Puzzlement

Our comprehension of states of affairs in day to day business life – the meanings we attribute to phenomena, the sense we make of particular environments and settings, and the effectiveness with which we project future states of affairs – depends on our grasp of relational structures.  It is otherwise impossible for us to make sense of experience. Conversely, when we are confused, anxious, or stymied, it is because one or more relations are missing from the situation as it stands. When the missing relations are discerned, discovered or created – the dissonance resolves and clarity emerges.  

This basic schema underlies problem-solving in general. It also lies behind what we term ‘puzzlement’ - or a timely response of curiosity with respect to a particular state of affairs. High-vale puzzlement emerges when one senses that a conventional account of a phenomenon is in some way deficient; it somehow breaks from one's basic intuition, though the reasons are usually not immediately clear. An example from the nuts-and-bolts world of actuarial analysis illustrates the point: 

Actuaries, economists, underwriters and regulators correctly assume that pricing insurance should depend on the uncertainty of the amount and timing of the insured losses, and the correlation of those losses with those already insured. The most common approach to these calculations is to allocate equity to the insurance transaction based on an expected rate of return on that equity. This Return on Equity approach has been conventional for some time, underlain by the Capital Asset Pricing Model.   

Yet, intuitively it is odd that the problem should lead to that solution. Our most basic intuition about risk – the shape of our fundamental thinking when it comes to risk – bears no resemblance to the CAPM idea, which in the light of intuition appears strikingly artificial. This puzzlement signals that further reflection is appropriate. As it turns out, it is not difficult to show that the approach is illogical and inconsistent – and that the correct tack for insurers is to accept no price that reduces their expected utility. The utility-theoretic approach yields consistent pricing, it involves no unusual practical difficulties, and is logically sound. While capital should obviously play a role in assessing the strength of an insurer, capital allocation should play no role in an insurer’s pricing.

High-value puzzlement is especially important in complex environments. For one thing, it can lead to analyses that have stronger clarity and thus to actions that have more penetrating efficacy. Moreover, under the cognitive stresses of complex environments many firms are less apt to question standard explanations. When leaders teach and encourage the productive use of puzzlement, competitive distancing can be one of the effects.