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Apply Inversion Thinking to Avoid Business Failure & Improve Decision Making

August 17, 2020 / by Ben Cohen, FSA, MAAA

What is Inversion Thinking?

If you're familiar with the premortem managerial strategy, then you're on your way to mastering inversion thinking. 

Inversion thinking is the process of approaching a situation from the opposite end or with an upside-down approach. It's a powerful method for identifying and removing obstacles and dealing with difficult problems on your path to success. Inversion thinking is just one of the many mental models that exist, along with Occam's Razor concepts.

When we solve problems, most of the time, we approach it forwards. We define an important goal, lay out a series of steps to follow to reach that goal, and execute those steps in sequential order. Sometimes, however, thinking about a problem backward can help us reach a goal or solution when a forward-oriented method is ambiguous. 

Great Thinkers on Inversion Techniques

Stoic philosophers would employ an exercise called the premeditation of evils. They imagine their worst-case scenarios, get over the fear of those results, and create simple strategies for preventive solutions. 

The method of squaring numbers and doubling the size of a square was well known and documented in Plato's Meno. By reversing the process, Pythagoras was able to apply inversion to find the world's first irrational number, the square root of two. 

The wise German mathematician Carl Jacobi once said, "man muss immer umkehren," or roughly translated into English, "invert, always invert." Jacobi, a great algebraist, made it a habit and practice to solve mathematical problems by addressing them backward. But Jacobi inspired more than mathematicians to apply this inversed problem-solving technique.

Mathematicians, ancient philosophers, thinkers from different scientific fields, innovators, and even billionaires have adopted this approach to meet their own goals and solve hard problems. Charlie Munger, the business partner of Warren Buffett and Vice-Chairman of Berkshire Hathaway, believed in inversion and took Jacobi's math lesson and turned it into a way of life. 

Munger once said, "It is remarkable how long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don't we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead–through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities, and you will succeed. Tell me where I'm going to die, so I don't go there."

Even Buffett said, "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

How to Apply The Inversion Thinking Skill

We can apply inversion thinking via two primary methods. 

Method #1: Prove the Premises

In critical thinking, an argument is defined roughly as a set of statements, one of which is the conclusion. The others are the premises. An example of an argument reads something like this:

  • Premise A: Clifford is a dog.
  • Premise B: All dogs are animals.

The technique used here is gathering information and extracting the conclusion from it. Once these pieces of evidence are collected, we would be able to conclude.

  • Conclusion: Clifford is an animal.

By inverting the problem, you assume a conclusion and then work backward to figure out what conditions would have to exist to make the conclusion true.

For centuries, we assumed that the world was flat until a group of people wanted to test the legitimacy of that conclusion. They believed the opposite was true – that the Earth is round – and created a list of variables to prove the conclusion. 

If we assume the world is round, the following would need to be true:

  • We would observe ships slowly dipping over the horizon.
  • We would be able to travel west and arrive on the east coast.
  • We would see shadows of identical objects in different locations across the world, having different sizes and directions, despite being observed at the same moment.

After making the initial assumption and putting a list of proposed premises together, they confirmed the validity of the premises, thus proving the conclusion. Greek philosophers and the explorers of the world used inversion to verify that the Earth is round. 

Method #2: Avoid the Opposite

The idea of disproving the null hypothesis is a standard scientific method. Still, it can be applied in virtually any situation in our lives. The idea is simple: instead of trying to reach a goal or achieve success, figure out what you would need to do to not reach the target or fail and then don't do those things. To illustrate this, we'll turn to a famous bet in the world of finance. In 2017, Entrepreneur Magazine reported the end of a 10-year long bet: 

"In 2007, Warren Buffett made a $1 million wager with a hedge fund manager named Ted Seides, who worked at Protégé Partners. Buffett bet that a low-cost S&P 500 index fund would fare better than a collection of a Protégé Partners hedge funds. It seems that he was correct, a couple of months ahead of schedule.”

Many people take this as a lesson of conservative spending and frugal investing. The real secret lies in Buffet's ability to use inversion thinking to make better decisions. Going into the bet, Seides asked the question, "How can I win this bet and make the most money?" That resulted in him investing his $1 million in investments with a high potential yield, but more risk. From 2008 to 2017, the portfolio grew by 2.2 percent year over year.

Buffet walked into the bet backward. Instead of making winning and high returns his focus, he asked instead, "What would I need to do to lose this bet and not make any money?" Funny enough, the answer was the same as Seides: investments with high yield potential but higher risk. Because of Buffet's inversed reasoning, Buffet made the S&P 500 his focus. 

He applied inversions thinking, and the result was the S&P 500 growing by 7 percent year over year, leaving Seides 2.2 percent growth in the dust. The wisdom of Buffett here is best explained in his own words, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Or, as Shane Parrish at Farnam Street would say, “Avoiding stupidity is easier than seeking brilliance.”

How Inversion Thinking Helps Our Clients

We often apply inversion thinking in our work as actuarial consultants. One aspect of our work is collaborating with insurance companies attempting to price new products for the market. To aid them, we employ a strategy tool created by Dan Sullivan called the Strategy Circle. By utilizing this tool, we work backward by evaluating obstacles and formulating strategies to overcome them.

Common obstacles we encounter are:

  • Poor sales strategies and execution.
  • Unprofitable responses after sales are made.
  • Surplus strain, or having a large upfront investment for potential downstream profits.

Pricing insurance products is a complex issue, but by identifying and working backward from these goals, we can create strategies that avoid or mitigate these obstacles. Solutions utilized in the past for these common problems have included:

  • Raising or lowering rates
  • Adjusting upfront commissions
  • Reducing underwriting costs
  • Finding reinsurance partners

On the surface, it might seem like addressing these smaller problems to avoid obstacles makes the strategy seem simple and less like a strategy than expected. However, sometimes, the best solutions end up being the simplest solution.

If you’re interested in finding out how Inversion Thinking can help you and your business, contact us today!

 

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Topics: Insights

Ben Cohen, FSA, MAAA

Written by Ben Cohen, FSA, MAAA

Ben serves as Wakely Actuarial’s President & Consulting Actuary. He joined Wakely in 2002 and enjoys the variety in the day-to-day of his current role.

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