Investing with Cynefin: Complex

For investments, the complex domain may be defined by the strategy used to manage it “Multiple hypotheses tested using safe to fail experiments”. The complex domain by definition contains uncertainty (risk) and is about acquiring knowledge. Investments the complex domain should be the smallest safe to fail experiment that test a hypothesis. Organisations should not be making investments that are large or that are not safe to fail.

Investments involving technology have three categories of risk¹ :

• Delivery risk.
• Business Case Risk.
• Risk of damaging the existing business model.

The Kelly criterion can be used to help understand the maximum size of investment in the Complex domain. Fundamentally investments in the complex domain are about reducing risk (uncertainty) by acquiring knowledge (certainty). The first two categories of risk are about failing to achieve an upside, they are not about protecting against a down side. Managing the risk of failing to achieve an upside is done by ensuring that individual investments are not so large that they damage the portfolio. Hence the Kelly criterion can be used. Whilst Kelly can assist with the first two categories of risk, alternate strategies are needed to protect against a down side.

Managing the risk of damage to the existing business model.

Protecting against down side is about managing the risk of unintended consequences. If a consequence is known, then a specific option should be created to ensure that the investment is safe to fail. Therefore ensuring investments are safe to fail, requires the investor to have options to detect problems and return the system to safety. This means the following:

1. Effective monitoring is required to detect unintended consequences.
2. Options to return the system to safety.
3. Failure containment.

Failure to monitor for unintended consequences is an abdication of responsibility and normally indicates a risk averse culture dominated by Hippos. The Hippos either accept of ignore risks that might occur.

Time is the key element of options. If the time the system can survive is less than the time it takes to return the system to safety, more options are required before the investment should be considered safe to fail.

Finally, one of the key differentiators between contemporary organisations like and Google, Facebook and Netflix and traditional organisations is that contemporary organisations manage risk rather than ignore it. They create failure containment.Contemporary organisations roll out investments to customers gradually. They test hypotheses to ensure that not only does the investment work, but also the customers have the anticipated, or at least a beneficial, behaviour change. The idea that you would roll out an investment to 100% of your customer all at once is the equivalent of putting all of your money on “red” at the roulette table… You are not investing, you are gambling. You might get away with it a few times but eventually you will do a “Knight Capital”.

The Complex domain is fundamentally about risk management. As such, it is the domain where Real Options are most effective.

1-Original article by Steve Freeman and Chris Matts. Published in Agile Times, 2005