Mapping the Institutional Mindscape
A 2x2 Guide for Reflective Investors — Capital Design: Field Notes #5
If I had a dollar for every time someone said, “I read your work, understood about 10% of it, but it sounds like you’re onto something,” I’d have enough to buy a fancy coffee.
Here’s the thing: It’s hard to translate intuition into instruction. Ever have a hunch, but can’t describe how or what happened between zero and metaphor or concept and solution? Designers, investors, and leaders alike see patterns, make connections, and arrive at decisions intuitively. But describing how we got there? That’s tricky. Synthesis, sensemaking, and abstraction can feel like magic to those who haven’t practiced them. It often feels like magic for those who do, too!
Researchers like Bryan Lawson and Kees Dorst have made careers out of unpacking these processes, and their work shows how design-as-a-way-of-thinking applies far beyond traditional design fields.
Obviously, I think it’s just as relevant in institutional investing, where understanding the right problem trumps applying the right tool to the wrong one.
The Capital Design Journal is how we think-in-public and debate the nature of what we know. Sensemaking, for real.
How do you orient yourself when facing something that doesn’t make sense? How do you ensure that what you think makes sense actually does?
The answer is simple but not always easy. You map the terrain.
Why You Need a Map
Institutional investing today is as much about navigating systems as it is about managing portfolios. What happens “out there” — geopolitics, climate shifts, technological disruption — has a direct impact on what we can achieve “in here.”
Traditional tools for decision-making don’t always cut it. That’s why I want to introduce a 2x2 framework that simplifies complex challenges. It helps you connect data to decisions and clearly frame the problem before jumping to solutions.
A problem space is different than a problem. A problem is an undesirable state, while a problem space is the set of all possible configurations of that problem. The problem space is the foundation for the solution space, which is the set of all possible solutions to a problem.
Yeah, we’ll need a map for this.
The Investor’s 2x2: A Map for Uncertain Terrain
When faced with a challenge, ask two questions:
- Are the facts knowable or unknowable?
- Does the situation call for creating options or making decisions?
Strategy: Creating Options in Uncharted Territory
This framework gives you four quadrants: Strategy, Governance, Risk, and Management. Each quadrant demands a distinct mindset. The first step is understanding where you are on the map. Then you can act in accordance with the problem space.
Sometimes, the facts are unknowable. True Knightian uncertainty. In these cases, your job isn’t to make decisions; it’s to generate options. It’s to create the largest, and most relevant data-set from which to decide down the road. Often, you will need to create data from the future to compare data from the past (which is all data can ever do you for you.)
The best approach is to map out scenarios in the form of strategic options. Roger Martin and Playing To Win is the gold standard in this respect, and no surprise it is heavily infused with design principles. Strategy is the business of choices, not answers.
But this approach also works in portfolio strategy and construction, capital rotation and asset management. By building these scenarios, you can test which investments, like EV charging hubs or municipal partnerships, or toll roads or staying the hell away from the whole sector, might thrive under different conditions.
Imagine your team re-evaluating its investment thesis about energy transition and mobility. You have data on vehicle registrations and transit ridership, but the real drivers of future demand are harder to measure. Shifts in consumer behavior, government subsidies for EVs, or emerging micromobility technologies could all play a role. What are gen Z attitudes towards car ownership? How will cost of living hinder the energy transition rollout? Do these things even matter considering a cynical bet on things staying as they are?
Strategy is about looking beyond what you know today and creating a range of viable options for tomorrow. Only when you have a full and representative set can you begin the process of deciding what to do and what not to do.
Governance: Setting Rules for What We Can’t Predict
Boards should be like referees. They are at their best when you don’t hear about them. As soon as they’re in the conversation, something is wrong. Boards and similar governance-type bodies must set broad parameters around things that we can’t predict. They need to give enough direction to management to do the job. Management has the vision, governance sets the horizon.
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Consider an investment committee revisiting its beliefs about systemic risks that include, but are not limited to climate change, declining trust in public institutions and the potential limits to economic growth. The path ahead is unclear. Regulatory shifts or technological breakthroughs could drastically change the landscape, or stakeholders and pensions could demand you work to create a better world for them to retire into, beyond the monthly cheque. You can’t wait for perfect information to act, nor do you have the access, or time to generate this robust set of options. That’s why you pay management to do.
This is where investment beliefs come in. Define clear guidelines, like prioritizing investments that support renewable infrastructure or favor systemic resilience. Build consensus around these principles, and then use them to guide decisions even when the future remains cloudy. Seek unconventional and counterintuitive opinions. Challenge yourselves, and management. And see to provide a framework for how you think about the world and decisions, not just what you’d do.
Governance is about defining the rules of the game when the outcome is uncertain.
Risk: Preparing for What’s Likely but Complex
When facts are knowable, but the situation is nuanced, your focus shifts to understanding and managing risks.
When you find yourself in the risk quadrant (and you’re not on the risk team already), integrate qualitative assessments into your process. Go out into the real world and talk to real people. Find out what makes them tick, what jobs they are hiring your company to do, and where they might be open to new solutions. Again, seek unconventional sources — different industries, countries, and belief systems. Blending hard data with soft insights will give you a fuller picture of the risks at hand.
Picture an investment diligence process for a logistics company. Financial risks like debt ratios or market share are relatively easy to quantify. But what about qualitative risks? The company’s leadership team might lack the ability to create new customers or markets for itself? How do you diligence a management team’s capacity to innovate, fail fast, and obsess about putting itself out of business before anyone else? What if we transplanted this existing business into a different economic and regulatory system? (Which is also a good way to understand seismic shifts to your own contexts) Hit the pavement and turn some knowables into knowns.
Risk management is about bridging what’s measurable with what’s material.
Management: Acting with Confidence While Managing Complexity
Sometimes, the facts are clear, and decisions need to be made. Here, it’s about prioritizing actions and turning choices into decisions. Hello, asset management and portfolio value creation teams!
This is where most of the day-to-day stuff happens, often with little attention paid to the other three quadrants. The quadrants work as an integrated set, where by the time you get to (asset) management, you’ve created and picked from an excellent starting set of options, you’ve set parameters on the things that you can’t know, you’ve gone out into the world to make sense of the things you didn’t know, and now you can execute with relative confidence.
Some of the most existing design integrations are at the value creation level. You can think expansively about the assets you have, to reposition, reinvigorate or reimagine them. And you can do so in the context of your broader portfolio.
An example that ties it all together. Let’s say you’re at a fund moving from strategic asset allocation to a total portfolio approach. Because each asset class has its benchmark, the asset class will try to beat the individual benchmark. What happens is they end up with a diversified portfolio in each asset class. While the total portfolio approach may seem to be relevant to the folks upstairs, it’s even more liberating for the individual investors. What if you decide to go all-in on a few ideas instead of aiming for the perfect region, sector, thematic and style diversification? You do so because, at your scale and with direct active management, you can begin to shape the industries to be more efficient, resilient, and productive. The upstream choices and uncertainties give you more confident and control over what you know to be profitable.
Management is about turning analysis into action while influencing the ecosystem around you.
YOU ARE HERE
The 2x2 maps the mindscape of the institutional investors. It asks:
- Are the facts knowable or unknowable?
- Do we need to create options or make decisions?
When facts are unknowable, focus on creating options (strategy) or defining beliefs (governance) to guide future decisions. When facts are knowable, shift to understanding risks at street level or executing plans with the benefit of an expansive map of how the world really works.
Even without doing, just knowing where you are sometimes brings a sense of calm. Like getting lost in a mall as a kid. There’s immense comfort knowing that “you are here.”
Asking Better Questions
If you guys had a dollar every time I talked about asking better questions, you could by a fancy coffee AND a fancy donut. But someone has to keep saying it, so it might as well be me.
This framework isn’t just about solving problems. It’s about framing them the right way. When you know the problem space, the problem becomes more apparent.
When you’re navigating complexity, the most important thing you can do is ask better questions. Are we creating options or making decisions? Do we have the information we need, or is uncertainty unavoidable?
By answering these questions first, you’ll align your actions with the nature of the problem and lead your teams with purpose. This is how we connect the dots between data, decisions, and the systems that shape our world.
Next time you’re in a quagmire of a meeting, put a big red mental pin that says “you are here” on your hastily sketched 2x2. See if it doesn’t bring a little clarity to question of where to go next.
Onward.
Originally published at https://www.jordanostapchuk.com on November 29, 2024.
