Lessons for banking in Pixar’s approach to dealing with uncertainty and the risk of failure.

The report on the Prudential Inquiry into the CBA (“CBA Report”) is obviously required reading in banking circles this week. Plenty has been written on the topic already so I will try to restrain myself unless I can find something new to add to the commentary. However, while reading the report, I found myself drawing links to books that I think bankers would find well worth reading. These include Foolproof (by Michael Ip) and “The Success Equation: Untangling Skill and Luck in Business, Sports and Investing (by Michael Mauboussin).

I have put up some notes on Foolproof here and intend to do the same for The Success Equation sometime soon. The focus for today’s post however is a book titled “Creativity, Inc” by Ed Catmull who founded and led Pixar. The overall theme of the book is about developing and sustaining a creative culture but dealing with risk and uncertainty emerges as a big part of this.

What does making movies have to do with banking?

One of the lessons Catmull emphasised was that, notwithstanding Pixar’s success, it was important not to lose sight of the role that random factors play in both success and failure. A quote from Ch 8 illustrates this point;

“… a lot of our success came because we had pure intentions and great talent, and we did a lot of things right, but I also believe that attributing our success solely to our own intelligence without acknowledging the role of accidental events, diminishes us.”

He goes on to describe how success can be a trap for the following reasons;

• it creates the impression that what you are doing must be right,
• it tempts you to overlook hidden problems and
• you may be confusing luck with skill.

There is a discussion in Ch 9 of the kinds of things that can lead you to misunderstand the real nature of both your success and your failure. These include various cognitive biases (such as “confirmation” where you weight information that supports what you believe more than the counter evidence) and mental models we use to simplify the world in which we operate. These are hard wired into us so the best we can do is be aware of how these things can take us off track; that at least puts us ahead of those who blindly follow their mental models and biases.

His answer to building the capacity to adapt to change and respond to setbacks is to trust in people but trust does not mean you trust that people won’t make mistakes. Catmull accepts setbacks and screw ups as an inevitable part of being creative and innovative but trust is demonstrated when you support your people when they do screw up and trust them to find the solution.

This is interesting because the CBA Report indicates that CBA did in fact place a great deal of trust in their executive team and senior leaders, which implies trust alone is not enough. The missing ingredients in CBA’S case were accountability and consequence when the team failed to identify, escalate and resolve problems.

The other interesting line of speculation is whether CBA’s risk culture might have benefited from a deeper reflection on the difference between skill and luck. Maboussin’s book (The Success Equation) is particularly good in the way in which he lays out his framework for making this distinction.

I plan to come back to this topic once I have completed a review of Maboussin’s book but in the interim I can recommend all of the books mentioned in this post.