The military’s powerful risk management technique

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Think Like a Military Commander: The Red Team

“One thing a person cannot do, no matter how rigorous his analysis, is draw up a list of thing that would never occur to him” – Thomas Schelling

The commander had a serious problem. It was October 2010, a company of Paras had just arrived in southern Helmand province; a stifling, bone dry, energy sapping, and colourless place. The usually fertile Helmand River valley was devoid of crops. Winter was approaching as they moved into the area of Nar-e-Saraj – just north of the barely recognisable group of mud walled compounds that made up the town of Torghai. It was a known Taliban safe haven. The area had witnessed intense fighting. To one side of the base’s sleeping quarters there remained a pile of twisted steel: the legacy of an RPG attack during the previous occupants’ tenure. The accommodation tents were riddled with bullet holes where an ‘Inside attack’ by a member of the Afghan Army had sprayed them with machine gun fire. Gun battles with Taliban insurgents operating out of the nearby town were a daily occurence, making the town and its surrounds a no-go area. 

Stress testing a plan to breaking point 

This was at a crucial juncture almost a decade into the war with many of the original goals still unaccomplished, the Taliban gaining confidence and public opinion in the UK faltering. The Company Commander had been tasked with taking the battle to the insurgents holed up in the town, and simultaneously winning over the local population. The Second in Command was tasked with coming up with the plan to make that happen – before we could work out a new plan, first we had to work out why the current plan wasn’t working, we had 6 months:

One of your authors has actually been in this unenviable position, and it certainly teaches you a thing or two about decision making, balancing competing objectives and risk as well as providing some helpful context for those of us not faced with this sort of responsibility on a daily basis. Your other author not so much, the closest he’s come to enemy fire is a few hostile questions in a badly air-conditioned conference room while low on coffee.

Knowing what you don’t know 

The military use taught and learned heuristics as a foundation to solve some challenging high risk “wicked” problems (those in complex or ambiguous domains, with unpredictable second order effects).The answer to the commander’s dilemma came from a source you have probably heard of, but almost certainly not done right: the Red Team.

Now I know what you’re thinking …. you’ve heard of Red Teaming and you know what it is. I bet you’re not doing it properly though.

Your other author has also heard the phrase Red Team in the business domain. However this had usually been experienced as an afterthought to a discussion, a box ticking exercise or worse, an excuse to throw on the table downright unhelpful or unfounded objections. I have seen it used as cover for flying kites or erecting strawmen, but rarely something that had any use to it.

I had Red Teaming all wrong – it has to be useful and timely

The first thing I realised when we sat down to write this piece, and I began to read the 87-page Ministry of Defence handbook on red teaming, was that the fundamental golden rule number one of the Red Team is utility. The product of the red team has to be useful to the commander (or, in a civilian context the decision maker).

Red Teaming revolves around timeliness, utility and access. 

The second thing I realised was that the Red Team is a very involved process that needs serious time and resources put into it (worthy of an 87-page manual and week-long courses in the defence system). Clearly, it’s not something you can do for every decision. But for your biggest most impactful decisions, perhaps around investment strategy, or key business plans you need to know how to do this well.

So the second golden rule of Red Teams is timeliness. The Red Team process must be initiated in parallel with the main decision making process in order to ensure the Red Team can produce something useful in a helpful timeframe. You can’t just throw it on the table at the last minute and expect it to be helpful.

Objective of the Red Team: To challenge norms and assumptions, to improve the validity of the plan.

What can investors learn from the military?

Constructive challenge is actually hard 

When forming plans we suffer from chronic ego, confirmation and overconfidence biases. These are so pernicious as they are hard to spot and control in ourselves (I don’t know about you but I’m great at spotting them in others though!). We like to think we’re open minded but really more often than not we want to prove we’re right and move on. 

But in making really good decisions for the long term it’s essential to expose ourselves to all the ways we could be wrong, how can we achieve this in a polarised and closed minded world? who better to guide us through this than those that have developed heuristics and frameworks to achieve exactly this in the highest stakes environments. 

When you look at it in detail, there are a lot of commonalities between the domains of investment and military campaigning, even though the weapon of choice on one side is the powerpoint presentation and on the other the GPMG machine gun.

  • Uncertain, ambiguous, complex domains
  • Long-run implications of actions with second and third order consequences likely
  • Timely decisions needed which rarely have the luxury of “full” information
  • Can take years for situations to play out and reveal whether decisions where “right” or “wrong”
  • Dealing with human psychology as much as things governed by universal laws

It’s not just investors who could take a thing or two from the military when it comes to Red Teams. Today’s social and public-health landscape has many similarities to the risky, unknown and uncertain environments in which the military operate in. Red Teaming as a risk management approach and a way to stress test plans to breaking point in a world where no-one has all the answers and the usual rules don’t apply has arguably never been more relevant. 

The Three Fundamentals of Red Teams

Done right, the Red Team process provides a structure and set of norms , that opens up a conversation on what’s missing, and allows you to ask better questions 

 The Red Team process consists of three stages, each requiring a very different skillset and approach.

  1. Diagnostic phase

This is all about identifying the key assumptions in the current plan. What are the key dependencies? What data is missing or incomplete? Where are the logical holes? Rational and common-sense thinking is paramount here, scrupulously turning over each step in the current plan and dissecting it into constituent parts. There will be lots of them, stress testing key areas will come later.

In investing this will often boil down to things like the returns of the different assets in the portfolio, and their correlations. But at a more granular level it might be things like defaults, interest rates, consumer demand, consumption patterns, energy usage. There will be a lot there, but try ranking them by approximate order of importance.

Take a view on relevant base rates not covered in the current plan. That’s how often relevant things happen on average – which is often overlooked. Eg how often the market falls, how often companies go bust, how often we go into recession. Don’t jump to consequences at this stage. 

We need to highlight key uncertainties here – this is vital as we are wired to dislike uncertainty and avoid it, and biased to pretend it doesn’t exist. It’s essential to bring these to the surface and get an honest measure of the uncertainties in our plan. 

In the military example cited above, the Red Team dug deep into some of the key assumptions that the NATO forces had been operating under:

  • Did we know enough about the local area, the local elders, grievances, feuds, history ? We didn’t. As we learnt more, things began to fall into place.
  • What motivated the locals really, what did the Taliban offer that made them follow?
  • What assumptions were we making that clearly weren’t right – had they ever been right?
  • What had caused the breakdown of trust with the local Afghan Army – that led to the insider attack?
  • Why were our patrols not able to exert the dominance that they should have?

What to ask: what’s the weakest assumption here, what’s the most important? What’s more uncertain than we think?

What to do: seek out additional data that might shed light on key assumptions

“It’s not what you don’t know that gets you, it’s what you know for sure that just ain’t so”

  • Mark Twain 

2: Creative Phase

Here’s where we need to get a bit weird: creativity comes to the fore. We need to imagine some of the strangest and most unexpected things that could happen. What’s the weirdest way the enemy could react, or the economy and markets could behave? 

We’re looking at isolated scenarios here, still resisting the temptation to play through all the consequences for the plan, we’ll bring this all together in the next step.

How many people expected negative interest rates a decade ago? Try and throw some really alternative ideas around here for things like inflation, markets, innovation, customer behavior, interest rates, policy and politics.

It’s not about focusing on one state of the world, we’re trying to throw a range of possible surprising, unlikely or “silly” scenarios into the mix. 

What to ask: What’s an alternative theory for how the economic boom could come to an end? What are the unintended consequences or the second order effects?

What to think: what does cause and effect look like here? Do we have any evidence we can look to? Can we test? 

3. Challenge phase

Here’s where we bring it all together and ‘stress test’ our plan within a realistic context. A wargame is one option, we’ll use that here; you could use Devil’s Advocacy, or a ‘pre-mortem’ that assumes something bad has already happened, you could  exploit your creative phase by using ‘Alternative Futures Analysis’ – there are lots of methods. 

In a wargame,  we game out a number of scenarios. What’s important here is to focus on placing some boundaries on things for the team for this stage otherwise it gets silly, there needs to be some realism for the output to be credible. Perhaps gaming out portfolio outcomes over 3-5 years. Don’t just jump to a doomsday end scenario, and don’t just focus in on a single pathway for how things play out. For example game out implications on different asset classes, of strange or dangerous economic scenarios – pick an event, a time, and ask questions: so what?, what would we do now? How would we mititgate that part of an event? How would we react to those ‘warning’ conditions, etc etc…

Find out how many realistic scenarios can be gamed out that defeat the plan. The team will need to have an ongoing debate on realism to try and place a limit on how extreme things can get. It helps to break down the war games into short steps so that cause and effect relationships can play out. In the army this means alternating between enemy and friendly moves, in investing this might mean exploring economic developments, policy reactions, and portfolio changes. It would probably help to have different individuals responsible for each part. A good goal here is to end up with half a dozen or so gamed out scenarios, that bring in the thinking from phases 1 and 2 – flawed assumptions, creative pathways, weird scenarios. 

What the army focus on in this stage is balancing the most dangerous move the enemy could make at any time with the most likely move, but not getting bogged down in focusing only on one other – it is a debate around danger and likelihood, bounded by a known reality, or the limits of known reality. In Helmand province, theTaliban couldn’t suddenly get nuclear weapons. The most dangerous scenario will always be bad (highlighting that doesn’t necessarily get you anywhere) but if you can identify a moderately likely move or series of moves that defeats the plan that might be more helpful.

What to ask: what’s the most likely thing to happen next, what’s the most dangerous?

What to think: how can we build resiliency into the central plan

“One thing a person cannot do, no matter how rigorous his analysis, is draw up a list of thing that would never occur to him” – Thomas Selway

This brilliant and self-evidently true piece of insight is nonetheless all-too-often overlooked, especially by overconfident people in positions of decision making power. In investing it can lead to large losses down the line, in other fields it could be much worse.

The Red Team gives us a shot at getting round this, injecting a dose of humility into our decision making process. We acknowledge we are in an uncertain and ambiguous environment without all the facts and data we would ideally need, and with a biased and overconfident perspective on the world. But with tried and tested tactics such as the Red Team we have a shot at minimising our losses. An annual offsite might be a great time to put it into practice, and gaming out the situations from different perspectives could well be a good exercise in building team cohesion. Like any exercise you’ll get a lot better with practice, and it’ll feel strange and awkward to begin with. 

In our example your author and his soldiers did manage to navigate their way through the deployment successfully, returning home in early 2011. Three major vehicles destroyed by IED’s, several injuries to personnel, some serious, but they all came home alive.  

The initial red-teaming session proved invaluable in identifying areas of weakness in the original plan: it meant we focused on mentoring the Afghans, we built a new matrix of check-points that could over watch each other, we stopped ‘coming and going’, we needed to stop skirting the town and get into it (permanently), we needed to stop thinking this was about winning gun-fights, we needed to give the town what it wanted: schools, and security. We didn’t leave it a perfect place. No one does. We did do our little bit to move things forward. These, and other endeavours by the Paras were immortalised in Patrick Bishop’s books : 3 Para.

Military veterans have a number of skills but an often-overlooked one is systematic thinking frameworks. These can have direct relevance in many other domains, especially those dominated by risk and uncertainty, and where action is needed without full information. Investing is one, responding to a pandemic perhaps another.

Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.

  • Sun Tzu 

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