Denial and Defensiveness

Inevitable Surprises
by Peter Schwartz

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If the future is so predictable, why do so many businesses and organizations have difficulty putting the facts together? One would think that many people would be well practiced by now, for discontinuities have been a regular fact of life since at least the mid-1960s. (Consider: the Kennedy assassinations, the oil shortages of the 1970s, "stagflation," the end of the Cold War, the shifts in medical and communications technology, and the impact of climate change, just for starters.) Intellectually, it's easy to recognize that some of our working assumptions have been wrong, that we're on a roller coaster of events that puts our organizations and our livelihoods at risk, and that we have to be prepared. But doing something about it is another matter entirely. When an inevitable surprise confronts us, there are two different types of natural reactions. Both of them can lead to poor decision making.

The first is denial-the refusal to believe that the inevitabilities exist. This was one of the key reasons, of course, why the U.S. government was unprepared for the attacks on September 11, 2001. Enough people in positions of authority simply refused to believe the need was great and urgent enough to justify rethinking the structure of our national security system. When in denial about an inevitability, people tend to blithely act as if it didn't exist, and as if there were no need to break from routine and prepare for it. The losses that result can be immense.

Similarly, one can have a great deal of sympathy for the employees of Enron who saw their stock portfolios and pension funds collapse in late 2001. It was beyond their control to try to salvage their pensions, and even the cautious among them were probably devastated. But one might also recall that on the way up, when the stock price was rising because of false profit reports, these people were enjoying it, denying that there was a potential for a crash, and in many cases reminding others less fortunate around them of their own good fortunes. A little foresight and reflection ought to have suggested that a price that goes up so quickly can come down just as quickly, and that-whether or not Enron's management supported it-perhaps they ought to diversify their holdings. To the extent they thought, Nothing bad can happen to this company because we're growing so fast, they were deceiving themselves. (Indeed, many Enron employees did take note of danger signals and diversified in time, thus weathering what would become a very difficult storm.)

Denial is perhaps the most dangerous response one can make when evidence of an inevitable surprise presents itself. Today, many political leaders are in denial about several of the surprises described in this book: global climate change, the inevitability of new diseases, and the dangerous "hot spots" of Mexico, the Caspian Sea, and Saudi Arabia. In Europe, denial of the realities of migration may tear the continent apart.

The second natural reaction to any turbulent crisis is defensiveness. This is a kind of opposite to denial. People take the inevitable surprise so seriously that they freeze; in their minds there is no viable way to act except to find a safe place, hunker down, and wait for it to all blow over. They reduce their investments and activities, focus on their immediate and narrow self-interest, and wait for another stretch of relative calm to set in before they are ready to take risks again. If they are corporate leaders, they cut costs and innovation. If they are political leaders, they look for short-term gains.

On a visceral level this defensive response makes sense. Emotionally, you feel much less in control of your destiny than you thought you were. (Your actual level of control is the same as it always has been, but it doesn't feel the same.) Maybe you can't control some external forces, you reason, but you can at least minimize your exposure to them.

Unfortunately, this strategy also tends to produce poor results. You are making one of the riskiest moves of all: to do nothing in the face of uncertainty. For example: If you lost money in the bursting of 2000's stock market bubble, it's natural to think: I won't invest in corporate stocks ever again, because they can't ever be trusted. But not all company leaders are as shortsighted (or exploitive) as those of WorldCom and Enron were. The bursting of a bubble is not a signal to stop investing in all companies-or even in technology companies, trading companies, or "new-economy" companies. It does mean that your criteria for investment need to be tougher. Your homework and due diligence need to be more sound. Rather than avoid taking risks, you need to be smarter about your risks.

While being emotionally understandable, both denial and defensiveness are fundamentally irresponsible, especially on the part of corporate leaders. Unintentionally, they foster an attitude of victimization throughout the organization: "There was nothing we could have done about our poor performance. We were overwhelmed by events." The airline industry has been a prime example of this: "There was a terrorist attack and demand for long-distance travel dropped, so we couldn't make our profit targets." Well, if you're in the airline business and you don't have a contingency plan for expanded terrorist activity, then you're probably going to suffer sooner or later anyway.

This book is for people who want to get past denial and defensiveness, to be the masters of their own fate in a world full of surprises. The first step in making that transition is to pay attention to the inevitable surprises of the future, and to develop strategies for dealing with them.

Different aspects of the environment demand different strategies. We know about some of the surprises in this book, for example, precisely because they have been a long time coming. They move in slow, steady ways; they can be seen coming for decades. The population slowdown falls into this category; so does the continued evolution of the computer and the impending global climate change. There is a long time to prepare for them-which is good, because they will require a long time of preparation.

Other surprises are both enormous in their implications and enormously abrupt. Everything is different after they take place. The release of Nelson Mandela from prison in South Africa was like that; many people inside the country were poised for apartheid controls to grow more strict. The end of the Cold War and the collapse of the Soviet Union was another. The fall of the Japanese banking system was a third; in the 1980s we were all prepared for "Japan, Inc." to virtually dominate the United States. Other examples are the takeoff of the Internet, the Asian financial crisis, the stock market boom and bust, and, of course, the attacks on September 11, 2001.

Copyright © 2003 Peter Schwartz, published by Gotham Books, a member of Penguin Group (USA) Inc., all rights reserved, reprinted with permission from the publisher.

About the Author

Peter Schwartz is cofounder and chair of Global Business Network, part of the Monitor Group. He is the author of The Art of the Long View, and coauthor of The Long Boom and When Good Companies Do Bad Things. He has been a leading advisor to governments and major corporations. A highly sought-after speaker for business symposiums, he writes the monthly "Scenario" column for Red Herring magazine.