It’s All in Your Head: Masterclass on Thriving in Turbulent Times

Darius Teter: In our last episode, we discussed the psychology of grit and how leaders and enterprises can be built to withstand crises. So we thought it was the perfect time to revisit an interview from one of our very first episodes. In this masterclass, we’ll hear from Stanford Graduate School of Business Professor Baba Shiv, whose research focuses on the neuroscience of decision making and the practice of innovation from Silicon Valley to emerging markets.

Baba Shiv: One thing you’ve got to recognize is that at the end of the day, most human decisions and most human behaviors are grounded in emotion. It is not the rational brain.

Darius Teter: In his experience surveying hundreds of CEOs over the years, Professor Shiv has seen companies deal with all sorts of crises. Some have flourished, but some have folded. In this deep dive we’ll discuss what distinguishes the survivors, the mental and physical ways that leaders can prepare to innovate during crises, and some distinct advantages shared by entrepreneurs in emerging markets when a crisis hits.

I’m Darius Teeter and this is a masterclass by Grit & Growth with Stanford Graduate School of Business, the show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs. Much of Professor Shiv’s work is focused on the difference between what he calls the type one and type two mindsets. I’ll let him explain.

Baba Shiv: If you have read Danny Kahneman’s book, Thinking Fast and Slow, then exactly what he is saying is that most of our decisions are being made by fast thinking systems, what I call emotional systems, not by slow thinking, deliberative systems. We’re going to understand how does the emotional brain work? The way the emotional brain is geared to behave at any given point in time will depend upon the mindset that prevails or the mental state that prevails at that point in time.

Is it a type one mindset or is it a type two mindset? So these are terms that are borrowed from statistics and in statistics we have the notion of the type one era, the type two era. What is a type one era? It’s a fear of making a mistake, it’s a fear of failure. The type two mindset on the other hand is not a fear of failure, it’s a fear of missing out on opportunities.

At the end of the day it’s really not a fear, it is a desire for new opportunities. And it turns out that the brain has two distinct neural circuitries; one devoted to the risk of a type one mindset and another devoted to the risk type two mindset. And the most critical thing about the way the emotional brain is geared to behave at any given point in time is that if the brain is still in a state of stress, in other words, still in a type one mindset, the brain will be unable to switch to the risk type two mindset. And that’s why it’s so crucial that you first get into a state of comfort. This could be for individuals, could be in the form of getting a good night’s sleep.

Fitness also makes a big difference; practices like meditation, et cetera, make a big difference because it’s going to make the brain a lot more resilient to stress, which means that the leader is not often stressed, which means that the leader’s brain can switch into the type two mindset. And there’s a lot of research backing this up, that something like 90 to 95% of human decisions and behaviors are shaped non-consciously by emotional brain systems, not by rational brain systems.

Darius Teter: So in Baba Shiv’s lexicon, the type one mindset worries about failure. While the type two mindset is open to opportunities. I wondered how these mindsets actually affect decision making.

Baba Shiv: At the end of the day, what the rational brain is good at is simply rationalizing what the emotional brain has already decided to do. Which means if you’re stuck in a risk averse mindset, the rational brain will come in and say, these are the reasons why you have to be risk averse. These are the reasons why you should not innovate, et cetera.

Whereas if you’re in a type two mindset, the rational brain will come in and say, here are the reasons why you should take some chances. And then you could start thinking about the downstream applications of the simple principle of the emotional brain, having the type one circuitry and the type two circuitry.

You’ll see some leaders when the crisis hits, they might have done all the scenario planning beforehand. They might have plan B, plan C, et cetera, but that is really very cognitive in nature, that exercise. It is when they get into the crisis, when the true leadership capabilities will begin to emerge, and you can see that happening among leaders, that when the crisis hits, they’re able to kind of take a step back. They’re able to assess the situation and then think very creatively about what can I do to address the challenge, but even more importantly, how can I leverage the opportunities that this crisis has afforded?

Darius Teter: Of course the mind is part of the body and our mindset is affected by our physical condition. So what can we do to achieve a type two mindset? Here’s what Baba Shiv recommends.

Baba Shiv: How should a leader go about managing a crisis? First and foremost, the person needs to calm down. First thing I would advise leaders to do is get good sleep. What tends to happen during crisis is that leaders are fighting a lot of fires and what they would sacrifice is sleep, and lack of sleep is a huge detriment because what will happen is that if you’ve not had enough sleep, what is called restorative sleep, when all the brain chemicals like serotonin, dopamine, et cetera, are coming back to normal, you’re going to naturally form a physiological and a brain standpoint, you’re naturally going to wake up being in a risk averse type one mindset.

That’s the last thing that the leader wants to do in times of crisis. So get a good night’s rest. If you can let your team do that, do that as well, because what is needed out here is not just the leader, but also the entire team that is on board to kind of wade through the crisis, addressing the challenges, but more importantly, grabbing the opportunities that the crisis is going to be afforded.

The second thing that I would do is that even before any crisis hits, a leader should get into practices like meditation, yoga, Tai chi, et cetera. Now this might sound like some kind of yoga master teaching you. No, there’s a lot of science behind this suggesting that if you engage in practices like Tai chi, yoga, meditation, et cetera, that slows down your breathing, your brain is going to become a lot more resilient to stress. So when a crisis hits, get a good night’s sleep. And if you’re not yet practicing, the leader’s not practicing meditation, Tai chi, yoga, et cetera, slowing down their breaths, they should start that practice just to make sure that the brain is able to go into the innovative or the type two, risk tolerant mindset.

Darius Teter: There are even ways to physically measure how prepared your mind is to deal with stress.

Baba Shiv: So technology is going to definitely help us going forward, right? I mean, so if you think about how resilient your brain is to stress is highly correlated with what is referred to as heart rate variability. Heart rate variability essentially taps into the parasympathetic nervous system. So we have the sympathetic nervous system and the parasympathetic. The sympathetic is the fight flight system, and the sympathetic parasympathetic is the rest digest system. Calm down, calm down, et cetera.

If you want to know if your brain is inherently resilient to stress, you can easily monitor your heart rate variability. There are a lot of ways of doing that. You can do this with your phone. There are other ones that are out there. You can measure your heart rate variability and the heart rate variability essentially is the falling. The heart doesn’t beat like a metronome. We think that it is beating at regular intervals. It is not.

There’s always a fluctuation between beats. So it is called beat to beat interval. The beat to beat interval will always have a fluctuation. The greater the fluctuation, the greater the variability. In other words, the greater the heart rate variability, the more resilient the brain is to stress. So one of the things that a leader could do thanks to technology is to monitor their heart rate variability at any given point in time, which will tell them, are they in a position right now to make a decision, an important decision.

Darius Teter: Many leaders in times of crisis, fall back on tried and true products, customers and markets. They go with what they know or they take a wait and see approach. That may seem reasonable, but is it right?

Baba Shiv: Let’s think about it. Why is crisis the best time to innovate? It is Charles Darwin who said that it is not the strongest of the species that survives; not even the most intelligent. The one that is going to survive is the one that is most adaptable to change. Which means that yes, you can say, as a leader, I’ll just wave this out. You know, for six months, fine, I’m going to emerge from there. Maybe I’ll emerge weaker, but I’ll kind of start from that point in time and move forward.

But keep in mind, you’re not lower in the market than other players in the market. And if there’s another player in the market who, as Darwin said, is much more adaptable to the change, they’re going to emerge much stronger than you are going into the future. So don’t assume that your strength before the crisis is going to remain the same going forward, because there are other players out there who are probably doing the right kind of things in terms of being innovative, adaptive, et cetera, who are going to be much, much stronger.

So the survival of the company in the long haul, never, ever comes from sticking to the status quo. It always will come from being adaptable to change, responding to change that is happening. And that is where the leader needs to have an innovation mindset. And the organization as a culture needs to have an innovation mindset. What they would do is that they always treat the situation as being dynamic. It is not static.

What it means is that you have come into the situation with a lot of assumptions, preconceived notions, et cetera. That’s the same thing for leaders as well. Crisis is a great opportunity for leaders to come in and reassess all the assumptions and preconceived notions that they have. Don’t try to do what you are doing in the past, because that is not going to help you address the crisis because you cannot assume that the world is static anymore. A crisis is going to be very dynamic.

Darius Teter: Baba Shiv has a simple shorthand for leaders who bring an innovation mindset to a crisis. Innovation equals creativity, times execution and divided by constraints. And no, that’s not a mathematical formula, but for Baba, it does add up.

Baba Shiv: Generally, if you should ask people, oh, what comes to mind? When the word innovation is uttered, in general, people will say innovation is creativity. Innovation is really not just creativity. Creativity is an important component of that. That requires an innovation mindset, the type two mindset, et cetera, but it also requires execution. You are coming up with certain hypotheses that need to be tested, and that requires execution. The third component here is constraints. So the way I look at it, this is that innovation is creativity multiplied by execution, divided by perceived constraints, all the constraints out there.

The second way to think about constraints is that, and I see this happening time and time and time, again, if I tell you to come up with a solution. So for example, you’re going to Rwanda, you’re looking at a rural home out there. The integrity of the flooring in the home is not great.

And if I’m going to tell you, you need to come up with a solution for this. Your first thing that you would do is to say, okay, I’ll just make sure I’ll just find out how much it costs to put cement and so on and so forth. Not realizing that person will not be able to spend more than $20 for the floor. That is a constraint.

So if you bring in constraints very early on in the design process, as you’re figuring out what is working, what is not working, what are the assumptions to be made? What are the hypotheses, et cetera? It is always a good idea to bring in the constraints.

So two things quickly to summarize about this equation, that innovation is creativity, multiplied by execution. Yes, creativity is important. Yes, execution is important, but let’s not forget the constraints and especially in a crisis situation. You’re bound to face constraints that you’ve never faced before. It could be financial constraints. It could be market constraints. It could be team constraints. Maybe a team member has fallen sick, a critical team member has fallen sick.

Those are all constraints and innovation comes from being able to develop your solution and deliver on your solution subject to these constraints. Always a good idea to incorporate constraints into the design process.

Darius Teter: Baba Shiv has seen firsthand that leaders from emerging markets are particularly resourceful, not in spite of their situations, but because of them.

Baba Shiv: What I notice about the entrepreneurs who come out from India, Africa, East Africa, West Africa, Southern Africa. One thing I noticed is that they’re extremely innovative, extremely innovative, because they’re facing constraints all the time. That could be credit constraints. Interest rates are very high.

There is a lack of trust between the supplier and think they’re dealing with all the time. And I feel that rather than saying that that is a disadvantage of being an entrepreneur in a developing economy, I would argue it is actually an advantage because inherently you are a lot more innovative in terms of the creativity, in terms of the execution and going with the constraints that are out there.

You’re far better equipped to handle a crisis than someone who is probably in the more Western, more developed kind of economies. And also one of the things that they quickly realize in these developing economies is that because of all the constraints, because of all the struggles they have to go through, when given an opportunity to collaborate with other business leaders, they jump onto that opportunity much sooner than people in more developed economies would do because in developed economies, you can say, yeah, I’ll kind of raise more money and I can solve the problem.

Yeah, I can hire more people. I can solve the problem. Yeah. I can pay more, pay less and give a discount. I can solve the problem. The business leaders in many of the developing economies that I have encountered out there, don’t go with that kind of assumption. It’s not, the first thing is not going to raise more money; it’s who can I reach out to in my network so that I can get some help. And it’s a very natural process that they go through, which is why you’re seeing now, we are seeing this right in front of our eyes, as we speak, all the collaboration that is happening among the business leaders who have attended the Seed program.

Darius Teter: Part of what makes a crisis such a fertile time for innovation is that it turns the world on its head.

Baba Shiv: If you go with that assumption that the world is dynamic. What that allows you to do is first get rid of preconceived notions and start looking at what new assumptions I have to make going forward. And how do I go about testing those assumptions?

It’s one thing to simply go about coming up with new assumptions out there. The other thing is to actually execute on that, which means you need to test these things out. So I would always advocate a leader during a crisis to consider the situation, to be dynamic even more so when we are not in a crisis situation, go back to the drawing board and ask the fundamental questions: what assumptions have I come into the situation with? That is all assumptions that have come from the past. What assumptions need to be relaxed? What new assumptions or hypotheses need to be formed?

Ask yourself what is the business that you are in? And very often I see entrepreneurs making the mistake: they’ll say that I’m in the business of selling pineapple juice. No, you’re not in the business of selling pineapple juice. You are in the business of quenching thirst with a beverage that tastes good and is also healthy and is also nutritious. Okay?

So if that is how you define your business, why rely on pineapple? I might find a local fruit in the country where I can utilize my same production facility to create a beverage that is no longer dependent upon pineapples. If it works, then how do you replicate that? If it doesn’t work, that’s fine. You at least learned, you failed fast, you failed cheaply and you failed forward in the sense that you learned something from the situation that you can now apply to the crisis situation going forward.

It is in times of crisis, that the true matter of a leader is going to be determined. And which is why if you go to a VC and you are a startup (your startup failed, you go for the next venture) you go and knock at the door of a VC and say, I want to raise money. The VC is not going to say, oh, the last business you started and you failed. What they’re going to say is that you learned a lot from what kind of failure that you went through, which means you’re going to be a lot more mature, which means you’re not going to repeat the same mistakes that you committed in the previous startup.

Darius Teter: Part of innovation is messing up. But in many cultures, the fear of failure can stifle experimentation.

Baba Shiv: In 2007, 2008 time period, the Department of Science and Technology in India had asked me to come down, do some work with them about how we foster entrepreneurship in India. I started talking to some of the best students from the best universities, most of them engineering schools in India. And I was shocked to learn that the top 10% of the class, irrespective of the university I went to, and I asked these students, do you want to innovate or do you want to become an entrepreneur? Let me ask you a question. You can either be an innovator or you can be an entrepreneur. And that’s a big difference out there. You can innovate stuff and then sell off the IP to someone else. Entrepreneur requires you to actually run a company. And I asked every one of these students that I met, would you like to be an entrepreneur?

And invariably, this is the 2007 time period, they said no. And I asked why. And that’s why you’ve got to understand the culture of the place. Imagine that a young kid in an engineering school, okay, 30, 32 years old has a job offer from the Tatas. The person cannot make career decisions on their own. That’s the culture of India, many of the Asian countries, and also countries in Africa, by the way, where if I have to make these career decisions, I have to consult my parents. I had to consult my uncle, my aunts, and so on and so forth. There are multiple people out there. If I’m this young person to my parents and saying, I have a job offer from the Tatas, but I want to go into entrepreneurship. What do you think the parents are going to say? They’re going to say you are stupid. This is how I brought you up.

And therefore, when you’re designing these solutions, you’ve got to be acutely aware of the cultural context that we are operating in. And you’re absolutely right. That in most cultures out there, failure is not tolerated. Failure is ridiculed, sometimes even punished, right? That’s going to state out there. Hopefully what the graduate school of business is doing. Because that is the mission of the graduate school of business is to change lives, change organizations, change the world, is for us to create these ecosystems where failure is no longer going to be seen as taboo.

Yes, it is going to take time. But the hope is that within one generation, 20 years, that we think about these developing economies, where this culture of failure or against failure is so deeply embedded will begin to change. And we are beginning to see the change and I mean from 2007 to 2017, there was a massive change in what I was observing on the ground in India, where now young kids in the top 10% of their class, they don’t want to go and work for a large corporation, which is no different than the Stanford GSB.

They want to work in a startup either in an early state or growth state. Why? Because that taboo has disappeared. And why has that happened? That’s because now there are role models. There are people who started companies like Flipkart in India, et cetera, who become very successful. Now the parents are saying, yeah, you have an offer from the Tatas, but I don’t want you to go and work in the Tatas out there. That is for the previous generation, I would rather you go and start a company and make it into the next Flipkart of the world.

Darius Teter: Baba has outlined a series of steps for a leader to get in the right mindset, to tackle crises, from challenging assumptions while recognizing constraints, to searching for opportunities to innovate and embracing failure. But I wondered, how does a leader bring their team along? How do they foster a type two mindset throughout the organization?

Baba Shiv: If everyone is stressed, generally, what tends to happen is people will go into their own shell because it’s a survival mode. I have to survive first, before I start helping others and start collaborating with others. It is the leader’s job to kind of say, let us go through this whole thing, forget about whether you win or lose. Ask yourself the question. Are you going to feel proud of yourself, of what you did?

And you’re going to feel proud when you’re giving your best. And that’s the leader’s job. The leader’s job is to have the internal team members get out of the state of stress, knowing that survival is going to come from teamwork. And the second critical factor that they have to be looking at the leaders are to be doing is for the team members to kind of put in place the culture and the space out there so that they can start now reaching out and collaborating among one another.

And that is the leader’s job. The leader’s job is to tell the staff out there that it is not about losing. It’s not about winning out there, but let us feel proud and let us feel proud in such a way that when we emerged from the crisis, we would’ve emerged much stronger. Not the company, not the leader, but all of us collectively have emerged from it feeling much stronger. Failures could have happened. That’s okay.

Darius Teter: One thing we’ve learned over the past 18 months is that big exogenous shocks like the pandemic are experienced not just as a crisis for each company, but as a series of interrelated and sometimes reinforcing crises throughout supply chains and markets. So focusing all your energy internally may be a missed opportunity. I ask Baba how leaders can draw on external resources in crisis. Do leaders have potential allies with shared interests?

Baba Shiv: People often talk about competitive advantage, and don’t get me wrong, that is important. In other words, how is your value proposition superior to that of your near risk competitor? That’s competitive advantage, but people forget a second element, which is referred to as collaborative advantage.

Now collaborative advantage very often is about how do you manage your dependencies? So you might have suppliers out there. You have customers out there, your distributors out there, these are all relationships. What do we often end up doing in trying to create a collaborative advantage? We adopt our transactional approach, the transactional approach, being that we are going to sign some contracts. If there’s any violation of the contracts, then we can go to the court of law and have that adjudicated and so on and so forth. But guess what? In a transactional approach, we’ll give rise to a lot of suspicion.

People are suspecting one another. They don’t divulge information with one another. It’s an adversarial kind of a relationship. The true collaborative advantage comes when one adopts a relational approach, not a transactional but relational approach. And if you go to many of the Asian countries, you kind of notice that, go to Japan.

For example, you will never be able to break into the Japanese market unless you have created a very strong, deep relationship with the key partner that you’re looking for in Japan, because everything is based on relationship. And at the core of the relationship approach to creating collaborative advantage is building trust.

It is in times of crisis when everyone is struggling, it’s not just you, you’re not alone in this. There are other people also who are struggling out there. How do we go to these important strategic partners, your suppliers, your distributors, et cetera, not with the transactional approach. And guess what, when you adopt that kind of relational approach that your partner has also been doing, people will feel grateful for that.

They will always remember that in times of difficulty, when even your partner didn’t have the money to pay salaries, et cetera, that leader was able to do something to help people out. And people never forget that. Never ever forget that. And you’re going to develop a deep level relationship, not only amongst your team members and your partners doing the right thing there, developing that kind of comradery to emerge the crises, but even your strategic partners out there, your suppliers or distributors are going to kind of look at you very differently that you’re not just here for a transactional game, but it’s just an exchange that is taking place. But you’re here for a collaborative game where all of us are going to win.

Darius Teter: I asked Baba Shiv to summarize some actionable takeaways for CEOs facing a crisis.

Baba Shiv: So let me give you some thoughts here for any leader who is going through a crisis. Okay. First one, remember that you are in a unique position to not only survive, but emerge from the crisis being stronger and you have the capabilities to do that. And if you don’t, you’ve got to build it.

The second one that I would say is always think about not just competitive advantage, think also about collaborative advantage and think about collaborative advantage that comes not from just a transactional approach, comes from a relational approach. And what that means is building meaningful connections that are grounded in trust. If you’re already in a crisis right now, hopefully you have prepared for the crisis. So keep in mind that the people who are better prepared are going to be the winners, but you can’t prepare for every single crisis. So preparation is not just about scenario planning.

Preparation is not just about thinking about various strategies and outcomes, and so on. Preparation comes from the fact that — do I have the capabilities, which are the emotional capabilities, to deal with the crisis? Number one, and number two, does my team have the capabilities, the emotional capabilities to be innovative at times of crisis? And the third takeaway is that it is a leader’s job to make sure that the organization is adaptable to change. And it’s a leader’s job to ensure that that organization emerges from the crisis a lot stronger than before. And at the root of that is an innovation mindset.

Darius Teter: Baba Shiv believes companies that take these steps are better positioned to win in the future.

Baba Shiv: If you think about the success of long term success of any organization, in my humble opinion, that is going to come from times of crisis like this and you, this is universal, but what these leaders would kind of learn from this is the importance of maintaining connections with one another; meaningful connections to one another and creating a collaborative advantage that is truly grounded in meaningful connections, truly grounded in trust, rather than a transactional approach.

So I believe that this period that we are in, where the leaders from Africa, from India, et cetera, are innovating, I think is going to pay off huge in terms of the long term, because what we are going to observe from this crisis is success stories. And these are not short term success stories, these are going to be long term success stories.

Darius Teter: I want to thank Professor Shiv for sharing his insights on how to prepare our bodies and minds to lead through crisis and for encouraging entrepreneurs across the world to work together in these difficult times. This has been a masterclass for Grit & Growth with Stanford Graduate School of Business. And I’m your host, Darius Teter.

In an upcoming episode, we will hear from Matt Abrahams, a Stanford lecturer and the host of the popular podcast Think Fast, Talk Smart. Matt will share invaluable advice for how to communicate your big idea. I hope you’ll join us.

If you want to find out more about how Stanford Graduate School of Business is partnering with entrepreneurs throughout Africa and South Asia through Stanford Seed, visit us at seed.stanford.edu/podcast. If you like this episode, don’t forget to hit follow and share it with a friend.

Grit & Growth is a podcast by Stanford Seed, Laurie Fuller researched and developed content for this episode with additional research by Jeff Prickett. Kendra Gladych is our production coordinator and our executive producer is Tiffany Steeves, with writing and production from Isobel Pollard and Andrew Ganem, and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll see you next time.