evaluation dimensions. They use their experience to size up situations very quickly and to identify what's going on, what's likely to happen next, what can I accomplish, and what should I do about it? And then to evaluate it. That's the intuitive part. But there's two parts to the model. The evaluation part was mental stimulation. If this is what I think I should do in this situation, Let me imagine doing it in this context and see if it works. If it works, I'm fine. If it almost works, I can improve it. And if it doesn't work, then I'll go to the next option in my list. And so we came up with a different model of decision-making, and that's probably the accomplishment in my career that I'm the most pleased with.

As you discussed that and looked at different applications, were there areas where it was highly effective and others where it's less effective?

We haven't found many areas where it's not effective. And we looked, we said, we're not teaching this strategy. This strategy describes what people naturally do. So we said, maybe it doesn't get applied when there's less time pressure. So we looked at non-time pressured situations. We looked at designers and they still were predominantly using a recognition strategy. And then we said, maybe if you don't have much experience to begin with, it's not a strategy you'll use. So we, we looked at novices, we looked at soldiers at Fort Knox, tank commanders who hadn't really had much experience in tanks. And we said, "What about them?" They were the group we've seen that did not use recognitional decision-making. They did look at options. They tried to identify the best option from a set. It didn't help them. They still did a terrible job, but they had no basis in expertise to use recognitional strategies.

Once you identified that the recognitional strategies are the way that people go about making decisions, how did you then study different ways that people can improve their decision processes.

That's where it really gets important, isn't it? What can you do about it? And so for maybe 10 or 20 years, we were looking for how do we turn this into training and into preparation so that we can help people become better decision makers? And we came up with nothing. And so it was very discouraging. And then about 6 or 7 7 years ago, I was exposed to a technique that we call the shadow box, which is a technique that we've been using it for the last 5 years. And it wasn't developed by me or my team. Developed by a guy named Neil Hines, who's a retired New York Fire Department battalion commander. And he had developed this in the wake of the 9/11 attacks, and how do people handle situations that no training could have prepared them for because nobody could foresee them. And the way shadow box works, it's a scenario a scenario-based approach. So I'd give you a scenario and we'd walk through the scenario, and then at a certain point I'd stop and I'd say, okay, Ted, here's 4 options of what you can do at this point. Rank order them and write down the rationale why you rank ordered them. But it's not just about the options. We may go a little bit further and then I'd stop and I'd say, okay, Ted, here's 3 goals that you could be pursuing. Rank order them in terms of what's the most most important to achieve to the least, and write down your reason. And then we might go a little bit further and I'd say, here's 5 different kinds of signals and pieces of information that you might pursue. Rank order which you would go for and why. And on the side, we'd have a set of 3 to 5 experts who've gone through the same scenario. They've done their ranking, they've written down their rationale. So after you, you come up with your ranking, then we say, here's what the experts ranked, and you want yours to match the experts. But more important, you look at what the experts saw. So this is really how to see the world through the eyes of experts. But the experts aren't there 'cause we already collected their data. So we don't have to gather them and schedule them or anything like that. And you see what the experts noticed in the same scenario you read. And you see the inferences they drew and all of the warnings that they spotted and things like that that you just went right past and you didn't notice. So that's how Shadowbox works.

Think about how you could revolutionize the Harvard Business School case studies. And it has enormous implications for training security analysts. And Ted, you can see why from what Gary's been talking about that I think that— and that's why I was attracted to Gary's work, because it's directly applicable in so many different ways to the jobs that portfolio managers and security analysts do.

You've now set up this framework with the shadow box where someone can go through a specific scenario and then have an expert way of assessing it. Is that just a specific training tool for certain scenarios, and where have you seen that applied?

Okay, so we've applied it to panel operators in petrochemical plants. We've applied it with caseworkers doing child protective services. We just did a project on systems integration specialists trying to get younger engineers up to speed faster in that area. I'm gonna be talking to a hedge fund. They're interested in, in shadowbox. So we've applied it in a variety of areas.

Interesting. And what are some of the other tools that you've seen along the way?

We have a method for cognitive after-action reviews who have noticed— Cognitive after-action reviews. After-action reviews. Right. So it's called CARGO, Cognitive After-Action Review Guide for Observers. And the idea here is a lot of times After a situation, after you've had something go well or go poorly, you do an after-action review. And frequently, the after-action review is, "You did X and you should have done Y. If you had done Y, things would have turned out better." But it doesn't get into the cognitive part. When you chose X, what were you seeing? What were you interpreting? In hindsight, what could you have been looking at? And so, trying to get into the person's head to see what they were considering at the moment that they made their judgment and decision rather than just saying X is better than Y. So that's, that's a method that we've been using now. Then there's also the pre-mortem method that we developed, gosh, about 30 years ago. And it's probably the best known of all the techniques that we're using.

What was the first insight in pre-mortems?

So let me just tell you what the pre-mortem is. So the pre-mortem is sort of a risk assessment method. And the idea is to try to anticipate what could possibly go wrong with a plan. And when I had my company, I had my research company for about 27 years till I sold it in 2005. And we had grown to 37 people by that time. And at a certain point we said, we have a lot of projects that go well, but not all of them. And some of them don't go well. And we do a postmortem after it's finished. May help us in the future, but it doesn't help us with the project that finished. Why don't we try to move that up front to the kickoff meeting? And the analogy would be like in medicine, in healthcare, you do a postmortem after a patient dies to find out why, and then the physician can discover what killed the patient and let the family members know so they also gain. And if it's something interesting, they can write it up so everybody Nobody benefits from a postmortem except for the patient, of course, the patient is dead. So the idea of a pre-mortem is let's anticipate what could happen at the very beginning of the project. So we started doing it with our own projects. We would add this and it doesn't take very long. We had added to the end of our kickoff meetings for a new project. And then in around 1993, we had an Air Force customer that wanted us us to lead an effort to build a complex piece of software for them. And there were a number of Air Force engineers and there were other team members who had algorithms that were gonna be included in this tool. And we said, okay, at the end of this kickoff meeting, we're gonna do a premortem, 'cause we had really gotten to like the method. And our contract monitor said, absolutely not. He hated the idea. He said, it's gonna be I don't want to do anything that might reduce people's confidence and enthusiasm. And we said, this is the way we do things. You hired us to run the project. This is the way we do it. So we have the meeting. The meeting goes for a couple of hours. It's the end, and we're going to do the premortem. And we said, all right, now let's go through the process. And the way the premortem works is you have a plan. Everybody knows what the plan is, and it's the team that's done the plan. Is going to do the execution. They're all primed. They're all ready to spring into action. And if I was doing a pre-mortem with you, I'd say, okay, now, now let's just step back a second. And I'm looking into a crystal ball and I might sort of imagine there's a crystal ball on the table in front of us all. I'm looking in a crystal ball and it's now 6 months in the future, maybe a year.

Oh.

I don't like what I see. I see a disaster. This plan has failed. It's been a complete and embarrassing failure, and the people on the team don't even make eye contact when they pass each other in the hall. It's been a really big disaster. All right, we know the plan has failed. Now everybody around the table, take 2 minutes and write down all the reasons "why this plan failed." And everybody starts writing madly. And then at the end of 2 minutes, I stop them and I say, "Now let's find out what people wrote." And I go around the table and I start with the project lead to see what that person came up with. And then we just continue around the table like that until we get all of the items that people had. That was fairly depressing. So we added another step after we finished compiling it, which is, now that we've seen all the things that might go wrong, that could go wrong, everybody take another 2 minutes and write down what you individually could do to prevent some of these things from occurring. And so people go through that, and that sort of is a mitigating factor. So we did the premortem on this project, this Air Force project. And we got to one person. He was, I think, a captain. He was the most junior person at the table. His specialty was information technology. And we got to him. He hadn't said a word during the entire meeting. And we said, "What do you have?" And he said, "Well, I'm looking at the algorithms that people are describing, and they're really powerful algorithms to do the job. And they run on a supercomputer, and they take a day or two." And we're talking about putting this in the field, like during Desert Storm or something like that, to be used by a history major who graduated from Northwestern and is now in the reserves, and he's now thrust into this job. And at that point, he might have had a 486 machine or something like that. It just won't work. The software won't run on that machine. And everybody looked at him and realized how ridiculous the quest had been up to that point. And had we pursued the vision that was the sponsor's vision, it would have been a disaster. And instead, people said, "You know, I have a back-of-the-envelope approach that doesn't require a supercomputer, and it's not as good as a supercomputer, but it's like about 90%." And we said, "That's what we want." Interesting.

So there were a couple things you mentioned as you laid out how the of the premortem works. I want to see if you can talk about the significance of it. The first is you said there's 2 minutes for everybody to go around and write down. Is that just because you just threw out 2 minutes, or is there significance to that timeframe?

Trial and error. When we did this for a number of projects in my company, 1 minute was leaving people frustrated because people were still writing when they said time is up. When we tried 3 minutes, a lot of people would be finished and they'd they'd be twiddling their thumbs and it would reduce the energy of the room. So 2 minutes seemed to be the sweet spot.

Okay. And then you said when people start discussing what they wrote down, the leader comes first.

Right. And the reason for that is people don't know how candid to be. And the leader is going to set an example. And if the leader picks something that's frivolous or trivial, that tells people not to take it seriously. So it's really important for the leader to come up with a real problem that hadn't been discussed before.

Now, if you are conducting a premortem on the premortem process, what are the things that will commonly go wrong that makes a plan of a premortem fail?

Well, that's one of the reasons that I've been writing this piece with Paul Johnson and Paul Salkin, we see people making mistakes. There are ways that the pre-mortem will fail. First of all, if the leader doesn't have buy-in, then the leader will come up with something trivial and everybody knows they have to not surface their prime concerns and choose something that's safer and minor. So that's one part. We see pre-mortems fail when the person who's facilitating will say something like, like, okay, we've seen the plan, let's do a pre-mortem. What could go wrong with the plan? That's the wrong approach. What can go wrong with the plan? That's a typical critiquing approach. You can't say what could go wrong. You say, I'm looking at a crystal ball, the plan has failed. There's no doubt. That changes the mindset that instead of just sort of musing about it, now you're seeing a disaster and you're now in a mode of what caused that disaster. It changes the kinds of issues people identify.

Why is it that it changes it?

There is a study from 1989 about perspective hindsight that giving people the perspective of a future situation where something that is counterfactual has occurred all of a sudden opens up access to kinds of thinking and speculation that people ordinarily wouldn't engage in. And the metaphor I have is like an eclipse. Right now, if we stare at the sun for like a quarter of a second or so, it's really bright and we look away. But during the eclipse— and I had a chance to see the eclipse a year or so ago when it happened— when the eclipse occurs and the moon blots out the sun and you look up and you see the corona, you see all of these these trails streaming out of the sun, and it's just gorgeous. And I had these issues I wanted to study during the eclipse, and I was just paralyzed by the beauty of it. But it was all invisible because the sun is so blinding under normal conditions. The pre-mortem is a sort of a way of blotting out what you normally think about and your enthusiasm for carrying out a plan. And so you, you need to cover that up. So that these other issues can emerge and become visible.

That was what we tried to do in the paper, was kind of tie some of these concepts back to research that's been done. But as Gary said, you're reframing the problem, and then it's easier to find a reason for why something has happened, why the project has failed, as opposed to developing different scenarios of things that might happen. So it just kind of shifts the mindset. It's very nuanced and it's very subtle. And that's why we feel as though the pre-mortem is misused because they'll just say, "Okay, what could go wrong?" And they think they're doing a pre-mortem, but just that subtle framing kind of kills the effectiveness.

I think there's one more thing that we sort of swept under the rug is that Gary says at the end of the meeting, You pause, take a deep breath. We're talking 15 seconds. And then you say to people, "You have 2 minutes to write down why the plan failed." And no one has a problem writing down 2 or 3 reasons. And that, to me, is so important because we've given them 5 seconds to think about it, and then 2 minutes to write, and everybody is scribbling things down. So that knowledge is in the group at the tip of their tongue. They're thinking about it all through them planning meetings, and nobody brings it up. And the pre-mortem allows you to change the mindset. As Paul said, it failed. Why did it fail? Then you give them 2 minutes and you get to take the number of people in the meeting, multiply that by 3. That's how many reasons you're going to get why it failed, none of which were brought up at any point in the planning session, and certainly none of them were brought up in the approval process. For me, the power of the pre-mortem is we're now allowing people to express their concerns, that they've had all along that they've been afraid to bring up. And I think the thing for me, I think, Gary, I 100% believe, agree with you that if the leader doesn't take it seriously, everybody hides. But the most important factor for me is psychological safety. So psychological safety is the notion that it is safe to say what you're most concerned about. This captain in the example said, this just isn't gonna run. Would've been very easy for him to sit on his hands and not say anything. And yet if you give him permission, he brings up the most critical issue, change the plan completely.

And he hadn't said a word in the whole meeting up to that point.

And that to me is the power.

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And now back to the show. How do you encourage that psychological safety in the context of running the pre-mortem?

We describe what the pre-mortem is going to do. And if it makes the organization too uncomfortable, then we might simply not bother, not waste our time doing a pre-mortem. So it, it takes courage for an organization to say, okay, let's do it. But organizations have learned to trust us and they've seen the results of what happens when we describe other pre-mortems that have occurred, like the story that I told you. And they said, we want some of that. But you're certainly challenging a culture and a culture of intimidation where people don't like to speak up because of the issue of psychological safety. One of the benefits of a pre-mortem is it starts to change a culture from a culture of hiding to a culture of candor, where we've been able to, to voice these concerns in a safe place because, you see, If I run a planning session and then I say, okay, does anybody have a problem with our plan as we're getting ready to implement it? We've just built a plan. It takes a lot of courage to say, well, here's why I think the plan isn't gonna work. It essentially means we're all idiots or we've been wasting our time. So that's really hard to do and people don't wanna do it. On the other hand, with a pre-mortem, The contest is to see who can come up with the most clever and worrisome issues that haven't been discussed at the time. So the whole incentive system changes, and now people are competing with each other to come up with really insightful problem areas that haven't been voiced before. It's amazing to see how it happens.

And I think that subtlety, and I think what Gary just said is really important, is none of us really like counterfactuals. But I've learned on your podcast many times that the counterfactuals are your best friend. As Annie Duke likes to say, "We're trying to get to accuracy, not to being right." Well, if I'm in a meeting and there's a lot of momentum and everybody's excited and I raise my hand with a counterfactual, I'm really putting myself at risk on many levels. I may be wrong on top of it. This is a concern I have we should probably address, but if it ends up being a wild goose chase, now all of a sudden I've exposed myself. The pre-mortem, you flip that. Now we're gonna have a contest who can be the most clever the most insightful, who can come up with the most serious risks that we've not talked about. And what I found when I've run my premortems, that little subtlety is shockingly powerful because people all of a sudden now it's no longer career risk. It's sort of like, oh, how clever can I be? How insightful can I be?

This is how you show off.

Yeah. Whenever I read about, whether it's in your paper or Gary's story about this fighter pilots, it's always, the introverted person who doesn't speak up, who seems to have the insight that's the mind-blowing insight. So how do you get that person in the room to consistently be part of the discussion?

Well, that's another part of the rhythm of, of a pre-mortem, is that we go around the table and everybody gets a chance.

Not only gets a chance, has to, has to.

Everybody has to to come up with something and is expected to. And so that's a part of it. There's also a structure that as I go around the table, I say, "Okay, Ted, what's the top of your list?" And you tell me what you have. And then I'll say, "Paul, what do you have on your list that Ted hasn't already covered?" And we do it one at a time, one item at a time. So you don't get to give your entire list. And there is some dynamic in some groups where people who are extroverted rather than introverted, they want to take more than their allotted time. They want to be able to tell you their whole list. They want to sort of go on. And that's not gonna work 'cause everybody else is waiting. And so this is a way of controlling them and giving everybody equal airtime.

You create democracy in the group. You force democracy. Everybody has to vote, which gets that introvert to actually say something, and often a very good insight.

Is there significance in the process to writing down that first response, as opposed to it being an open, but person-by-person verbal session?

It's too easy to say, "Yeah, I thought of that," or just not to keep track of what you had considered. So this really forces each individual to go on record, at least on the paper in front of them, and write down what their ideas were.

You also get that production blocking and that, that people, if they don't write it down, they'll forget. So it's a lot in the cognitive science that there is importance to writing it down as well.

There's one more issue here. By having people write it down, then they're each working independently. So I'm not influenced by what other people are saying. These are just my own ideas.

Are there any other features of the pre-mortem that are kind of essential to making it work?

What we've done a lot of work on is the wisdom of crowds and cognitive diversity. And we think that if you think about an investment committee meeting where they're discussing a stock idea, you have senior people and you have junior people. And the junior people, like, fear stifles ideation. So they're afraid to say anything because they've only been there for 6 months and the portfolio manager's been there for 20 years. And as Paul said, they could be wrong and they don't want to look stupid, so they keep their mouths shut. When you think about all of the money that firms spend on that talent, it's wasted because there's a lot of cognitive diversity that is lost if these people don't articulate what they're thinking. And that also happens when you get the conversation which is dominated by one particular individual, is that that cognitive diversity is lost.

And we once did a study where we had 4-person teams going through an exercise. And let's call it a garden path exercise, where we introduced something at the beginning that made it seem that certain thing was going to happen, and everybody was preparing for it, but that was wrong. We were trying to mislead them. And then we dribbled in cues to indicate that it was something else going on. And we wanted to see when the team would get off the garden path. We ran 7 teams. None of them got off the garden path. The initial assumption held for the entire session. So that was a failure. But we had each person keep a diary of what they were thinking. And we found that in every team, at least 1 or 2 people had noticed the anomalies and had worried about it. So the knowledge was in the team. You might say the subconscious of the team, but nobody said anything. And so that's the kind of fear that we're trying to overcome.

And I think if you get back to the diversity cognitive diversity comment is that the more people you have in the group that bring a different perspective, the more cognitive diversity you're gonna get almost by nature. And so if you create psychological safety, you do the pre-mortem where you force everyone to contribute, people are gonna come up with their own. If you have this cognitive diversity, you're gonna get a broader list of items. I ran a pre-mortem a year ago on a project we were gonna launch. 27 people in the room wrote 27 things down on the first pass. 5 of them were path critical. Of those 5, I'd only thought of 1. And so I was blown away because I was team leader. I took it very seriously. We wrote stuff on the board. I was like, I hadn't thought of that. That's a really good one. And it's that power of getting the cognitive diversity, forcing the interaction, forcing people to contribute. And the 27 things, 5 of them who cared, 5 we'd kind of thought about already. And then you start to get into some really good stuff. And there were 5 that were path critical, like the computer in the Army thing. That we're gonna kill the project. I hadn't thought of 4 as a team leader, and we hadn't in the process. We'd had a very long process. So it was just very powerful, the combination of the 2.

Ted, as you could see, as we're going through this process, there are like 4 or 5 really nuanced things that if you don't get it right, the premortem doesn't work, and they're very subtle. So just something as simple as, having each person say one idea, or that problem reframing, saying that the project has failed, or requiring each person to say one thing. If you don't get each of those steps right, it doesn't work.

So let's say we do it the right way. We take our deep breath for 15 seconds, and we've got 2 minutes of writing it down, and the leader starts, and we go through this, and now we've got 27 ideas on the on the board. But Paul, as you said, 4 of the 5 important ones you hadn't thought of.

Great.

What if the real issues were in the other 22? So how do you know when you go through this, or more importantly, when you go through and you've got all your ideas on the board, how do you then make sure that you are using those ideas to improve the process?

So after you get everything out in the open, that can pretty much end the meeting. Then we do another phase. What ideas do people have for mitigating that? But then the team leader takes all of that material and goes away and thinks about it and sorts through and said, might say, okay, this one, hmm, I was ready to dismiss it, but now that I think about it, it might be more important than I imagined. So there's a subsequent phase of replanning and reassessment using all the material.

The other thing is that there's no system that's foolproof. So going back to Rumsfeld, that he said that in terms of risk, there are the known knowns, there are the known unknowns, and then the unknown unknowns. What the pre-mortem does is you're trying to take those unknown unknowns and make them known unknowns and reduce that. But you're still going to have unknown unknowns.

And the key is, is that But you're never gonna eliminate all of them. But you learn so much in this process, and it doesn't require much time or energy or investment, that it's borderline free, and you do pick up a bunch of things that you didn't have before. I guess if you could invite God to the pre-mortem, we could get everything. But short of that, the list is gonna be so far expanded that if it's really a critical plan, you could do a second pre-mortem. Replanning, come back in a day, a month, or whatever it is, do another pre-mortem after time has changed. You're never going to be 100% foolproof. There's always going to be some unknown unknowns, but you have mitigated an enormous amount of risks, and we think that's incredibly powerful.

There are a bunch of other techniques that we see investment teams use to try to mitigate risks upfront. What are some of the— your favorite ones in addition to pre-mortems, or, well, some of the ones you don't like as much?

Let me start with the ones I don't like that much. So one of them is the devil's advocate. Devil's advocate approach, which gets a lot of publicity. I'm only aware of one study that tried to evaluate the effect of a devil's advocate to see if it had an effect. And they got a significant result. It was significantly worse than not using a devil's advocate. And the reason seems to be, if we're a team and I appoint somebody to be the devil's advocate, then I don't know if the person is coming up with these ideas because they're of genuine concern because that's the person's role. But I assume it's because it's their role and they don't really necessarily believe in it. So it's easy to discount the devil's advocate. It also means I don't have to be critical. I've outsourced it to a devil's advocate. So that's not healthy for a group.

Oh, so one thing, and I guess I call devil's advocate Dr. No, and that's the role that I've played within organizations or have tried to create. And you're a skunk at at a picnic. And it's just, you piss people off and people don't like it. The other thing is that if you just have one person do it or a small number of people, you're really losing that cognitive diversity of the organization.

Right. And so what you want is for people to articulate genuine concerns, which a devil's advocate doesn't, and want to have the psychological safety to be able to articulate that. Another approach is to use red teams, and that's a very powerful method, and certainly a very impressive one. I like the method of red teaming, bringing in outsiders to review it.

How does the red team work?

There's a great book by Bryce Hoffman called Red Teaming about his observations of an Army unit at Fort Leavenworth who was set up to do red teaming. You just bring in outside experts who haven't been involved in preparing the plan so that they can do the critique. Boutique. And so they have different kinds of expertise. Now we're talking about diversity. And they don't have the investment in the plan. They don't feel like they have to make the plan work.

And the problem with red teams, particularly in the investment businesses, since we're making decisions almost daily or certainly fairly frequently, having a red team coming in and prepping them is probably prohibitive in terms of time and energy. Works really well on a big plan, works really well where there is outside expertise. You can bring in to influence it. But when we're making decisions in more in process on a regular basis, investment decision, you just couldn't scale it in the right way.

That's an important issue is what kind of effort is involved for a pre-mortem. If you took 2 hours to do a pre-mortem, that would be terrible because people don't have that time. So they wouldn't use the pre-mortem very often and it would reduce the energy and then people would be sitting back in their chair rather than leaning forward, ready, ready for their turn in the barrel to be able to say, "Here's my best salvo against this plan." Premortem should take no more than a half hour, maybe 20 minutes. If it goes for an hour, that's too long. So there's a virtue of keeping it really brief 'cause that compresses the energy rather than dissipates it.

And when you think about it, in the investment process, like if you buy a stock that goes wrong, is so painful that if you could just eliminate a small fraction of the mistakes, it makes your life so much better. And the batting average with investments, it's like 55% for someone that's a hero. So if you just make one or two less errors over whatever time period, it's a total win. And it's not a lot of time.

Another technique is risk assessment. And there are a variety of risk assessment methods and a lot of a lot of research has gone into potential risk factors. And so having people systematically go through all of the risk factors, and that's strikes me as fairly mechanical and fairly insensitive to context because it's the same factors all the time. Whereas for pre-mortem, you're looking about what can go wrong with this plant in this context, in this situation. And so that's gonna be always changing.

So Gary, as you're going into any type of organization, and you're pitching them on doing a premortem, how do you describe what the benefits of the premortem are to those organizations?

First of all, we have collected some evidence about what happens to confidence when you use a premortem. And we compared it to other methods like listing pros and cons, listing cons, just offering critiques. Offering critiques seem to have have no impact on reducing confidence. Listing pros and cons or just cons reduced confidence, but the pre-mortem reduced confidence more than any of the other techniques we measured. So that's one of the benefits.

And I think, Gary, what you mean by that is overconfidence, right?

Overconfidence.

We're trying to reduce the hubris in the group that we figured everything out, the plan's perfect, let's go, nothing can go wrong. So any kind of critiquing method is about reducing overconfidence, increasing the humility, and recognizing that things can go wrong.

Thank you for adjusting that.

You don't have a lot of overconfidence on Wall Street.

So we assume overconfidence is pretty much the norm in many settings. And so pre-mortem has that effect. A second effect is it changes the culture to some extent to one that accepts candor. And so that where people are, feeling that they can speak out. And of course, they have spoken out with their bosses and supervisors present, and the world didn't change. They didn't get fired.

I think one of the follow-ons is you do a couple of pre-mortems, which I have now done, you get to the point where you realize it's so incredibly powerful, you're sort of an idiot not to do it. It's not very much time. You're tapping into your group. You're building confidence within the group to be candor. You're getting more honesty, more transparency. The group dynamic improves. I've failed to find anything that hurts because it's really talking about a half an hour, 45 minutes time commitment. So even that time commitment, that after you've done a couple of them, you get groups that refuse to not do them. Right? We're not going to make a decision. I know you're this, Gary. I know you feel the same way. I'm at the point now where I won't— any plan I'm in, small or big, I won't go forward without a premortem. It's just once you've done 2 or 3 of them, it's so powerful. You sort of like, Why would we not do it? And then that increases the dynamic in the group. Everyone is now more candid during the planning process. We've gotten to the point where the premortem is sort of not that important because we've been really critical in a very constructive way along the process. We still do it, but at the end, it's this sort of sense of confidence. We're being a much more thoughtful group in sort of figuring these things out. That, I think, is the real benefit as you start to do them. You do one that works well, I don't think you ever go back.

And another advantage is you make the group smarter because now we're listening to each other and realizing I came up with one. I'm looking at you, Paul, and there were 4 others that I didn't come up with. So at the end of that session, you were smarter, you were more sophisticated, your mental model was richer. And you also have a chance to see somebody who maybe didn't say a word, that they really, even though they were sitting there quietly, they were thinking and that they have something to offer and it would've been missed otherwise.

Great. Well, we've mentioned this paper and we'll certainly put a link to it. Where is this paper sitting today?

We've published it in a fairly academic structure. It's called "Rendering a Powerful Tool Flaccid: The Misuse of Premortems on Wall Street." We put it out into the wild. We want people to read it. We want people to use it. Certainly we will consult with them if they have any questions in any way. In a more formal setting, Paul or I will certainly when they come into an organization. Gary loves doing these, so he's available, but he's the busiest man I know and he lives in Washington, DC, so a little bit harder. I teach this at Columbia Business School, so if somebody's interested, they can come when we talk about premortems for that lecture. Yeah, our goal is to just give this away to everybody as much as we can.

I guess we haven't officially released it into the wild yet, but we would have it on our website, pitchtheperfectinvestment.com, and then we'll also try and put it on a, SSRN, so it'll be available to the masses. And we're looking at different academic journals to possibly get it published, but we're just not sure if jumping through all the hoops and actually getting it published helps.

All right, speaking of which, what's happened to Pitch the Perfect Investment since you guys were last here talking on the show?

It's actually sold really well.

I'm gonna brag more. I, uh, Recently taught a class at Columbia Business School, was an investment class for one week. One of the students, very experienced hedge fund manager in Australia, was taking the class, just heard it was a good class. And he thought, you know, I might as well read a little bit of the book on my flight to New York. He thought it'd be great. He's read a lot, written a lot, very experienced. And he said he started reading it and he didn't stop until he read the very last page. So I've heard this from time and time again, people, particularly practitioners that say, you know, it's not really designed for me. Especially for a student, somebody coming out of business school, and they start reading it and they're like, holy smokes, this is fantastic. I've heard that now enough that I will repeat it. Whereas when we were on last time, it was just being launched and the thought was, we hope it's good. You know, people love it and I can't encourage, and I always joke with them, the book is $33 on Amazon. Paul and I each get a buck and a half. We'll rebate the buck and a half if you buy the book. But I really encourage people to read it because I think it's great. And I think that they walk away and they're like, holy smokes, Either it just reminded me of some of the things I knew, maybe it gave them an insight. So I can't encourage people enough, and I'm happy to rebate my royalty.

Great. Well, Gary, while we have you here, before we let you go, I want to ask you a couple of closing questions. What's your favorite hobby or activity outside of work and family?

There's a number that I enjoy. I like movies. I like to read. I like to jog. I like to play the game of Go. So that's pretty much it.

All right.

What's your biggest pet peeve?

People thinking that complex tasks can be boiled down into checklists and procedures, and you just have to follow the steps and you don't need expertise, and you just have to follow the steps and don't be an idiot. And that's just too shallow.

Doesn't quite work that way. No.

All right.

What reading do you almost never miss?

New York Times Sunday sports section.

How about what teaching from your parents has most stayed with you?

The idea that when you hit what looks like a barrier, rather than saying, okay, that's as far as I'm going on this path, often there's a way around it. And not to give up so quickly, but to look around and see, are there any leverage points? Are there any opportunities that I haven't considered?

All right, last one. What life lesson have you learned? That you wish you knew a lot earlier in your life?

When I see people make mistakes, instead of immediately becoming critical and impatient, to become curious. Why would somebody smart do something that looks stupid? Maybe there's a reason. Maybe I need to try to investigate further.

Great.

Gary, Paul, Paul, thanks so much for joining me.

Thanks, Ted.

Thank you very much for having us.

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All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.