Chess Anyone? Rules for Decision-Making in Asset Management

Game of chess with king in focus

"Failing to consider second and third order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored."
—Ray Dalio

Many of us, including yours truly, take vacation during the winter holidays to spend the time with loved ones, relaxing, reenergizing, and planning for the upcoming year. After long days of going up and down the mountains in the northeast, I like to wind down by playing chess.

In chess, what may seem as an attractive immediate next move, may result in losing an important piece or even the game. Thus, it’s important to think through consequences of each action—possible move(s) an opponent could make, as well as your own follow up steps. Those who evaluate second, third, fourth and Nth degrees of permutations will win in chess.

At some point, I found myself reflecting that the game of chess is not that different from what we do professionally. Similar to chess, asset management executives must plan for the future several moves, or years, ahead. In both cases, considering what Ray Dalio called “the second and third order consequences” are critical to long term success. When making any critical business decision, thinking through not just immediate impact, but also through second, third, fourth, and Nth degree consequences could mean the difference between success and failure of a project, program, acquisition, and the organization as the whole.

There is no one way to look at second and third order consequences in asset management. Nonetheless, just like in chess, it is possible to methodically approach the decision making by considering these and similar questions:

  • What is your target state, overall goals and objectives?
  • What are your intermediary steps to get there, i.e., the roadmap?
  • Does your vision have support of all stakeholders?
  • What is the impact of your decision or action on: people, process, technology, and data?
  • Is the impact immediate to one stakeholder but requires investment from another?
  • Have we done this before? Do we know what we know, and what we don't know? 
  • Who is a believable party on each of these topics? 

The larger the project or program, the more complicated the decisions are as they result in more and more ripples throughout the organization. No example may be more pertinent than in an acquisition or merger. Often, firms get lost in the possible synergies, while overlooking the functional capabilities that each firm needs which may or may not overlap. Since the scale of the decision to merge has many second and third order consequences, this is a breeding ground for time lost and blown budgets. Smaller decisions, such as the implementation of a new system after an exhaustive RFP and demo process, may seem like an obvious step in the right direction, but eventually become a time and cost sink if later impacts are considered. Questions specific to a new implementation include: Do we need to build any proprietary workarounds to bring it into our ecosystem? What data integration challenges should we anticipate? Will we receive buy-in across the organization? Quite often, our projects at Citisoft involve an intricate dismantling of systems and processes that were implemented without consideration to second and third order consequences.

If there are no easy decisions in asset management operations initiatives, how do you direct the way forward? Consciously exploring all available options and thinking through second and third order impacts on all stakeholders is a good start. Hiring a consulting expert could be a useful shortcut as well. Consultants have the benefit of experiencing these Nth degree consequences firsthand throughout multiple programs of various sizes and degrees of success. As one of my colleagues says, we are here to connect the dots, sometimes the dots that don’t even exist yet.

Now, game of chess anyone?