If an individual had the following resume, how would you view them:
University of California-Berkely: B.A. Economics, Minor in Mathematics and Philosophy
Harvard Business School: MBA
Harvard Business School: Youngest Assistant Professor in College’s History (24)
US Air Force: Captain
Ford Motor Company: 15 Years Executive Management, including CEO
United States Government: Secretary of Defense, Longest Tenure in Institute’s History (7 Years)
World Bank: President
Logically, this person would be thought of highly; and he was, until his tenure as Secretary of Defense. The person with this resume is Robert McNamara, the architect of the Vietnam War and of the namesake McNamara Fallacy.
The Wiz Kid
McNamara built his reputation on quantitative wizardry. As former Senator and Presidential Nominee Barry Goldwater stated, he was “an IBM machine with legs.” Following his academic career, his prowess was leveraged by the US Air Force to improve the bombing calculations of the B-29 Superfortress. His success in this arena led him to Ford where he became part of the famous “Whiz Kids” who leveraged scientific management practices, aka cost controls and spreadsheets, to save the fledgling automotive giant in the 1950’s. After succeeding in saving the company, McNamara was named CEO in 1960, the second person not bearing the name “Ford” to hold such position.
Only a year later, he’d forgo his CEO role for Secretary of Defense under the newly elected John F. Kennedy. It was in this role his name would become forever associated with the Vietnam War and the eponymous logical fallacy stemming from its fallout.
Origins of the McNamara Fallacy
During his time as Secretary of Defense, McNamara leveraged a series of quantitative metrics, the most prolific body counts of North Vietnamese and US Troops, to justify escalating US presence in Vietnam. He theorized as long as the number of North Vietnamese troop deaths exceeded that of the United States troops, the United States would eventually win the war. Initially, his theory was accepted, and the troop count escalated from 400 Green Beret’s in 1960 to 150,000 by 1965. It was at this point President Lyndon B. Johnson became skeptical of the “Whiz Kid’s” analysis.
McNamara personally sent analysts to Vietnam in 1967 to report on the origins of the war – the Pentagon Papers. The report, which took 18 month to compile, was not completed by the time he left office in early 1968 for a role as president of the World Bank. At the time of his departure, the war had escalated to a bloody national and international conflict involving ~500,000 U.S. troops with no end in sight.
Definition of the McNamara Fallacy
The McNamara Fallacy suggests sole reliance on quantitative metrics misleads decision makers and argues in-tandem use of qualitative metrics to ensure informed decision making. Following the conflict, it was determined the South Vietnamese falsified the body counts to appease the United States. We will not delve into the reasons why.
Now we understand its origins, its paramount to understand this fallacy’s ubiquity. Ranking sites, which include news and review websites, social media, and search engines, are fantastic examples. The advertisements, links, and pages which make it to the top of these websites are determined by clicks. All other metrics claimed to influence the algorithms including “seemingly qualitative ones such as authenticity and relevance, are derivatives of clicks, which are a popularity metric.
Another great example of this fallacy is the stock market. The vast majority of us know the phrase “buy low, sell high”, but how do we know we’re doing so? There are an infinite number of quantitative metrics which, when cherrypicked, can come to the conclusion you want. That is why in addition to quantitative analysis, qualitative analysis is needed to determine if a stock is worth buying or selling. As stated to me by an ex-Goldman-Sack’s trader “there’s a reason something is cheap or expensive.”
The Importance of Qualitative Analysis
“Data” is a commoditized term in today’s society. Unfortunately for us, there is a lot of it, more than we can biologically handle. That is why any entity promising to “make data-driven decisions simple” is attractive. It shouldn’t take a huge jump to see why artificial intelligence is an equally commoditized term.
The McNamara Fallacy does not argue against the use of quantitative analysis, quite the opposite, but it does state the necessity to supplement it with qualitative analysis. Numbers will alert you; experience, sentiments, and words will inform you. The latter is the more difficult given the extreme variations in the aforementioned subjective items. It is often in these details which separate those who are competent to those who are exceptional.
In our next piece, we will elaborate further on how to develop the skills underpinning a sound qualitative process, and also why the term “late bloomer” isn’t derogatory.
Be More.
Become Polymathic.
Quote of the Week: “Data is like garbage. You’d better know what you are going to do with it before you collect it.“ – Mark Twain