The Yellow Pad

• Chapter I •

Reacting VERSUS Responding

The invitation was written on lined, three-hole-punched paper. The handwriting was tidy, with every letter an identical height, signed by someone named Shadeed Wallace-Stepter.

"I know you're a very busy dude," it read. "But if you can ever find the time I want to formally invite you to San Quentin."

That's how I ended up giving a talk in a California state prison.

During my career, I've entered plenty of intimidating buildings, from the White House and the Capitol to Wall Street banks and corporate headquarters. Still, visiting San Quentin was different. A massive stone fortress overlooking San Francisco Bay, the prison has housed some of our country's most notorious figures over the years. More than any place except Alcatraz Island, San Quentin is synonymous with the American penitentiary. It was impossible not to feel the building's symbolic weight.

Before our arrival, my wife, Judy, and I were told which colors we could wear-different types of people were required to dress in different colors for easy identification. Upon arriving at the gate, we emptied our pockets and were checked for weapons by guards in green uniforms, who then took us to a large room filled with incarcerated men dressed in blue pants and blue shirts. After being introduced (and after Judy recovered my speech, which I had dropped on the floor while walking to the stage), I addressed a room filled with men who had been convicted of serious crimes: murder, drug dealing, and armed robbery, to name just a few.

Initially, I must admit, I had not been sure that agreeing to the invitation was a good idea.

I wasn't troubled, in a moral sense, about speaking to people who had committed crimes. It is my firm belief that we are all flawed. That view, coupled with my dislike for absolutes, means that while I have no problem thinking of individuals' actions as good or bad, I don't tend to sort people that way. Some people do serious and even terrible harm to others, and I believe that one of society's important functions is to protect people and appropriately punish those who violate our laws. But I also believe that the lawyer and activist Bryan Stevenson, who has advocated on behalf of dozens of people sentenced to death, put it well when he wrote, "Each of us is more than the worst thing we've ever done."

My concern in speaking at San Quentin was not with my audience, but with me. I worried that my story would simply not hold the attention of the people there. How could a debt crisis in Mexico or lessons learned at the risk arbitrage desk of an investment bank be of interest to men living behind bars? How could the challenges I'd faced on Wall Street or at the Treasury Department relate to the struggles they had gone through? I feared my experience might be alien to them-that they might find whatever I had to say irrelevant or, even worse, off-putting, as though I were trying to say my experiences were identical to theirs.

What changed my perspective was a phone call I had a few weeks before my visit, which was set up by Delia Cohen, the organizer who planned the event. Shadeed, the letter writer who invited me (and who goes by "Sha"), was part of our discussion, along with several other incarcerated men.

Our conversation lasted an hour and twenty minutes. I took five pages of notes. As we talked, something dawned on me. I had spent time with many different kinds of people in my life. Yet I had rarely encountered a group as thoughtful and reflective, a group so willing to accept and engage with complexity, as the men I spoke with on that call.

Most impressive was how forthright these men were about the crimes they had committed, and how deeply they had considered the consequences of their actions. I was particularly struck by the way one man analyzed the decision-making that had led him to that point, describing what he had learned and how he hoped to behave differently in the future.

"We shouldn't react," he said. "We should respond."

To react, he elaborated, is to make a decision based on a split-second, emotionally charged impulse. Responding, on the other hand, involves thought and patience. It requires stepping back to consider the situation and the potential consequences of one's actions.

This man who had brought up reacting and responding-someone who was serving a long prison sentence for felony murder-understood something that eludes countless policy-makers, investors, and CEOs. If we want to make better choices regarding our lives, our economy, our country, and, ultimately, the criminal justice system itself, I can think of no better prescription than the one he offered on the phone.

We shouldn't react. We should respond.


In the Clinton White House, one of the speechwriters was a young man named Jonathan Prince. He was very bright, with a rare ability to think through problems and express the solutions. Among Jonathan’s insights was a phrase he coined, “extreme disruption.”

This was years before Silicon Valley made the word "disruption" its own and turned it into a cliché. What Jonathan meant was something closer to what most of us would call a crisis. But the importance of his language was that it captured the dynamic that underlies so many crises. In moments of extreme disruption, circumstances change dramatically in a relatively short period of time. In most situations, decision-makers can rely on experience to help them make the best possible choices. But in moments of extreme disruption, experience becomes far less helpful because so much has changed so quickly.

Moments of extreme disruption can be very different, depending on the circumstances. The people I spoke to in San Quentin described fights breaking out or robberies gone wrong. One incarcerated man I later spoke with told me that together, a group of twenty-eight incarcerated men had tried to quantify the personal cost of their decisions in such moments. In total, they concluded, crimes that had taken 4 minutes and 26 seconds to commit had resulted in prison terms that added up to 715 years. These men had reacted rather than responded, with permanent consequences for both the victims and perpetrators of their crimes.

Most of us, myself included, have little experience with such dramatic or violent moments of disruption. Yet everyone I know has experienced extreme disruption in their own lives.

Some of these moments are quite literally instants, when everything changes in a split second. On other occasions, the "moments" can take weeks, months, or years, but nonetheless are periods of rapid and intense change. As individuals, organizations, nations, and societies, we inevitably encounter occasions where the situation changes quickly, threats become more dangerous, and the way forward becomes unclear. Today, even younger people are familiar with such moments: they lived through 9/11, the Great Recession, a global pandemic, and the Russian invasion of Ukraine, all within roughly a two-decade span.

Unfortunately, these moments of extreme disruption are precisely the kinds of circumstances that often lead to bad decisions.

To use just one example, shortly after Donald Trump was elected president, a friend of mine, who generally has very sensible judgment, sold all of his stocks and mutual funds. In retrospect that may seem like an overreaction, but at the time his motivations were, broadly speaking, understandable. Like many people, myself included, he worried that an unstable president could precipitate a stock market crash.

But my friend nevertheless made a mistake in reacting to Trump's election, and exploring the nature of this mistake helps illustrate the usefulness of thinking probabilistically.

At a moment of extreme disruption, when circumstances were simultaneously more frightening and less stable, my friend made an emotional decision that didn't recognize the high levels of uncertainty associated with any big-picture prediction. The odds of a Trump-related crash were, of course, greater than zero and might have been significant-meaning that perhaps he should have sold off a percentage of his investments if he wanted to provide some financial security in case of a severe downturn. But something about the combination of sudden change and heightened stakes caused my friend to act as though the odds of a crash were 100 percent, which led him to an unwise choice: selling 100 percent of his portfolio.

This kind of thought process is common, perhaps surprisingly so. In every arena I've entered-finance, politics, business, personal investing, nonprofits-I've seen otherwise excellent leaders and thinkers abandon a sound approach to decision-making when extreme disruption strikes. When the future becomes harder to predict than ever, they paradoxically act as though they are completely certain as to what the future holds. In the short term, reacting in this way-instinctively, impulsively, and overconfidently-sometimes actually does lead to a positive result. After all, if I act as though a given outcome has a 100 percent chance of occurring, when in fact it has only a 10 percent chance of occurring, then 10 percent of the time things will work out the way I expected. But in the long run, this seemingly fortunate scenario will likely end poorly, because if I continue to double down on reacting instead of responding, eventually it's going to catch up to me. Lucky streaks have a tendency to end.

In other words, in almost all cases, an instinctual reaction to a moment of disruption leads either to bad outcomes in the short term, or to even worse outcomes over the long term.

The alternative, as many in San Quentin had come to understand, is to respond. At the moment of disruption, whether that moment is an instant or some longer period, a decision-maker must be able to overcome the pressure to act rashly and instead analyze costs and benefits, making the best possible choice given the circumstances and time available.

So what separates those who make thoughtful decisions in moments of disruption from those who do not? Why is it that some of us react, and others are able to respond?

The typical answer is temperament. I won't deny that temperament plays a role. For some, responding comes naturally. For others, reacting does. But I have seen plenty of otherwise thoughtful people default to absolutism in a highly charged moment, just as I have seen passionate people handle a crisis by carefully thinking things through.

In my experience, the key to sound decision-making is not to resist having strong feelings about an issue. It's human nature to have emotions. The question is: Do you get swallowed up by your emotions? Or do you have an emotional reaction, recognize it, and then manage to postpone your initial impulse long enough to make a considered choice? Responding takes discipline; reacting does not.

The best time-indeed, often the only time-to build that discipline is before a moment of disruption strikes. I have found that what distinguishes strong leaders and good decision-makers isn't that they have no emotional bias. It's that they understand their emotional biases and compensate for them.

For example, I know that as an investor, my instinct is to overweight risks-in other words, my risk aversion is a character trait rather than an investment strategy. But because I know this, I'm able to adjust my decision-making accordingly. At the very least, in the heat of the moment-or better yet, when building my expected-value table on a yellow pad long before the moment arrives-I can question and evaluate my own instincts. Am I taking unnecessary precautions? Am I systemically overestimating the odds of negative outcomes occurring?

While I still might tend to err slightly on the side of caution, forcing myself to consider these possibilities helps me recognize where emotions may have affected my decision, and then readjust accordingly.

(Of course, other people might have to correct for the opposite emotional bias: if you're too comfortable with risk, you'll want to ask yourself whether you're systematically underweighting the chances of a negative result.)

Which brings me to another way in which decision-making can be improved during moments of disruption: instead of relying solely on one's individual judgment, decision-makers can harness the power of a group. This is difficult to do effectively. It requires leaders to be receptive to people who don't share their views and to seek out disagreement rather than gravitate toward easy consensus. But the benefits can be immense.

For example, during my time as the director of President Bill Clinton's National Economic Council, and later as secretary of the Treasury, I came to believe that one of the president's greatest strengths was that, if nobody disagreed with him, he would ask his team: "Okay, what's the other point of view?" He didn't just tolerate differing viewpoints. He embraced them as essential to understanding. And his psyche never seemed to feel threatened if someone who disagreed with him was better informed or seemed to be thinking differently about an issue than he was.

While those meetings with the president tended to have anywhere from half a dozen to about two dozen people, sometimes effective groups can be as small as just two or three. Early in 1995, when I was at the Treasury Department, Mexico was facing a sovereign debt crisis, and the prospect of a deep and prolonged economic downturn that would affect not just the Mexican economy but the American economy as well. We tried to support Mexico directly, by loaning their government money in the hopes of creating the conditions for a rebound, but at first, the markets didn't seem to be responding. At one point, I discussed the matter with Larry Summers, my deputy at Treasury and a renowned economist. We looked at the cost up to that point, which was several billion in taxpayer dollars, and concluded that the program simply wasn't working-the markets weren't reacting in a way that would support Mexico's financial sustainability-and thus wasn't worth continuing.

But when we went over to see Leon Panetta, who was then the White House chief of staff, and told him we were thinking about ending the program, he came at it from a different perspective. "My gosh, you can't do that," he said, urging us to reconsider. We replied, "That would be throwing good money after bad. There's no sense to that."

Leon was concerned about a political rather than a policy outcome-he wanted to avoid the embarrassment of publicly admitting an expensive intervention had failed. Yet precisely because his perspective was so different from ours, Larry and I agreed to take another look. When the two of us worked through it, we realized our initial analysis might have been wrong. While we'd run into a very difficult period and maybe our program ultimately wasn't going to work, it seemed that from a purely economic perspective, the expected value of continuing it was greater than the expected value of ending it. In the end, our intervention turned out to be a success. Mexico paid back its loans to American taxpayers in full plus interest, and the Mexican economy recovered and stabilized in relatively short order.