In June 2016, I got the opportunity to attend Prof. Sanjay Bakshi’s workshop in Flame University. Prof. Bakshi’s style of teaching is remarkably unconventional. He uses a lot of images, videos and stories to explore ideas. Such method serves three purposes.
First, unlike traditional classroom lectures, Prof. Bakshi’s classes, from start to finish, are very interesting.
Second, a human mind is better at remembering information when it comes via multiple sensory inputs. Understanding of the concepts is much deeper when different sections of the neural machinery are engaged through visual information.
Third, stories make the information stick better. A message packaged in the form of a story has a longer shelf life.
One such video that Prof. Bakshi shared during his workshop was an old Hollywood movie called ‘12 Angry Men.’ It came out in 1957. The story is based on a drama written by Reginald Rose.
The jury system is designed to be a wonderful system for decision making. So, the movie has important lessons on decision making, thinking, and human psychological biases. Interestingly, there’s also a Bollywood version of the same movie titled Ek Ruka Hua Faisla. However, I suggest you watch the original 1957 version first. I guarantee that the 90 minutes you’d spend on the movie will be worth every second of it.
The story is about a 12-member jury team debating on a court case. The case concerns the trial of a teenage boy who allegedly stabbed his father to death. The judge has provided all the facts and the closing argument to the jury and instructed the 12 men to decide whether the boy is guilty or not.
Since, there’s a death sentence for the crime, the boy’s fate hinges on the jury’s ability to make the right decision based on a rigorous rational analysis. Like any other real-life situation, most jury members arrive in the room with their personal biases and preconceived notions.
To take stock of the initial standing, the jurors do voting among themselves and it’s immediately clear that the decision is already made in everyone’s mind except one person. When 11 of 12 people vote ‘guilty’ in the first voting, it looks everyone is in a hurry to get over with the discussion.
At the beginning of the movie, juror no. 7 excitedly announces that he has tickets to a baseball game in the evening and he intends to get over with the discussion as soon as possible. The problem was that no one in the jury would’ve been affected negatively if the boy didn’t get justice because of the jury’s hurried deliberation.
The movie subtitle captures this situation brilliantly – Life is in their hands, death is on their minds.
Now, imagine that the judge gave a condition – if it’s later found that the boy was sentenced to death unfairly because of sloppy decision making by jury, every juror’s son/daughter would be sent to the electric chair. With that mandate, wrapping up the meeting quickly would’ve been the last thing on every juror’s mind. It may sound like an extreme example but that’s how king Hammurabi ensured justice 4000 years ago – by guaranteeing Skin In The Game.
Lesson number one: Making right decisions demands skin in the game.
Having skin in the game shouldn’t be confused with having the incentives aligned with the positive outcome (as most CEOs have when they get stock options). Having skin in the game means being exposed (equally as other stakeholders) to both positive and negative consequences of an outcome which was made possible by your decisions/actions/approval.
How many so-called independent directors and CEOs today have their skin in the game?
When Satyam Computer’s massive accounting fraud was being orchestrated, these were Satyam’s independent directors –
- Vinod Dham (Famously known as ‘father of Pentium,’ an ex-employee of Intel, and now executive managing director of NEA Indo-US Ventures in Santa Clara, California)
- M Rammohan Rao (The dean of Indian School of Business, Hyderabad)
- U S Raju (Former director of IIT Delhi)
- TR Prasad (Former union cabinet secretary),
- Mangalam Srinivasan (A management consultant and advisor to Harvard’s Kennedy School of Government)
- Krishna Palepu (Professor at the Harvard Business School)
(Source: Business Standard)
Each of them received a sitting fee of Rs. 13 lacs, so their incentives weren’t directly connected to company’s profit. But that takes care of only one part of the equation, i.e., they didn’t benefit directly by making biased decisions in company’s favour. But what about skin in the game? Where’s the risk of losing hard-earned social stature and personal reputation?
When the Satyam scandal came out with Ramalinga Raju delivering his infamous “riding on the back of a tiger” speech, how many of these independent directors were publicly scrutinized? Were they fined for being ignorant?
When there’s is no reputational and/or monetary risk involved for being on the board, the most common behaviour exhibited by any human would be of carelessness. In the absence of skin in the game, most boardroom-decisions would be mediocre at best.
How about Kingfisher airlines? Who all were on its board when the “King of Good Times” fleet was grounded? Find it out. Treat it as your homework 🙂
So that argument was from the perspective of independent directors making decisions. But how can an individual investor use this insight to improve his/her decisions?
When you own 50 stocks and one goes to zero, your portfolio isn’t going to move down by more than 2 percent (assuming you had equal allocation for each stock). Which means you’re not really bothered about a couple of bad decisions for it’s not going to create meaningful damage to your net worth. However, when you run a relatively concentrated portfolio of 10 stocks, you’d be more careful about choosing those stocks. Won’t you?
In other words, over-diversification leads to no-skin-in-the-game. Without skin in the game, most people, like the juror no. 7, will usually be concerned more about the upcoming baseball game rather than the possibility of betting money on the wrong business.
Superficially, the concept of Skin In the Game may look like a case for morality in human transactions but if you go deeper, you will find that it’s a wonderful trick for improving our own decisions.
Anyways, let’s move on with our angry men drama.
In the preliminary voting, juror no. 8 (played by famous actor Henry Fonda) votes ‘not guilty’ which annoys everyone because the court wanted a unanimous verdict and this one dissenter was holding up everyone.
Juror no. 8 argues that the evidence presented in the case were circumstantial. He reasons that he cannot, in good conscience, vote ‘guilty’ when he feels there is reasonable doubt of the boy’s guilt. That’s a very robust way to analyse anything. Throughout the movie, juror 8 keeps planting the seeds of reasonable doubt in every other jury member’s mind, not to convince them but to force them to think harder.
Lesson no 2: When you start with an investment hypothesis, the job is not to find confirming evidence but to ensure that there’s no reasonable doubt left in your mind before you pull the trigger. Ignoring a reasonable doubt is being dishonest to a rational assessment. Twelve angry men is a great metaphor for various psychological biases that inhabit our mind. And our mind is that closed jury room where most voices in the head just want to get over with the task at hand whereas one lone voice of rationality (juror 8) is the one who shouldn’t be ignored when the stakes are high.
The final lesson that I took away from the movie was about the power of empathy. Right from the beginning , Henry Fonda’s character attempts to put himself in the shoes of the accused boy. The boy was a slum dweller and grew up being frequently abused. Fonda urged the jury members to imagine what it must have been like to live in a slum and grow up in a violent environment. How did the things look from the boy’s perspective?
Empathy is very different from sympathy. Empathy opens the door to different vantage points and reveals things which might have been hidden earlier. For an investor, it means looking at the business from the point of views of the customers, vendors, debtors, management, promoters and the society.
Stepping into others’ shoes will allow you to feel how a decision is likely to affect others and how it may impact things in the long-run. Empathizing makes you see the bigger picture more clearly.
Twelve angry men is a masterpiece. If you don’t want to watch it for its lessons, do watch it for the cinematic excellence that Sidney Lumet, its director, showcased by capturing the human drama created by opposing forces of rationality and irrationality.
Thanks for reading.