PART I

The Disruption Theory Debate

Before we dive in, let me first give you a very brief background on the debate in case you haven’t been following it. The ‘disruption theory’ explains how new companies enter markets with simpler and more affordable product alternatives. It also explains why existing players in existing markets often miss the opportunity and get replaced. For more details, have a look here. The theory, which is subject of several of Christensen’s books, is supported by a number of case studies, which show how existing players were replaced by innovators. Lepore argues that, since the theory predicts the future, its credibility depends on the quality of the case studies, which were used by Christensen. She then starts to deconstruct each case study with counter-evidence. Her deconstruction of the case studies has been analyzed in a number of articles, which you will find listed at the end of this post. Based on those articles my take is that Christensen’s theory withstands her criticism. However the reliability of the case evidence is not subject of this post.

Evidence or no evidence?

So let’s return to the question, which we want to discuss here. How can this battle between two top-notch academics emerge? And what lessons can we draw from the two views for our own decision making process as investors?

Clayton Christensen is Professor for business administration at Harvard, where he succeeded the legendary Michael Porter. With his highly successful books on innovation and disruption, Christensen became similarly legendary as Michael Porter. He has been awarded No 1 Management Thinker in the World.

On the other side, Jill Lepore teaches at Harvard as well. She is a staff writer at The New Yorker, which has an excellent reputation; and which wouldn’t be interested in publishing nonsense. Lepore would not get into a battle with one of her fellow academic colleagues if she weren’t convinced of her point.

Lepore thinks, that for the theory to work, the evidence of case studies is necessary. She is looking for scientific proof. The books of Clayton Christensen however cannot be considered academic books. Academic books usually don’t make the bestseller lists. These are books, which are made to help mangers, and investors make predictions and accordingly take decisions under uncertainty.

Investors and Decision Making

As investors, we permanently face uncertainty in our decision making process. The better we are at reducing this uncertainty, the better the returns we will generate. However, as businesses and markets are complex, we will never possess all the information we need or would like to have. How can we cope with this? There are two ways in which people tend to handle this. One way is to try to gather all the information that is available on a topic and to try to examine every possible option in order to take a “safe” decision. The other way is to take a decision based on good enough information and put intuition into play. People who take the first approach are called “Maximisers”. People who take the second approach are called “Satisficers”.

I have seen these differences manifest itself in investment committees. Some of the decision makers requested to obtain all the financial data of a company before taking a decision, while others decided based on their assessment of the management team and the business model. Personally I believe that, in principle, it’s of advantage to have both types of personalities add up as part of a decision making team. They balance each other and they bring different views to the decision-making.

 

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