Checklists: a market device that guides calculation and affect
January 20, 2010
Today I read a book excerpt that persuaded me. Atul Gawande, professor at Harvard Medical School and staff writer at The New Yorker, has written a book about the many benefits of checklists. Generalizing from his own experience with surgeons, Gawande argues that checklists are useful in finance or airline cockpits.
That checklists can be critical should be of no surprise to sociologists of finance. It is, after all, another material device that provides what Andy Clark calls “scaffolding” to complement our limited cognitive skills. And indeed, I myself came across checklists in my own research on derivatives traders. In my latest paper with David Stark, we describe how the head of the merger arbitrage desk is very clear about the importance of checklists and rigorous procedure:
Taking a position, then, involves a successive winnowing of the possible contingencies involved in the merger as the arbitrageurs think through the deal. The traders search through a form of mental decision tree in which each specific merger is considered in relation to similar deals that they encountered in the past. Max explains, “it’s almost like you’ve been in this road before and [the past incidences] direct you.” The advantage of this system, which Max describes as a “process-driven arbitrage,” is that numerous issues need not be taken into account.
In other words: process, process, process; our head trader even mentioned the word check-list. At first I was surprised to see that the traders were using such a mundane tool. Now I see that they are not an exception. Gawande explains that many of the best value investors and venture capitalists also rely on lists.
But Gawande goes beyond giving examples. Crucially, he explains why checklists complement judgment. As it turns out, a checklist is very different from a shopping list. While a shopping list is just a form of distributed memory (make sure I don’t forget…), a professional checklist entails a systematic self-examination of one’s own past errors of judgement — blindspots, if you will — and the creation of a tool that avoids them. Here’s how he talks about it:
Looking back, Pabrai noticed that he had repeatedly erred in determining how leveraged companies were. The information was available; he just hadn’t looked for it carefully enough. In large part, he believes, the mistakes happened because he wasn’t able to damp down the cocaine brain.
The anonymous investor I spoke to – I’ll call him Cook – made a checklist. But he was even more methodical. He enumerated the errors known to occur at any point – during the research phase, during decision-making, during execution of the decision and even in the period after making an investment. He then designed detailed checklists to avoid the errors, complete with clearly identified pause points at which he and his team would stop and run through the items together.
What the checklist does, in other words, is help in the calculation process. If calculation, as Callon reminds us, entails judgement and affect, managing these two becomes crucial. The list is a disciplining device that allows the actor to channel the affect.