James Montier gave a great interview on The Long View Podcast where he discussed the difference between optimal and robust. We may not want to use these words with our kids or our clients, but they are concepts to apply far more broadly than Montier’s take on investment portfolio construction. Understanding the difference can be really helpful whenever we’re grouping any collection of things, people, or ideas together.
An optimal solution requires us to know the outcome we’re after and a formula to achieve it. The formula will tell us the variables that matter and how to pick the “most good” combination. When baking a cake, knowing the ingredients and following a recipe is optimal, while winging it (for most of us) is suboptimal.
A robust solution requires us to have a general idea of a broad range of outcomes and the rough probabilities of each occurring. A robust solution isn’t too confident in any one result and aims to find the “probably least bad” combination. If we don’t know how to make a cake, the time to experiment is not hours before the party we promised to bring one too. Googling “good cake near me” for a list of options is a robust solution.
The more “big picture” a problem becomes, often the harder it will be to find a truly optimal solution. This is where people can get tripped up. Markets, organizations, party cake selection – we have to be mindful and not optimize for a suboptimal solution in categories like this. It may seem boring, but it’s usually better to be robust. Don’t bet the life savings on a favorite stock, don’t assume a formula can run a company and know when a professional baker’s talents do or do not exceed one’s own.
We’re going to have to zoom in and optimize and zoom out for robust solutions. We’re going to have to help clients to do the same when they get overconfident and take a dose of our own medicine whenever we start to feel too certain. Writer, surgeon and administrator Atul Gawande sums it up well with, “No matter how routine an operation is, the patients never seem to be.” It’s a messy world. Knowing when to look for an optimal or a robust solution can help us and our clients stay in the game.