Management decisions have superlinear returns. So do management mistakes

There is an essay showing that returns in the world are superlinear, not linear — they compound and take off. Applied to management, this means good decisions compound superlinearly: one good decision enables others. But the same holds for errors: one error compounds others. Superlinearity cuts both ways.

There is an essay arguing that returns in the world are superlinear, not linear — that effort and result do not grow in fixed proportion, but compound and take off, with small differences producing enormously different results. Applied to management, this illuminates a hard truth. Management decisions have superlinear returns. But there is a corollary the enthusiasm forgets: so do the errors. Superlinearity cuts both ways — compounding the good decisions and the errors.

Start with the idea of superlinear returns. Linear returns grow in fixed proportion: twice the effort, twice the result. Superlinear returns grow more than proportionally: twice the effort can produce much more than twice the result, because the returns compound (one result enables the next) and take off (they pass a threshold and accelerate). In a world of superlinear returns, small differences in quality produce enormous differences in result, because the quality compounds and takes off, instead of adding linearly. Superlinearity makes quality disproportionately decisive.

Here is why good management decisions have superlinear returns. A good management decision does not produce only its direct result; it enables other good decisions. A good decision creates conditions — resources, position, optionality — that make the next decisions better and easier. Good decisions compound: each one enables the next, and the advantage takes off as the good decisions compound on top of each other. That is why the quality of the management decision has superlinear returns: a slightly better management does not produce a slightly better result, but a much better result, because good decisions compound and take off the advantage.

Here is the corollary the enthusiasm forgets: errors also compound. If good decisions compound superlinearly, errors do too: a management error does not produce only its direct damage; it creates the conditions for other errors. An error consumes resources, closes options, creates problems that force other errors — and errors compound, each one enabling the next, with the damage taking off as the errors compound. Superlinearity is not only of the positive returns; it is of returns in general, positive and negative. Management errors have negative superlinear returns: a slightly larger error does not produce a slightly larger damage, but a much larger damage, because errors compound and take off the damage. Superlinearity cuts both ways.

Notice the connection to compounding, optionality and asymmetry we had been pulling. I pointed out that advantages compound, that optionality enables future options, that decisions have asymmetric consequences. The superlinearity of management decisions is the application of those threads: good decisions compounding the advantage, errors compounding the damage, the quality of the decision being disproportionately decisive. What we had been seeing about compounding is confirmed in management: decisions compound superlinearly, for good and for ill, making the quality of the decision the disproportionately decisive factor — because both good decisions and errors take off, instead of adding linearly.

See what superlinearity in both directions suggests about management. If management decisions have superlinear returns, positive and negative, then the quality of the decision matters disproportionately — a slightly better management produces a much better result, and a slightly worse one, a much larger damage. That raises the value of deciding well and the cost of deciding badly, both disproportionately. The suggestion is to treat the quality of the decision as the decisive factor, investing in deciding well and in avoiding the errors that compound — because in a superlinear dynamic, the difference between the good decision and the error is not linear, but takes off. Management in a superlinear world is, above all, the pursuit of the quality of the decision, whose return (and whose damage) compounds and takes off.

It is fair, in balance, to recognize that superlinearity has limits and that not every context is equally superlinear. Not all returns are superlinear — some contexts are more linear, with less compounding and take-off. And superlinearity has limits: the compounding is not infinite, and external factors can interrupt the take-off. The point is not that everything is superlinear or that the compounding has no limits, but that management decisions tend to have superlinear returns, positive and negative, and that recognizing this raises the importance of the quality of the decision. Maturity is recognizing superlinearity where it operates — in the compounding of management decisions — without presuming it universal or unlimited, but taking seriously that, where returns compound, the quality of the decision is disproportionately decisive, for good and for ill.

For the investor and the manager, this suggests treating the quality of the decision as the disproportionately decisive factor, given the superlinearity of returns. The question about a management is not 'does it decide reasonably?', but 'does the quality of its decisions compound advantage or compound error, given that both take off?'. The managements that decide well compound advantage superlinearly; those that err compound damage superlinearly — and the difference between them takes off, instead of adding. Whoever evaluates management linearly underestimates both the value of the good decision and the cost of the error; whoever recognizes the superlinearity sees that the quality of the decision is disproportionately decisive, because the returns of management, positive and negative, compound and take off instead of adding.

The rule of this moment: management decisions have superlinear returns — good decisions compound the advantage, errors compound the damage — and the superlinearity cuts both ways, making the quality of the decision disproportionately decisive, for good and for ill. Whoever treats the returns of management as linear underestimates both the value of the good decision and the cost of the error; whoever recognizes the superlinearity invests in the quality of the decision, whose return and whose damage take off, instead of adding.

Management decisions have superlinear returns. So do the errors. Good decisions compound the advantage and errors compound the damage, because the superlinearity of returns cuts both ways — making the quality of the decision disproportionately decisive. Mark the superlinearity of management decisions not as a promise of taken-off returns, but as a double-edged truth — the demonstration that good decisions compound the advantage superlinearly, that errors compound the damage the same way, and that superlinearity, by cutting both ways, makes the quality of the decision the disproportionately decisive factor of management — because in a superlinear dynamic, the difference between deciding well and erring does not add linearly, but compounds and takes off, for good and for ill.

Leo Bentier