Our World has generally become more complex, in part because of the many linkages and relationships between elements that make it a lot harder to figure out how things work and where they are going. Let’s take the stock market for instance. One day it is affected by the country of Greece, and the next by Amazon’s quarterly revenue. The price of an airline ticket to a particular destination is another good example. It depends on the time of year, the day of the week, the flight’s time of day, the airline’s particular network structure, the number of stops, how many seats remain in each fare class, what the competition charges, what the market will bear, etc… Below are three important skills to help us deal with complexity:
Critical thinking is the ability to break down a complex system (my definition) and using analysis to understand its inner-workings. Critical thinking requires research, critique, analysis and evaluation of the system and its sub-components. “Research” means gathering facts, information and opinions. “Critique” is the ability to discern what is important and what is not. “Analysis” (from the Greek “αναλυειν”, meaning to “untie”) is the ability to understand how things work. “Evaluate” means forming a quantitative assessment of a system, understanding how it may behave under various circumstances. Critical thinking is about identifying what, in the complex system under study, is important for the particular situation at hand.
This is a tough one. Conceptual thinking is the ability to reduce a complex system into a simple, critical model. The concept of a cat, for instance, is a representation of knowledge in our brain about what makes a cat, and how a cat is different from a dog, or an elephant. Cats may be all very different, but we recognize them all as cats and not dogs. We know it when we see it! Things are a bit more complicated when we talk about complex systems. Both experience and creative thinking help reduce a complex system into a simple conceptual model. We then intuitively understand how it works. Take for instance the concept of “supply and demand”. Conceptual thinking means that we recognize that the price of an airline ticket is highly driven by supply and demand. Suddenly, we understand better what drives the price of an airline ticket.
Reducing a system to its critical relationships, or building a conceptual model to understand it, are key to decision-making and to management. Of course, it is possible that we do not understand perfectly the complex system we are looking at or that we are not able to predict how it will behave. In particular, assumptions about what will happen in the future are likely be shattered by unforeseen developments. That’s where risk management comes in. Risk management is a systematic process of addressing and understanding what can go wrong with our assumptions. What can be done? Typically we can build flexibility into our decisions, but that will likely cost us something. For instance, we can buy a refundable air ticket in case we change our mind, but that’s more expensive as we know.
Thinking critically, conceptually and systematically addressing risks are important, lifelong skills that everyone should learn.