Business: Decision Making, Bias, and Pitfalls
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Business Horizons (2008) 51, 113–119
Managers and their not-so rational decisions
S. Trevis Certo ⁎, Brian L. Connelly, Laszlo Tihanyi
Mays Business School, Texas A&M University, College Station, TX 77843-4221, USA
⁎ Corresponding author. E-mail address: [email protected]
0007-6813/$ - see front matter © 200 doi:10.1016/j.bushor.2007.11.002
Abstract
Today's corporate environment requires managers to be excellent decision makers. Their ability to make fast, widely-supported, and effective decisions will, in large part, shape the performance of their firms. In this article, we describe two cognitive systems that influence decision making. System 1 refers to a process that is fast, effortless, and intuitive. System 2 is a slow, controlled, and rule-governed decision- making process. Both are important to a wide variety of managerial decisions, and they interact with each other. There are, however, a number of forces at work that hinder the effectiveness of these processes. For example, we know from prospect theory that managers are unwilling to incur loss, so much so that they often make irrational decisions based on a small probability that they could avoid such loss. Another example, the escalation of commitment, explains why managers may continue to dedicate resources to failed projects. We describe these and other biases, with a view toward helping managers better understand the problems of decision making and improve the effectiveness of their decisions. © 2008 Kelley School of Business, Indiana University. All rights reserved.
KEYWORDS Top executives; Decision making; Risk
1. Managerial decision making Webster's Dictionary defines decision as “the act
Each day, practicing managers around the globe make decisions, some of which are more important than others. Based on the prominence of decision making in everyday life, researchers in various dis- ciplines – both within and outside of business schools – have examined the ways in which in- dividuals make decisions. That various disciplines within business schools have studied decision mak- ing should come as no surprise, as managers make decisions that span the various business functions.
.edu (S.T. Certo).
8 Kelley School of Business, In
of making up one's mind.” Hastie (2001) suggests that decisions involve three main components: courses of action (i.e., alternatives), beliefs about objective states and processes (including outcome states), and desires (i.e., utilities) that correspond to the outcomes associated with each potential action–event combination. Stated more simply, Hastie suggests that good decisions are those which link decision-makers' utilities with decision outcomes.
In business settings, managers make various types of decisions. Managers may make relatively minor decisions that are primarily operational or tactical in nature. For example, a manager may need to decide which type of napkins to stock in a
diana University. All rights reserved.
1 Hammond, Keeney, and Raiffa (1999) provide a slightly different rational decision-making model.
114 S.T. Certo et al.
restaurant. In contrast, managers may make more strategic decisions that involve larger outlays of capital. Such strategic decisions may include, for example, potential acquisition targets or host countries for foreign direct investment.
A decision implies that an individual has access to two or more alternatives. Some decisions may involve many alternatives, such as “Which country should we enter to begin our globalization effort?” In contrast, other decisions may involve only two alternatives (i.e.,“yes/no”decisions), suchas“Should I hire this individual to work in our department?” In fact, Henry Mintzberg studied the decision-making processes used by executives and found most deci- sions that executives faced were yes/no decisions (Mintzberg, 1975).
The decisions managers make vary in risk and uncertainty. Although some managers use these two terms interchangeably, they are, in fact, distinct. Frank Knight (1921) suggested long ago that risk refers to situations in which statistical probabilities can be assigned to alternative potential outcomes. The probabilities associated with the outcomes of roulette, for example, are known to individuals in advance. In contrast, uncertainty refers to situa- tions whereby the probability that a particular out- come will occur cannot be determined in advance. A manager, for instance, may be unable to articulate the probability that R&D expenditures will increase a firm's sales in five years.
It is important to note, though, that risk and un- certainty are not always objective standards. Speci- fically, two managers may ascribe differing levels of uncertainty or risk to the same decision. To this end, scholars have examined the role of perceptions in understanding how these characteristics may influ- ence decisions (e.g., Weber, Anderson, & Birnbaum, 1992).
1.1. How managers make decisions
There exists a sizeable literature – descriptive and normative – related to decision making. Perhaps the most prominent assumption in this body of lit- erature is that decision makers are rational. Among scholars working in this arena, decision makers are understood to vary with respect to their beliefs, opinions, and preferences, but rationality deals with the notion that these should cohere in a defensible fashion (Shafir & LeBoeuf, 2002). This explanation complements the assertion by Eisen- hardt and Zbaracki (1992, p. 18) that “In its most basic form, the rational model of choice follows the everyday assumption that human behavior has some purpose.” Summarizing the decision-making literature and the role of rationality, Shafir and LeBoeuf (2002, p. 492) suggest that “the rational-
ity assumption has come to constitute perhaps the most common and pivotal assumption under- lying theoretical accounts of human behavior in var- ious disciplines.”
Despite the dominant stronghold of rationality in decision-making research, some scholars have ques- tioned this assumption. Herbert Simon (1957) introduced the concept of bounded rationality, which suggests that managers make imperfect decisions due to a variety of factors including lack of information, inadequate time, and cognitive limitations. Simon's work suggests that managers could make better decisions, if only they could access the necessary resources. Instead, though, managers are often forced to make decisions with- out the resources necessary to ensure decision- making success. Simon labeled this process of making decisions that are suboptimal yet “good enough” as satisficing.
1.2. Decision-making processes
As decision-making research progressed, scholars began to question whether or not a single process properly described decision making. Stanovich and West (2002) summarized this research by suggesting that two cognitive systems, which they labeled as System 1 and System 2, influence decision making. According to their framework, System 1 refers to a process that is described as fast, automatic, effortless, and often emotional. Kahneman (2003) suggests that this system relies, to some extent, on habit and is difficult to break. Some scholars rough- ly equate this system to a decision-maker's intuition or instincts (see also Miller & Ireland, 2005).
In contrast, System 2 is described as slow, con- trolled, requiring effort, rule-governed, and flexible (Kahneman, 2003). This system is often typified as a more “rational” decision-making process. Bazerman (2006) describes, for example, a rational decision- making process that includes steps such as defining the problem, identifying relevant criteria, weighting these criteria, generating alternatives, rating alter- natives on each criterion, and computing the optimal decisions.1 Some scholars propose that System 1 is less developed, while System 2 has evolved over time (for a synopsis, see Morse, 2006). This line of rea- soning is consistent with Evans' (2003) assertion that humans and animals share System 1 processes, but System 2 is believed to have evolved more recently and is uniquely human.
Both System 1 and System 2 processes are im- portant to managerial decision making, and one is
115Managers and their not-so rational decisions
not inherently preferred over the other. For most people, these two processes work together in such a way that System2monitors the activities of System1, either confirming or denying intuitive decisions. It would be impossible for managers to operate using comprehensive System 2 processes for every decision they face, so they often rely on System 1 processes wherever it is sufficient and practical (Chugh, 2004). In fact, skilled decision makers may actually make higher-quality decisions when they rely on their in- tuition rather than relying on purely economic utility functions. For example, a manager who has a hunch about hard-to-quantify potential synergies in a pro- posed acquisition may be operating under System 1 processes, but the manager would later confirm these hunches through the System 2 process of due diligence.
While both processes may work in tandem, they are also susceptible to biases that interfere with our ability to make good decisions. Most people are aware that biases can create false impressions and distort intuitive judgment, but biases also affect System 2 processes, causing managers to make irrational decisions. In the remainder of this article, we describe some of the most significant biases and how they affect managerial decision making.
2. Decision-making biases
Daniel Kahneman, the 2002 Nobel Laureate in economics, made many important contributions to rational decision-making theory in conjunction with Amos Tversky. Prospect theory, as their collective ideas came to be known, describes several potential systematic biases derived from laboratory experi- ments.2 The results of these experiments cast doubt on the rational choices executives make.
2.1. Framing and loss aversion
One of the most common biases in decision making involves framing. When executives make decisions, they may frame the potential outcomes of their decisions differently relative to an earlier status quo. For example, some executives of a firm may consider a takeover or a buyout offer as the ideal solution to the firm's problems. Others within the firm may believe that the same transaction is destructive. Whether an option is framed as a gain or as a loss can lead to systematic differences in decision-makers' preferences, and may result in different outcomes for the firms involved.
2 For notable examples of their influential work, see: Kahne- man, Slovic, and Tversky (1982), Kahneman and Tversky (1979).
When options are framed as potential for loss, prospect theory describes how managers may be irrationally unwilling to incur loss. The idea behind loss aversion is an observed asymmetry between perceived gains and losses. Results of several experi- ments suggest that decision makers are approxi- mately twice more likely to try to avoid losses than favor gains; that is, their “value function” is twice as steep when they consider losses than when they consider gains. The perception that losses appear larger than equal-size gains forms the basis of the endowment effect in economics. Thaler (1980) found that individuals value their own goods that they consider selling more than they value goods that they consider buying. One practical implication of loss aversion was described by Odean (1998) in a study on investor behavior. This work suggests that investors hold on to their losing stocks too long, but sell their winning investments too soon.
Avoiding such loss aversion bias is nearly impos- sible, but being aware of its existence can help managers make better decisions. Furthermore, anticipation of loss aversion by competitors, buyers, or suppliers can improve the effectiveness of de- cision making. A recent article by Mercer (2005) lists several examples of the loss aversion bias from political science. Because the examples described above are from field settings rather than laboratory studies, they are more readily applicable to com- petitive conditions, the environment whereby many managerial decisions are made.
2.2. Risk seeking
In contrast to loss aversion, prospect theory re- searchers have also observed that decision makers irrationally seek risk. Risk-seeking behavior works in two different ways. First, individuals will take irra- tional risks when the alternative is a certain loss, despite the fact that System 2 processes should lead them to the opposite conclusion. This is actually the other side of the loss aversion coin, because it suggests that individuals strongly prefer risks that might possibly mitigate a loss. For example, man- agers may prefer a product development project with a high probability of large loss over a devel- opment project with a certain, but much smaller, loss. Second, individuals will take irrational risks when the potential payoff is unusually large. An example of this is evident in lottery jackpot events, whereby individuals are willing to bet for a large prize, despite its associated small probability. Here again, there appears to be a bias toward the poten- tially large payoff that distorts System 2 decision making.
Contrary to the principles of rationality, risk- seeking preferences also tend to be nonlinear. That
116 S.T. Certo et al.
is, when the probability of an event increases by the same rate but may lead to a different outcome, people make their decisions differently. For exam- ple, a .01 increase in the probability of an event occurring appears to be different for decision makers if this increase is added to an earlier low probability (e.g., .25) as compared to an earlier high probability (e.g., .99).
We see an example of risk seeking in the recent decisions made by Jeroen van der Veer. After taking the helm as CEO of Royal Dutch Shell PLC, van der Veer abolished the old board structure, streamlined decision making, and effectively concentrated power in the CEO position. The new structure fa- cilitated risk-seeking behavior and was followed by a series of high risk investments. Rather than main- tain the long-held and stable portfolio of traditional oil-development deals, van der Veer placed big bets on multi-billion dollar projects in places such as Qatar and Russia's Far East. The Wall Street Journal calls the strategy a gamble that is paying off for now, but, as van der Veer admits, it is still too early to deem the project an outright success (Cummins & Chazan, 2007).
2.3. Source dependence
Source dependence is based on the observation that decision makers often consider the source of an uncertain event, in addition to its level. For example, people may prefer to bet on a familiar sporting event, such as the NCAA Basketball March Madness, than on a matched chance event (e.g., a coin toss), regardless of the clearer probability in the chance event. Source dependence bias may explain failed acquisitions in seemingly related industries or failed investments in stocks of well- known but risky firms in the areas of technology, communication, and entertainment.
The problem of source dependence was likely a contributing factor to the recent collapse of the sub-prime mortgage industry. Banks and lenders are familiar with both mortgages and the underlying housing market. As housing prices boomed, they felt comfortable offering progressively easier and riskier lending terms. The number of no- or low-documen- tation loans increased three-fold from 2001 to 2006, placing lenders in a highly risky position. It is unlikely that they would have placed such high- risk bets in other, less familiar industries. When housing prices slumped nationwide, their position was exposed and delinquencies skyrocketed.
2.4. Escalation of commitment
Calvin Coolidge famously noted the importance of perseverance when he declared, “persistence and
determination alone are omnipotent.” While there are virtues associated with trying again in the face of failure, problems arise when executives remain committed to a course of action despite mounting evidence that the action is not paying off. In fact, research suggests that decision makers are likely to allocate more funds to an investment project when feedback shows that the project is failing than when the project is succeeding (Staw & Ross, 1989). Perhaps owing to personal responsibility or ego, de- cision makers seem to interpret negative feedback as a signal that they should commit additional resources in order to save a project to which they were initially committed. Even though the initial decision was made on a rational System 2 basis, subsequent decisions may be irrational as they in- volve continued, and escalating, investment in a failing course of action.
History is replete with decisions that appear to have been influenced by irrational escalation of commitment. For example, the tunnelmega-project commonly known as “the Big Dig” was conceived, designed, and undertaken to relieve congestion of Boston's tangled historical streets. The project, initially estimated at a cost of $2.6 billion, was plagued with a wide variety of implementation, en- vironmental, and human resource problems from the beginning. Learning of serious problems at var- ious stages of construction, turnpike officials and politicians continued to allocate additional funding. The Big Dig was completed in 2006, with expenses totaling over $15 billion. Once the plans were in place and unexpected problems arose, a process of escalating commitment began that would have been very difficult to reverse.
Escalation of commitment may affect a broad ar- ray of business decisions. Shimizu and Hitt (2005), for example, found that many firms retained unprof- itable business units with steadily mounting losses for years without divesting them. In several cases the arrival of outside executives, who were not in- volved in the initial acquisition decision, was need- ed to hasten divestiture of the failing division. Others have found evidence of this bias in the new product development process. Schmidt and Calantone (2002), for instance, found that managers who initiated a new product were less likely to perceive it as failing and were more likely to continue funding the project despite evidence of failure than those who assumed leadership after the product was launched. Escala- tion of commitment often occurs for another common business decision: information technology (IT) invest- ment. Many internal IT projects become “runaways” that continue to receive funding in excess of their benefits (Nulden, 1996). Together, these findings sug- gest that simply giving managers more information
117Managers and their not-so rational decisions
will not necessarily lead to better decisions. Instead, organizational, social, and psychological factors combine such that those who were involved in an initial decision may interpret negative incoming information differently than those who arrive later.
2.5. Overconfidence
There exists a substantial literature highlighting the egos of business executives (Hiller & Hambrick, 2005). This literature reflects a natural tendency to overestimate our abilities and perceived chances of success. This bias is sometimes called the Lake Wobegon effect, named for Garrison Keillor's humor- ous musings on the human condition as he de- scribes the people of Lake Wobegon, “where all the women are strong, all the men are good-looking, and all the children are above average.” Although assessments of self-competence vary based on the task being performed, overconfidence may span across multiple contexts. If individuals reassessed their behaviors, attributes, and abilities in light of changing tasks, they might avoid forming inflated estimates. This often does not happen, though, because past success becomes the primary influ- ence in forming future beliefs. Falsely assuming that prior patterns of successful behavior will con- tinue to work under new conditions, people over- estimate their ability to succeed at tasks under new and changing requirements.
William Smithburg, CEO of Quaker, displayed such hubris and serves as an apt illustration. Re- nowned for his highly successful and almost impul- sive acquisition of Gatorade, Smithburg purchased the brand for $220 million and grew its worth to several billion dollars, representing nearly half of Quaker's sales. This success in hand, Smithburg em- barked on an acquisition of Snapple for $1.4 billion. Industry analysts voiced concern because Snapple was outside the mass-market arena, did not have manufacturing or distribution synergies with Gator- ade, and was carrying obsolete material due to poor inventory management (Nutt, 2004). Despite these apprehensions, Smithburg was confident that he could succeed where others had failed in turning the Snapple brand into a money maker; unfortunately, the overconfidence effect potentially distorted his estimation of the problems associated with the Snapple brand. The disastrous result was summar- ized well by an April 1997 headline, which read: “$1.4 billion mistake costs CEO his job” (Millman, 1997, p. 1).
The overconfidence effect is likely to influence managers at many different levels of the organiza- tion. Malmendier and Tate (2003) saw evidence of such a bias at the highest levels, finding that overconfident CEOs invested a greater percentage
of cash back into the firm rather than releasing the cash as dividends. These CEOs likely overestimated their ability to produce success and, as a result, ended up investing in many projects that they should have avoided. Others have found that over- confidence leads to dysfunctional strategic per- sistence among samples of both executives and students (Audia, Locke, & Smith, 2000). The prob- lem of strategic persistence often arises because individuals who are successful at a task are more likely to believe, mistakenly, that they will continue to be successful under new conditions. Entrepre- neurs may be particularly susceptible to this bias. Statistics abound which point to the low chances of success for new ventures. Entrepreneurs, how- ever, generally feel that they will succeed where others typically fail. One study finds that 8 out of 10 entrepreneurs estimate their chances of suc- cess to be about 70%, and fully one-third believe their chances of success are completely certain (Cooper, Woo, & Dunkelberg, 1988). Although this may be more prevalent in some people than others or for some decisions as compared to others, it appears that people overestimate their abili- ties and chances of success with some degree of regularity.
3. Closing observations
Summarizing the research on decision making represents a daunting challenge. Herein, we out- lined the basic processes that individuals employ to make decisions, and we reviewed a number of biases that may interfere with these processes. Although we believe it is important to understand these processes and biases, it is imperative to note that our review only scratches the surface of the vast decision-making literature. In the process of writing this article, for example, we entered the term decision making in a prominent search engine for academic research pieces, and the search returned over 32,000 relevant articles.
In our view, this academic work is important, and we seldom reflect on the significance of decision making in our lives. Herein, we have reviewed several different examples of decision making in the context of business. It is easy to forget, though, how many relatively simple decisions we make each day: Which clothes should I wear? Which way should I drive to work? Should I pick up my dry cleaning before or after work? What will I eat for lunch? In contrast, we make many other decisions that are less simplistic: Should I entertain another job offer? How should I manage my relationship with a difficult co-worker? In which neighborhood should I buy a new house? Simply stated, decision making pervades
118 S.T. Certo et al.
our lives; as such, it is important to understand how we make decisions.
We have described a number of specific cogni- tive biases that affect managers' judgment; we expect most people's experience and everyday observations will confirm the presence of these biases in their own work environment. However, we would like to offer two caveats. First, we reviewed only a small number of decision-making biases. In fact, researchers have uncovered many other biases which we were unable to include in our review.3
Second, it is relatively straightforward to demon- strate that biases exist and apply to the general populace, but it is much more difficult for indivi- duals to recognize the effect that these same biases have in governing their own judgments and inferences. There is a perceived asymmetry in susceptibility to biases that causes us to believe our own judgments are less prone to distortion than those of others (Ehrlinger, Gilovich, & Ross, 2005). In other words, people perceive themselves to be better-than-average in a wide variety of domains, and the decision-making context is no exception.
Another explanation for “bias blind spots” is that we assess susceptibility to bias differently for ourselves than we do for others. When examining ourselves, we rely on introspection and look for detectable traces of the influence of bias, but in most cases such traces are hard to find or do not exist. When evaluating others, however, we are more likely to consult our own abstract theories about biases and objectively apply them to the situation at hand. In this sense, we hope that our article has not armed readers with new theories to explain the faulty decisions of others without also turning these theories inward and applying them to one's own decision-making processes. Another phe- nomenon that brings about a bias blind spot is that people are more inclined to understand that they may be guilty of bias in the abstract, but less willing to admit susceptibility in specific instances.
In closing, then, we suggest that it is not enough to simply understand how managers make decisions and how biases might affect those decisions. It is also important to take the difficult final step of acknowledging that the same biases apply to ourselves and to our specific decisions. Hopefully, by better understanding the processes and biases involved in decision making, we might all make better decisions.
3 For an excellent review of these biases, see Gilovich, Griffin, and Kahneman (2002).
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Schmidt, J. B., & Calantone, R. J. (2002). Escalation of com- mitment during new product development. Journal of the Academy of Marketing Science, 30(2), 103−118.
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Simon, H. A. (1957).Models of man: Social and rational. New York: Wiley.
Stanovich, K. E., & West, R. F. (2002). Individual differences in reasoning: Implications for the rationality debate? In T. Gilovich, D. Griffin, & D. Kahneman (Eds.), Heuristics and biases: The psychology of intuitive judgment. Cambridge, UK: Cambridge University Press.
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- Managers and their not-so rational decisions
- Managerial decision making
- How managers make decisions
- Decision-making processes
- Decision-making biases
- Framing and loss aversion
- Risk seeking
- Source dependence
- Escalation of commitment
- Overconfidence
- Closing observations
- References
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Avoiding the Pitfalls and Developing An Action Plan 10
Avoiding the Pitfalls and Developing An Action Plan
“Making mistakes is the key to making progress... Mistakes are not just golden opportunities for learning; they are, in an important sense, the only opportunity for learning something new ... Biological evolution proceeds by a grand, inexorable process of trial and error—and without the errors the trials wouldn’t accomplish anything.”Daniel C. Dennett
The Hidden Pitfalls In Decision Making The way that people think, both as individuals and collectively within organizations, affects the decisions that they make, in ways that are far from obvious and rarely understood. Writing in the Harvard Business Review, John Hammond, Ralph Keeney, and Howard Raiffa have provided some of the most intriguing research and insights in this area. (See John S. Hammond, Ralph L. Keeney, and Howard Raiffa, “The Hidden Traps in Decision Making,” Harvard Business Review, September—October 1998.)
Although bad decisions can often be traced back to the way the decisions were made, the fault sometimes lies not in the decision-making process, but in the mind of the decision maker.
Effective Decision Making 4May.indd 164 6/1/11 8:37 AM
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ex ce pt f ai r us es p er mi tt ed u nd er U .S . or a pp li ca bl e co py ri gh t la w.
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Avoiding the Pitfalls and Developing An Action Plan Avoiding the Pitfalls and Developing An Action Plan 165
!The work of the human brain can frequently undermine our choices and decisions. Avoiding the following traps
requires recognizing that they exist and understanding those most likely to cause you problems.
THE ANCHORING TRAP
This occurs when we give disproportionate weight to the fi rst piece of information that we receive. Our immediate reaction to the initial impact of the fi rst information is so signifi cant that it outweighs everything else, “drowning” our ability to evaluate the situation effectively. As a result, the decision or solution is anchored around this one issue. The antidote is to be sure about what is happening and to wait as long as possible to ensure that you have all the information—and to look for different options.
THE STATUS QUO TRAP
This biases us toward maintaining the current situation— even when better alternatives exist—and might be caused by inertia, or the potential loss of face if the current position was to change.
Organizations often have managerial beliefs and approaches that have developed over time from experience and become institutionalized, guiding strategic thinking and action. It is easy to dismiss corporate legend. People may believe that an idea or business formula developed under previously prevailing conditions is still appropriate.
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ex ce pt f ai r us es p er mi tt ed u nd er U .S . or a pp li ca bl e co py ri gh t la w.
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166 EFFECTIVE DECISION MAKINGEFFECTIVE DECISION MAKING Avoiding the Pitfalls and Developing An Action Plan
Worse still, there may be vested interests in maintaining the status quo, and people may feel insecure about either admitting that things have changed, or recognizing the need for a new approach. The solution for the individual is to value openness, honesty, and courage. Beyond this, the leaders of the organization also need to build a positive, blame-free culture to ensure that the organization as a whole values questioning, experimentation, and learning. People and ideas undermining this culture need to be challenged.
THE SUNK-COST TRAP
The mistakes of the past are often perpetuated because “We have invested so much in this approach/decision that we cannot abandon it or alter course now.” The management accountant’s view of this is refreshingly sanguine: if it’s spent, it’s spent—worry about the present and future, not the past. This trap is particularly signifi cant when it comes to managing risk and investing in new projects or deals, such as acquisitions or capital investments.
This situation is also known as an escalation of commitment, a fl awed way of coping with—rather than simply making—decisions, and is discussed further later in this chapter. The antidote is to plan effectively and know in advance where the plan can be modifi ed and by how much. Maintaining a clear focus on the desired outcome helps, as does keeping an overview of the situation.
THE CONFIRMING EVIDENCE TRAP
Also known as confi rmation bias, this is when we seek
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information to support an existing preference and discount opposing information. It is also a tendency to seek confi rming evidence to justify past decisions. People seeking to support the continuation of the current favored strategy frequently manifest this tendency. This way of thinking may lead managers to fail to evaluate the weaknesses of existing strategies, and to overlook important and successful alternatives.
A classic example of the confi rming evidence trap is The Waiter’s Dilemma—a thinking fl aw that is a self-fulfi lling prophecy. Consider the situation of a waiter in a busy restaurant. Unable to give excellent service to everyone, the waiter serves only those people that he believes will give a good tip. This appears to work well: only those that he predicts will tip well, do so. However, the waiter fails to realize that the good tip may be the result of his actions— and so might the lack of a tip from the other diners. In fact, the only way the waiter can test his judgment is to give poor service to good tip prospects, and excellent service to poor tip prospects. The point here is that original judgments and decisions (such as those made by the waiter) could be less valid than is assumed, as the adequacy of the judgment has not been tested. The solution is for managers to challenge and test existing assumptions, to identify weaknesses in current thinking, and to research alternative approaches to strategic development.
THE OVERCONFIDENCE TRAP
Closely linked to confi rming evidence, the overconfi dence
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trap is when a decision maker overestimates the accuracy of their forecasts because of an exaggerated belief in their ability to understand situations and to predict the future. This is particularly true among business leaders and decision makers, who are not known for being particularly timid or uncertain in their views! This trap is actually more subtle and insidious than it may seem.
One problem with overconfi dence is that the solution may sometimes seem obvious, when in fact a better option lies hidden elsewhere. Another danger of overconfi dence is casual implementation of the solution.
Many factors can cause overconfi dence: a lack of sensitivity, routine, constant success leading to complacency, a lack of criticism or feedback, a confi dent pre-disposition, or a tendency to make assumptions. Confi dence is clearly vital for success, particularly with diffi cult decisions where a steadfast, determined approach is needed. However, the solution for avoiding overconfi dence is to research, investigate, and understand all the possible options and to act appropriately. This means avoiding quick and hasty action. Knowing which approach fi ts each situation is important for success—another reason why scenario thinking is particularly valuable.
THE FRAMING TRAP
Incorrectly stating a problem or situation completely undermines the decision-making process. This is often, but not always, unintentional. Clearly, how an issue or situation is seen is important in providing the basis for developing
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an effective strategy or decision. It is worth noting several points: • Managers habitually follow established success
formulae (sometimes known as managerial recipes), and as a result view emerging issues through a single frame of reference
• People’s roles and situation within the organization infl uence the way problems are framed. For example, if one leader is being judged by the staff turnover in their team, then they are likely to frame a departure in a way that does not undermine their position
• The framing trap often occurs because well-rehearsed and familiar ways of making decisions tend to be dominant and diffi cult to change
• The framing trap may lead managers to solve the wrong problem—decisions may have been reached with little thought and better options may be overlooked
• A failure to defi ne the problem may not only lead to the wrong solution being implemented, but the right solution being implemented incorrectly. The causes of this failure include: — Poor or insuffi cient information — A lack of analysis — A feeling that the truth needs to be concealed, possibly out of concern — A desire to show expertise, or a belief that they have to handle it — A lack of time to frame the problem correctly
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Clearly, organizations can go out of business if their managers fail to change their frame so that it encompasses— and allows valid insight into—changes in the business environment. Defi ning the problem is the foundation to solving it. This requires time, information systems, and analysis skills. It also needs a supportive atmosphere of honesty and fairness where issues and concerns can be openly discussed.
THE RECENT EVENT TRAP
This trap gives undue weight to a recent, and quite probably dramatic, event or sequence of events. This is very similar to the anchoring trap, except that it can arise at any time— not just at the start—and cause a misjudgment. This is also known as hindsight bias.
In a study, the research group tended to recollect that they had predicted the occurrence of an event with a high degree of confi dence. If a named event had not occurred, they either claimed that they had not predicted it, or that they had placed a low degree of confi dence on the poor prediction. The research has demonstrated that we believe that our judgments, predictions, and choices are well made, but this confi dence may be misplaced. Awareness of this trap and the danger that it might pose in the way decisions are made is vital for avoiding it.
THE PRUDENCE TRAP
This is being overcautious when we make estimates about uncertain factors. It appears as a tendency to be very risk
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averse, and is particularly likely to occur when there is a decision dilemma: a situation when the decision maker feels that continuing with the current approach carries risks, and that alternative courses of action also carry risks.
In truth, part of successful problem solving and decision making is a willingness and ability to take calculated risks when required, and to minimize those risks. Natural caution, hesitation, and fear of failure are major factors in avoiding risk, but the leader needs to show the way in controlling risk and managing the situation. An unsupportive work environment can also be a factor. The leadership of the organization should therefore set the parameters, clearly demonstrating how and when to manage risk, as well as building a blame-free environment, where experimentation is allowed, properly managed, and controlled.
!It is a fl aw to be overcautious. Realism, perhaps erring on the side of caution (depending on the nature of the
decision), is the antidote, together with effective, active leadership.
Coping with Decisions: Typical Behavioral Flaws Leaders cope with decisions and situations in various ways, and these often work against fi nding or implementing an effective solution.
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PROCRASTINATION
Frequently, and almost instinctively, leaders look to lower the level of stress inherent in decision dilemmas. This spawns a number of typical coping patterns, as leaders “wait and see” and try to avoid the risk of failure—often by avoiding a decision.
There are several points to note about decision avoidance or procrastination: • It can actually result in greater risk, for example, by
maintaining an increasingly fl awed, outdated, or irrelevant status quo
• Over-reliance on a previously successful formula has damaged many businesses that were, in their time, successful fi rst-movers
• A belief that an established approach remains valid and valuable—even impervious to current external changes—is fl awed
• Procrastination and decision avoidance invariably worsen the situation, creating greater complexity and making an effective solution much harder to achieve. They give unhelpful attitudes time to harden and allow time for demotivation and cynicism to take hold. These complicating pressures can, in their turn, frustrate effective decisions
Clearly, procrastination can be caused by many factors. The key, however, is to recognize it when it occurs. Some of the most obvious causes of procrastination include: • Lack of motivation
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• Lack of understanding about the importance of solving the problem
• Fear about the consequences of solving the problem or dislike for the methods that will need to be used
Several approaches can tackle this, including: • Leading by example: demonstrating commitment,
diligence, and other qualities needed to resolve the situation
• Breaking the cycle of procrastination by setting clear priorities for the strategy, yourself, and others
• Empowering people to act, giving them the necessary authority, and making their responsibilities clear
If a decision on an issue beyond the authority of the empowered team is required, then the added pressure of the team usually forces a swift solution.
ESCALATION OF COMMITMENT
In this coping strategy, when decisions or strategy start to fail, the leader responsible for the decision typically commits further resources in an attempt to recover the situation. This stems from a need to defend previous choices. Escalation of commitment is characteristic of the manager’s need to be proven right, and is, in effect, the sunk-cost trap mentioned earlier.
BOLSTERING
Bolstering occurs when decision makers defensively avoid
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the stress of diffi cult decision dilemmas by uncritically emphasizing one option. This happens most often when there is no “good” option available, only a choice among the “least worst” courses of action. There are several key points to note about bolstering: • Bolstering is a basic way in which decision makers
cope with the threats or opportunities that are often part of crucial decisions
• The problem with bolstering is that it can result in a sense of invulnerability to external events, especially when accompanied by an escalation of commitment to the current strategy
• This, in turn, leads to an inadequate search for information and alternatives that might provide a better choice or a more effective solution (nothing will match the artifi cially “bolstered” choice)
• Bolstering results in poor contingency planning in the event that the favored option fails
SHIFTING RESPONSIBILITY
Shifting responsibility is often a sign of weak leadership. A decision maker will pass ultimate responsibility for the choice to other individuals or groups, usually because of a decision dilemma. Again, this coping pattern is used to reduce the stress of making decisions.
The Pitfalls of Decision Making Which Involves Groups Of People Potential pitfalls can also result from the culture
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or environment of the organization. The fi rst two, fragmentation and groupthink, can be thought of as the opposite ends of the same spectrum.
FRAGMENTATION
Fragmentation occurs when people disagree with either their peers or their superiors in the organization and has the following features: • The expression of emerging dissent is usually disguised
or suppressed, although it may appear as “passive aggression”
• Dissenting opinion can often fester in the background, for example, mentioned informally in conversation, rather than clearly raised in formal situations, such as meetings
• Each of the fragmented groupings—and there may be several— often show a confi rmation bias. In other words, they evaluate incoming information to support initially held opinions, rather than viewing it more objectively
• Fragmentation is corrosive, hindering effective analysis and decision making
• Fragmentation can worsen when the views of one grouping are dominant
• Fragmentation feeds off itself in a loop, with any move to break it cynically seen as an attempt to gain dominance by one side or faction. It can therefore become locked into the organization and be extremely diffi cult to reverse
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GROUPTHINK
Groupthink is the opposite of fragmentation, and is no less of a hindrance to decision making. • Groupthink occurs when the group suppresses
ideas that are critical or not in direct support of the direction in which the group is moving
• The group appears in agreement, and this may be caused by many factors; for example, past success can breed a belief of an infallible team
• Groupthink may occur because the group is denied information, or because individuals lack the confi dence or ability to challenge the dominant views of the group
• People may be concerned about disagreeing, because of either past events, present concerns, or a fear of what the future might hold, and so seek safety in numbers
• Groupthink is exacerbated by the fact that cohesive groups tend to rationalize the invulnerability of their decision or strategy, and this in turn inhibits critical analysis and the expression of dissenting ideas. The effect is an incomplete survey of available options, and a failure to examine the risks of preferred decisions
• Groupthink can occur in organizations where teamwork is either strong or weak. As with fragmentation, groupthink is also self-sustaining. Moreover, the longer it lasts, the more entrenched and “normal” it becomes in people’s minds and behaviors. After a little time, it is also very diffi cult to reverse
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AN EXAMPLE—AND A SOLUTION—TO THE
PROBLEMS OF FRAGMENTATION AND GROUPTHINK
These problems are illustrated by the Abilene Paradox, written by Jerry B. Harvey. In the story, a man suggests a family trip to Abilene, a town in Texas that was over 50 miles from the family homestead, on a hot, dry, Sunday afternoon. The man asks each person in the room in turn if they would like to go, and each one says yes. However, only when they are returning from their long, uncomfortable, and unpleasant journey does each member of the family confess that they did not want to go in the fi rst place! The fi rst person that was asked—the man’s wife—agreed to the trip because she thought that her husband was keen to go. The son-in¬law agreed because he thought his parents-in- law (quite possibly authority fi gures!) wanted to go, and the others in the family agreed because they did not want to spoil the trip for everyone else—so they all reacted positively. However, even the man who suggested the trip in the fi rst place admits that he only did so because he thought that everyone else would prefer to go out, rather than remaining in the house.
Remarkable though it may seem, this situation often occurs in organizations. • Decisions are made and choices are validated, even
though the people involved have hidden reservations • Decision making is made complex by human nature,
with people either seeking to satisfy and support others, or keen to avoid confl ict and the risks that this brings
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A further frustration arising from the nature of organizations is the phenomena of organizational lock-in and feedback loops, mentioned earlier. These occur when the organization is so fi xed on a particular belief or view of the world that all of its actions simply reinforce a fl awed perception. This can even go so far as to bring about the expected result—i.e. becoming a self-fulfi lling prophecy. Information is collated and analyzed through one specifi c fi lter, strengthening a fi xed perception. Of course, this perception may be accurate—but nothing is forever. The point about lock-in and self-reinforcing feedback loops is that they are unable to sense, with any accuracy, when circumstances are changing, and more importantly, why they may be altering.
!The solution to organizational problems of fragmentation and groupthink is to understand their root causes, to consider
how, where, and when they might exist, and then to challenge and confront them. Clearly, both problems stem from a lack of honesty and understanding.
THE BIGGEST PROBLEM OF ALL: FAILING TO
RESPOND TO CHANGE
The need to change is often complicated by such fundamental issues as funding, regulation, customer perceptions, and technology. Be that as it may, the need to change in the right way at the right time—and in
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particular, to develop and compete—is axiomatic for any business leader.
If change is so important, what is it about decision making that prevents organizations from achieving it? Put another way, what is it that anchors businesses in their present or past? There are, of course, almost as many answers to these questions as businesses to ask. However, there are several main themes and reasons for failure: • A lack of recognizable strategies in areas such
as functional policy, corporate direction, and environmental monitoring. Part of the reason for Enron’s failure, for example, was a reliance on fi nancing arrangements, rather than on developing and selling sources of energy. Financial chicanery may have given the impression (and reality) of profi t growth and rising shareholder value, but it was no substitute for a strategy to grow and diversify a major energy business. The truth was brutally exposed for Enron when their fi nancial techniques crumbled
• Weak execution, combined with poor timing of responses to developments, such as declining customer demand or increasing competition, also causes decline and failure. A clear example of this is the many major airlines that are now grappling with the increasing popularity of low-cost carriers
• Poor risk taking and poor risk management are major problems, leaving many organizations overtaken by events. Firms undertake projects that are too large or assess acquisitions too optimistically; for example,
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AOL and Time Warner, Daimler and Chrysler— massive corporations that faltered in the execution of their strategies, believing that mergers were substitutes for innovation, risk management, and adding customer value. Allied Irish Bank and Barings Bank are more extreme examples of corporations that simply failed to manage risk
The inability to understand and adapt to change is characterized by a leadership that lacks dynamism and is unaware of the need to compete. This typically underpins organizational inertia, uniting the points above. In addition to underestimating the changing market environment, many organizations fail to see the consequences of increased competition—even when the signals are clear.
Overcoming the Problems of Decision Making It is often easy to see decision-making fl aws, particularly
in others, but much harder to remedy them. Most antidotes are common sense and easily recognizable to any experienced manager. However, it is still worth pointing out the solutions and for this reason they are outlined on the following pages.
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Potential pitfall Possible causes Potential solution
Failure to defi ne the problem—this may lead to the wrong solution being implemented, or the right solution being implemented the wrong way. Either way, the problem persists and potentially worsens.
• Inadequate or insuffi cient
information • Lack of analysis • People hiding
the truth out of concern, a desire to show their own expertise, or a belief that they have to handle it
• Lack of time
Defi ning the problem clearly is the key to solving it. This requires suffi cient time, information systems, and adequate analysis skills. It also needs a supportive atmosphere of honesty and fairness where issues and concerns can be openly discussed.
Failure to understand the problem and fi nd a solution—sometimes problems can be so complex or fast- moving that fi nding a solution is diffi cult. Sometimes there is no satisfactory solution— only a choice between alternatives that are less or more acceptable.
Many of the same factors that stop the problem being clearly defi ned also combine to prevent it being understood. Information overload or the consequences of the situation can also make it extremely diffi cult to distinguish between cause and effect.
Understanding the problem will help to highlight possible solutions, or enable a choice to be made between competing options. Ask several key questions: What is the problem? What is not the problem? What is affected by the problem? Who is affected, who is not affected and what is different about those that are affected?
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Potential pitfall Possible causes Potential solution
Subjective, irrational analysis—this can lead to a solution that fails to solve the problem, or the wrong solution entirely.
This may result from prejudice; being unduly infl uenced by the “halo” effect (where individuals feel success simply from association with the project, regardless of the likely effectiveness of any decisions); or from expectations or assumptions about behavior or circumstances. Other causes may include casual complacency, arrogance, laziness, tiredness, or overwork.
Check and verify facts and information, avoiding assumptions wherever possible. Objective, rigorous, and unbiased analysis is the best approach.
Laziness or procrastination— avoiding diffi cult or unpleasant problems invariably makes them worse, or creates time (and other) pressures as additional issues arise and need to be resolved.
This can be caused by lack of motivation; lack of understanding about the importance of solving the problem; fear about the consequences of solving the problem; or dislike for the methods that will need to be used.
• Lead by example, demonstrating commitment, hard work, and the other qualities needed to resolve the situation
• Set clear priorities • Monitor key issues
and areas of work • Empower people
to act by giving them the necessary authority and making clear their responsibilities
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Potential pitfall Possible causes Potential solution
Lack of sensitivity—failing to appreciate the sensitivity of a situation can result in problems worsening, other diffi culties being spawned, and solutions being undermined.
Lack of time, information, and analysis are among the most common causes. A lack of sensitivity may also be a factor, for example, being insuffi ciently tuned in to people’s thoughts and feelings, or failing to show respect.
People are invariably the key to success or failure in problem solving. Infl uencing, leading, communicating, trusting, and empowering can all help to develop and display sensitivity.
Lack of focus and direction—at best, this erodes effi ciency; at worst, it results in the wrong solution or implementation— or no solution at all.
This can occur when there is an absence of leadership or a crisis of leadership, with the person in charge simply failing to lead well enough.
Establish clear priorities and objectives. People need to know what to do, how to do it, and have the necessary skills and resources to ensure success.
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Potential pitfall Possible causes Potential solution
Lack of creativity and innovation— relying on experience or past approaches, even when tried and tested, is no guarantee to future success. Certain problems may require a new approach for them to be resolved.
People may not see the need for creativity, or they may not have the skills or resources to be suffi ciently creative.
The adage that “if you always do what you’ve always done, you’ll get what you’ve always got” is important, highlighting the need for an approach that emphasizes continuous improvement. One way forward is to question everything about the problem, even reconsidering factors that may seem fundamental. Alternatively, don’t look for major leaps forward or visionary breakthroughs, but instead adopt an approach that emphasizes slow, incremental improvements.
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Potential pitfall Possible causes Potential solution
A focus on peripheral issues, rather than substance— sometimes the facts surrounding a problem are distracting or demanding in their own right, with the result that the problem is tinkered with or simply left to grow.
A lack of information or analysis, or the daunting nature of a diffi cult, sensitive, important, or highly complex situation. People may take shelter in little issues or problems, rather than struggle to solve the whole thing— expending large amounts of energy and risking failure.
Consider fi rst principles: what is happening, why, what are its consequences and how can it be resolved. Maintain a clear focus on the problem-solving process. Discussing the situation with others can develop a sense of perspective.
Overconfi dence— sometimes the solution may seem obvious, when in fact a better solution lies hidden elsewhere. Solutions can be casually implemented because of overconfi dence. Never assume that the best solution to any problem is easily available.
A lack of sensitivity, routine, constant success leading to complacency, a lack of criticism or feedback, a confi dent pre¬disposition, or a tendency to make assumptions.
Confi dence is often vital for success, particularly with diffi cult decisions where a steadfast, determined approach is needed. However, acting appropriately means avoiding quick and hasty action where possible. Know which approach fi ts each situation.
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Potential pitfall Possible causes Potential solution
Being too risk averse—part of successful problem solving and decision making can be a willingness and ability to take calculated risks. Hesitation and fear of failure are natural, but the leader needs to show the way in controlling risk and managing the situation.
Natural caution is one of the biggest factors in avoiding risk, but an unsupportive work environment can also be a factor.
The leadership of the organization or team needs to set the parameters, clearly demonstrating how and when to manage risk, as well as building a blame-free environment, where experimentation is allowed and properly managed and controlled.
Using Scenario Thinking to Overcome Problems The strategic conversation is the continuous process of planning, analyzing the environment, generating and testing scenarios, developing options, selecting, refi ning, and implementing. It is a central part of the increasingly popular and successful approach of scenario planning. Scenarios are effective because: • They provide a framework for combining the formal
and informal elements of the strategic conversation • They enable decision makers and strategists to examine
a wide range of information, to understand the drivers
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of the present and the future, and to articulate and challenge their assumptions as to how and why the future may evolve
• The outcome of the scenario process is a deeper understanding of alternative views, and a new and more sophisticated language approach to strategic decisions, largely resulting from an enhanced “strategic conversation”
!Scenarios may not predict the future but they do illuminate the causes of change— helping managers to take greater control
when conditions shift.
!If enacted effectively, scenario thinking challenges managers’ mental models and orthodoxy in a way that fosters a shared
understanding and leads to joint action.
Scenario thinking is such a potent technique for “wind tunneling” decisions and solutions—as well as understanding, preventing, and pre-empting problems— that its benefi ts deserve explanation.
THE BENEFITS OF SCENARIOS
• Understanding the present. Scenario thinking provides a better understanding of how different factors affecting a business affect each other. It can
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reveal linkages between apparently unrelated factors and, most importantly, it can provide greater insight into the forces shaping the future, delivering real competitive advantage
• Overcoming complacency. Scenarios should be designed to challenge established views, overcoming “business-as-usual” thinking and enabling established formulae and new ideas to be tested. Seeing reality from different perspectives mitigates the pitfalls of groupthink, procrastination, hindsight bias, bolstering commitment to failing strategies, and shifting responsibility
• Promoting action and ownership of the strategy process. Scenario thinking helps break the constraints on traditional strategic practices as it enables those involved to discuss the complexity and ambiguity of their perspectives in a wide context
• Stimulating creativity and innovation. Scenarios encourage the opening of minds to new possibilities and the excitement of how they may be realized. The process leads to a positive attitude that actively seeks the desired outcome
• Promoting learning. Scenarios help people to understand their environment, consider the future, share knowledge, and evaluate strategic options. Information is better evaluated and integrated in the scenario planning process, which enables those involved in it to recognize and react to emerging circumstances
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• Creating a shared view. Scenario thinking works because it looks beyond current assignments, facts, and forecasts. It allows discussions to be more uninhibited and it creates the conditions for a genuinely effective shared sense of purpose to evolve. Getting support for strategic decisions requires involving those that matter in the scenario planning process
ACTION CHECKLIST: SCENARIO PLANNING
The scenario thinking process is not one of linear implementation; its effectiveness lies in stimulating decisions, in the strategic conversation—a process that is refi ned with further environmental analysis.
!There are two things we can say for certain about the future. It will be different—and it will surprise.
1 Planning and structuring the scenario process. The fi rst stage is to identify gaps in organizational knowledge that relate specifi cally to business challenges whose impact on the organization is uncertain. To do this, create a team to plan and structure the process. The team should probably come from outside the organization and its members should be noted for their creative thinking and ability to challenge conventional ideas. An external team is better placed to provide objective support, free from internal agendas or tensions. In discussion with the team, decide on
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the duration of the project; ten weeks is considered appropriate for a big project.
2 Exploring the scenario context. Team members should be interviewed to highlight the main views and to assess if these ideas are shared among different team members. Questions should focus on vital issues such as sources of customer value, the current success formula, and future challenges, identifying how each individual views the past, present, and future aspects of each issue. The interview statements should be collated and analyzed in an interview report, structured around the recurring concepts and key themes. This now sets the agenda for the fi rst workshop and should be sent to all participants. It is also valuable to identify the critical uncertainties and issues, as perceived by the participants, as a starting point for the workshop.
3 Developing the scenarios. The workshop should identify the forces that will have an impact over an agreed period. Two possible opposite outcomes should be agreed and the forces that could lead to each of them should be listed. This will help to show how these forces link together. Next, decide whether each of these forces has a low or high impact and a low or high probability. This information should be displayed on a 2 x 2 matrix.
By clearly presenting two polar outcomes and all the driving forces, the team can then develop the likely “histories”—or scenarios—that led to each outcome. These histories of the future can then be expanded
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through discussion of the forces behind the changes. The aim is not to develop accurate predictions, but to understand what will shape the future and how different events interact and infl uence each other. All the time, discussions are focused on each scenario’s impact on the organization.
This part of the process opens up the thinking of the members in the team and it makes them alert to signals that may suggest a particular direction for the organization. The outcomes of different responses are “tested” in the safety of scenario planning, avoiding the risk of implementing a strategy for real.
4. Analyzing the scenarios. The analysis stage examines the external issues and internal logic. Consider: • What are the priorities and concerns of those
outside the organization who are also responsible for the main decisions in the scenario?
• Who are the other stakeholders? • Who are the key players and do they change? • Would they really act and make decisions in the
way described? Systems and process diagrams can help address
these questions, as can discussions with other stakeholders. Remember, we are not trying to pinpoint future events, but to consider the forces that may push the future along different paths.
5. Using the scenarios. Working backwards from the future to the present, the team should formulate an action plan that can infl uence the organization’s
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thinking. Next, it should identify the early signs of change so that when they do occur, they will be recognized and responded to quickly and effectively. The process then continues by identifying gaps in organizational knowledge. The participatory and creative process sensitizes managers to the outside world. It helps individuals and teams to recognize the uncertainties in their operating environments so that they can question their everyday assumptions, adjust their mental maps, and think “outside the box.”
Checklist: Assessing Behavioral Problems and Challenges Decision-making fl aws are common in every organization. To assess the situation and start improving decision-making capabilities, it is helpful to consider the extent to which the hidden traps of decision making hamper the organization, by asking whether people regularly: • Give disproportionate weight to the fi rst piece of
information they receive • Seek to maintain the status quo • Pursue failing decisions, in a forlorn attempt to recover
past investments and credibility • Seek confi rming evidence to justify past or present
decisions • Display overconfi dence • Display excessive caution • Incorrectly frame or state an issue—often leading to a
fl awed decision
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• Give undue weight to a recent or dramatic event • Procrastinate—delaying important decisions
As well as these common problems and behaviors, strategic decision making in groups is often hampered by groupthink and fragmentation. • To what extent do these approaches affect key
decisions? • How prepared is your organization to drive and
respond to change? Can you recall examples when the company has driven change, responded to it, or failed to do either? What are the reasons for this failure?
• What is the solution? (Understanding the root causes and then confronting them is the best approach— although this simple advice may often mask a complex and sensitive, even explosive, situation.)
Planning to Improve Decision Making and Problem Solving If you develop a personal action plan to improve decision making and problem solving, this should take account of the following challenges:
BALANCE ANALYSIS WITH THE NEED FOR ACTION
• Highlight major points in the data—keep to single words or one-liners
• Identify the critical detail required to make decisions • Look for relationships and trends in the data • Keep informed about relevant issues and trends
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with weekly updates, reports, and discussions with colleagues
• Build informal networks with colleagues and others outside the organization whose insight will be valuable later
• Establish a relationship with a mentor who can (a) help to develop decision-making skills, and (b) provide a sounding board when urgent decisions are needed
• Generate mutual understanding and respect with colleagues— especially those people whose information, position, and skills will be needed when you have a crucial decision to make
• Find out about incisive thinking techniques, such as Kepner-Tregoe analysis, lateral thinking, and mind mapping
BE PROACTIVE
Here are ten things that proactive decision makers and problem solvers do: 1. Question the appropriateness of previous decisions. 2. Involve stakeholders in making decisions to build
commitment. 3. Actively search out information from a variety of
sources. 4. Identify the non-negotiable constraints in a decision. 5. Search for a broad range of alternatives. 6. Look for long-term solutions. 7. Create new options by combining features of other
options.
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8. Figure out how to improve the best option and make it even better.
9. Ask “What could go wrong?” and plan preventive actions.
10. Anticipate and plan for future decision points.
Think about the decisions you make: • Which of these ten things do you do consistently? • Which of these ten things can you start doing more
often?
!Thinking critically means asking “Why?,” “What else?,” and “What if?” questions to probe thinking.
It is also useful to: • Challenge the thinking of others, even when they
appear to be on fi rm ground • Identify and challenge the assumptions or rationale
that underpin decisions • Get others to pinpoint the exact reasons for their views • Challenge and provoke—look for radical change • Play devil’s advocate and go for the opposite of current
practice • Avoid acceptance of the status quo
IDENTIFY OPTIONS
This can be accomplished by brainstorming the available options and highlighting the most favorable ones.
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Techniques that can help include: • Reducing your list of available options by ruling out
those that miss some agreed criteria • Identifying one vital question that if answered would
provide the information needed to proceed—how can you get this answered?
• Calculating which option gives most benefi t after taking into account the costs
• Using others’ experiences to see how they would tackle the task
• Avoiding always choosing the easiest option
USE LATERAL THINKING
Find other ways of generating solutions and ideas by: • Brainstorming ideas without criticizing them • Saying something silly or provocative to get the
creative juices fl owing • Drawing a picture to describe how things could change • Avoiding a conservative or “safe” approach
CONCEPTUALIZE
Create an ideal picture of how you would like an issue to be resolved or progressed. • Think of what you are trying to achieve not how you
will achieve it • Establish the end point in your mind—what the
initiative will achieve—and work backward to see which method best achieves this goal
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CONSIDER CUSTOMER NEEDS
The single biggest infl uence on entrepreneurial decisions is how it affects customers. Focusing on customers is a vital part of making the best decisions and it can be achieved by: • Putting yourself in the customers’ shoes and seeing
areas of vital importance • Brainstorming what you could do to best meet their
needs and objectives • Researching your intended changes to ensure that
customers want them • Prioritizing the list of actions that you need to take • Avoiding assuming you know what the customer wants • Finding out about the customers’ aims and aspirations • Looking to offer options to the customer in most
standard situations • Avoiding accepting without question the customers’
fi rst statement of need • Looking for opportunities to talk informally to
customers • Following up on sales to see what happened post-sale • Using customer feedback as evidence in making
internal recommendations • Anticipating customer needs, where appropriate, by
taking time to review their long-term plans
MASTER THE ESSENTIALS
• Anticipate the impact of major decisions • Find out about decision analysis techniques • Keep informed about relevant issues and trends
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ex ce pt f ai r us es p er mi tt ed u nd er U .S . or a pp li ca bl e co py ri gh t la w.
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198 EFFECTIVE DECISION MAKINGEFFECTIVE DECISION MAKING Avoiding the Pitfalls and Developing An Action Plan
• Build informal networks • Deal with ambiguity and risk • Take unpopular decisions when needed. This may
mean you need to: – Prepare an honest explanation and keep putting the message over – Explain the implications of not taking the decision – Involve those affected by the decision wherever possible – Keep people informed of progress – Paint clear pictures of the desired result – Avoid delay or signs of personal uncertainty – Achieve consensus
FINALLY, ACCEPT PERSONAL RESPONSIBILITY
This may mean that you need to: • Ask for comments from colleagues on the effectiveness
of a recent decision or the way it was made • Discuss and explicitly agree with your manager the
extent of your decision-making responsibilities • Talk through the expected outcome of a decision with
your manager or team before making the decision— and remain accountable for the results
• Find a challenging issue and take responsibility for delivering an effective solution (working with others as necessary)
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EFFECTIVE DECISION MAKING Avoiding the Pitfalls and Developing An Action Plan Avoiding the Pitfalls and Developing An Action Plan 199
Dos And Don’ts DO:
• Clarify the issues, working out what is essential and what is desirable
• Consult widely to gain a comprehensive perspective • Gather information and remain objective • Look for other situations when similar solutions and
ideas were required • Review past situations—what worked, what failed, and
why? • Understand where the risks lie and take action to
control and reduce these • Communicate—people need to know what decisions
are being made and why, if they are to be successful • Challenge existing thinking and orthodoxy—brilliant
decisions and solutions are rarely routine
DO NOT:
• Let personal preferences or preconceptions cloud your judgment
• Forget to consider implementation: decisions need to be pragmatic and workable
• Neglect to monitor or follow up decisions—decisions need constant attention and leadership. Don’t just decide and never look back!
• Forget customers—what will the decision mean for them?
• Rush to an obvious decision or solution—a better alternative may exist
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Case 2/ebscohost.pdf
ChapTer
2 Optimizing Decision Making and Avoiding Pitfalls
CORInnE FARnETI and GLEnn DISHMAn
Each day we make hundreds of decisions. What should I eat for breakfast? Which way should I drive to work? Should I hire another employee? Whether simple or complex, private or public, decisions are an essential part of all areas of our lives. When you understand the inherent psychological, social and emotional components of a smart decision, you can examine errors that you might have made in past decisions and avoid potential future mistakes.
Making a good decision or avoiding a bad one is not a chance act; it is a skill that can be learned, developed and even perfected. This chapter suggests that bad decisions are usually made because of a poor decision making process. It is our contention that the decision making process can be enhanced by controlling personal biases, gathering pertinent information and using intuition appropriately.
In this chapter we will explore how individuals, groups and organizations make effective decisions. Further, we will offer you tips and techniques to enhance the effectiveness of your own decision making efforts.
What are some famous decision making blunders?
You are probably reading this chapter because you either just made a bad decision or you want to avoid making a bad decision. You are not alone. Professionals all around the world have made mistakes in their decision making. For example, let’s consider the 1996 Mount Everest Tragedy. As Dr Michael Roberto (2009) notes, this tragedy occurred when two expedition teams got caught in a storm, high on the mountain, on May 10– 11, 1996. Both expedition team leaders, as well as three team members, died during the storm. Despite knowing all the risks and preparing thoroughly for the trip, the two leaders obviously made grave errors. These errors were caused namely by the cognitive biases of overconfidence, the sunk-cost effect, and the recency effect (all of which will be explained in detail later in the chapter).
Another example of a horrible error in judgment occurred in 1986, when NASA decided to launch the Challenger space shuttle despite engineers’ concerns about possible O-ring erosion due to cold temperatures on the morning of the launch. How could such intelligent people ignore such prudent advice? Finally, why did Coca-Cola’s CEO, Roberto Goizueta, decide to introduce New Coke to the world in 1985, when their current formula was an obvious hit with the public?
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One more blunder occurred in 1961, when President Kennedy decided to invade Cuba in the Bay of Pigs fiasco. With hopes of overthrowing Cuban communist dictator Fidel Castro, Kennedy asked the Joint Chiefs of Staff to look at the plan proposed by the CIA. They concluded that it could work, but only with certain caveats. The CIA argued that the time was right to invade. The process went wrong because there was no candid dialogue, and debate did not take place in the meetings between the CIA, the President and his staff. The group spent most of its time tweaking the proposal rather than analyzing other options. Groupthink (also discussed later in this chapter) was the major downfall. In other words, the group felt it could do no wrong. The result of the invasion included a significant loss of life, a tarnished United States reputation and it may have led to the Soviets putting missiles in Cuba the following year. The above-mentioned scenarios demonstrate that bad decisions are made even by experienced, intelligent professionals and are not limited to the everyday layperson.
What are some common decision making myths?
According to Professor Michael Roberto, there are five distinct myths about how decisions are made in organizations. By identifying these myths, we can improve our decision- making capabilities.
Myth #1: The chief executive decides. Reality: Strategic decision making entails simultaneous activity by people at multiple levels of the organization (refer to chapter five for more on strategy). We can’t always blame or credit the head executive for all the decisions.
Myth #2: Decisions are made in the conference room. Reality: Much of the real work occurs off-line, in small groups or in one-on-one conversations. Usually, formal meetings are used to simply approve decisions that have already been made.
Myth #3: Decisions are largely intellectual exercises. Reality: High-stakes decisions are complex emotional, social and political processes.
Myth #4: Managers analyze and then decide. Reality: Strategic decisions occur in a non-linear fashion, with solutions often arising before managers define problems or look at other alternatives.
Myth #5: Managers decide and then act. Reality: Strategic decisions often evolve over time and proceed through a repetitive process of choice and action.
There are several ways to make a decision. Although some issues may seem complex and confusing, the process below is one that will help make the decision-making process a little bit easier.
What should we do about risk in decision making?
With all decisions comes some level of risk. Risk exists when the outcome of a chosen course of action is not certain. Keep in mind that some risk is okay. A decision wouldn’t
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be a decision without it. In life (and in business) there are low risk takers and high risk takers. There are benefits and drawbacks to both styles of decision making.
While low risk takers may collect and evaluate more information, trying to obtain and consider too much information may also paralyze them. High risk takers, on the other hand, do not waste time agonizing over small details. But on the flip side, they may make their decisions based on too little information. As a decision maker, you should evaluate your current risk-taking profile. It is virtually impossible to know all of the information there is to know. At some point, there needs to be a level of information that is good enough. This point will differ by individual based on risk tolerance. Are you a person who jumps into things head first? Or are you someone who gets caught up in the details and ends up always making the safest decision?
Believe it or not, there is a happy-medium. Some risk is a good thing, and that is where you should strive to be. Look at the average performance level of others. Where do you stand in comparison to them? Is everyone around you taking more decision-making risks than you? Or are you the one always making the high-risk/high-reward decisions? As a decision-maker, your optimum level should probably be right in the middle, making educated, researched decisions that do in fact have some associated risk.
Why do we make bad decisions?
According to Dr Michael Roberto, decisions are complex emotional, social and political processes that often evolve over time. Sometimes we think too deeply, ignore our intuition, or make biased judgments that can lead to errors in the decision making process.
COGnITIVE BIASES
A cognitive bias is a distortion in the way we perceive reality a trap that affects us all as we try to make decisions. In other words, we do not examine all options and often take shortcuts when we make choices. What makes cognitive biases unique is that they are predictable and consistent, fooling you over and over again. There are several biases to which decision makers fall victim. Below is a description of some of the more common biases and how to avoid them.
• Ease of Recall/Recency Effect: The ease of recall/recency effect occurs when decision- makers rely too much on information that is easy to recall from recent memory.
− Example: When doing a yearly evaluation of an employee, a manager usually recalls the last few months prior to the evaluation much more easily than the employee’s performance ten months prior. This can work for or against the person being reviewed.
− How to Avoid the Ease of Recall/Recency Effect Bias: First, being aware of the problem in and of itself can help. Second, keep good notes. Whatever the situation may be, reviewing previous notes or records is a great way to analyze all information, not just the most recent. This will help you get the big picture and make the best decision possible.
• Confirmation Bias: According to the University of Southern California’s Levan Institute (2010), people tend to look for information that will confirm their pre-existing views,
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to interpret information in ways that support their own view and to selectively remember the information that supports their view.
− Example: Your organization is looking to put out a new product line. You’ve paid to have some market research done and the results are finally in. Some of the data indicates just what you had hoped, that your new product line is highly desired by the public. However, portions of the results suggest that some small changes may be necessary to appease the public. Despite the mixed findings, your company decides to launch the product as-is solely because they received some indication that their initial thoughts were correct.
− How to Avoid the Confirmation Bias: Write down all possible reasons why your decision (or original thought) might not be the best option. Think of as many alternatives as possible, even bringing in outside analysts to help objectively look at the situation. If you have data available, remind yourself to include all relevant information when making the decision.
• Sunk-Cost Bias: The more we invest in something (financially, emotionally or otherwise), the harder it is to give up that investment. This leads to making poor decisions based on invested capital. Psychologists believe this is because we are unwilling, consciously or unconsciously, to admit to a mistake.
− Example: You are serving on a hiring committee and looking to bring in a high- ranking employee to your organization. You fight very hard for one candidate, and even convince the rest of the committee to give him the signing bonus that he requested. As time goes on, the new employee struggles and is even costing the company money. Since you are his direct superior, you are responsible for reprimanding, disciplining or firing him. Because you put so much effort (and money) in the hiring of this employee, you keep him on board just so you don’t look like you made a bad recommendation to hire him and spent all that money up front for nothing.
− How to Avoid the Sunk-Cost Bias: Stop spending resources (time and money) on a bad move and cut your losses immediately. Quickly admit your mistakes—in fact, be proud of them and of the fact that you were able to cut off a problem before it became that much worse. Try to detach yourself emotionally from your past decisions. Finally, always be mindful of long-term objectives.
• Anchoring Bias: Per Robbins and Coulter (2008), the anchoring bias involves putting too much emphasis on the first piece of information encountered and failing to adjust for subsequent information.
− Example: A person buying a used car may focus excessively on the odometer reading and model year of the car, and may subsequently use those criteria as a basis for evaluating the value of the car, rather than considering how well the engine or the transmission has been maintained.
− How to Avoid the Anchoring Bias: Make a physical list of your thoughts or statistics regarding the decision. Do not rank the list and make sure all aspects of the decision are considered. This will allow you to assess all information equally. In fact, if you have time, take a day or so away from the decision and come back to the list you made. Your initial anchor may disappear when you step away from the issue for a bit.
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• Bandwagon Effect: The bandwagon effect occurs when people do and believe things merely because many other people do and believe the same things, regardless of underlying evidence.
− Example: Your company is thinking about buying out a smaller, rival company and all of its factories. All of your fellow executive staff members think it is a great idea because it will not only eliminate a competitor, but it will also increase product reach to markets in which you hadn’t had a presence before. Privately, you have misgivings about the deal because you aren’t sure your company can handle all of the overhead costs. But, because all of your co-workers and fellow managers believe it is a fantastic idea, you decide that they must be right and you must be wrong. Therefore, you go along with the deal, despite your initial trepidation.
− How to Avoid the Bandwagon Effect: Have confidence in yourself and your initial feelings. Any decision requires thorough research and should never be made just because several people like the idea. If you are afraid to speak up about your doubts or even suggest alternatives, perhaps approach a co-worker or superior individually. This will help you avoid any potential groupthink that may arise in a group setting. Your co-workers will appreciate the thought and effort you put in, especially if you save the organization from making a grave error.
• Framing Effect: People’s decisions are altered when the same option is presented in different contexts or formats.
− Example: Faced with a decision between two packages of ground beef, one labeled 80% lean, the other 20% fat; which would you choose? Based on the work of Miller (2006), the meat is exactly the same, but most people would pick 80% lean because of an emotional reaction to the word “lean” versus the word “fat.”
− How to Avoid the Framing Effect: It is important to remind yourself that information is often presented in a way solely to trigger an emotional reaction. If, for example, you are reading a proposal, be aware that the person who wrote it had a vested interest in getting it accepted. They may frame all of their data to trigger a positive emotion in the reader. Do your best not to be fooled. Look at the data for what it is. Even if it means writing down statistics, facts or thoughts separate from the original format to be sure you are analyzing them independently.
• Overconfidence Bias: From the writing of Robbins and Coulter, overconfidence bias occurs when decision makers hold unrealistically positive views of themselves and their products or performance.
− Example: Product A has been selling like hotcakes after a strong marketing campaign. It is time to decide how much of Product A to manufacture for the next sales period. Without looking at any hard data you decide to double the quantity, solely going on the fantastic sales from last quarter. Unfortunately, you are way off the mark and the market has cooled off. Apparently, your product was just a fad and now you are stuck with thousands of units of Product A on your warehouse shelves.
− How to Avoid the Overconfidence Bias: Find someone who can act as your voice of reason. Present them with all the relevant facts and data and allow them to give their unbiased opinion. Also, be cognizant of your optimism. While it’s great to think positively, make sure thinking positively doesn’t outweigh reality.
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With decision making biases, half the battle is knowing they exist. The fact that you are aware that these pitfalls are out there will help you make better decisions if you actively look for and respond appropriately to your own biases.
What is the role of intuition?
Intuition is a process dominated by your subconscious mind which somehow finds links between your current situation and various patterns of your past experiences. This subconscious activation is often experienced as a gut feeling. In many cases, your gut feeling is correct. Unfortunately, it doesn’t ring true for all cases and we may not trust our intuition merely because we’ve been trained not to.
When we use our intuition, we do not evaluate a whole set of alternatives. Instead, we assess a situation and instinctively spot certain cues. From these cues we recognize patterns based on our past experiences. We then subconsciously match the current situation to these past patterns. Intuition becomes a major problem when you solely rely on your instincts and ignore or fail to seek additional information. Our subconscious mind isn’t correct 100% of the time. Sometimes, it does not make the right match to past situations. Therefore, we draw the wrong lessons from those perceived parallel situations and end up making poor decisions. Another issue with intuition is the fact that it’s very hard to communicate our intuitive choices to our fellow employees. How can you explain the choice of your subconscious mind when your conscious mind doesn’t even know why or how you made it?
Some jobs require employees to not only be experts about the information in their field but also to be able to act intuitively. Nurses and doctors use intuition all the time. For example, consider the case of a patient who is both showing and describing signs of a pulled or torn calf muscle. The doctor knows that the patient gets little exercise as they’ve talked about this in the past. However, having seen several similar cases in the past the doctor is able to recognize and compare the situations with a greater eye for detail. As it turns out, the pulled muscle is not a pulled muscle at all, but is a blood clot. The doctor had a feeling that such an inactive person could probably not pull their muscle that badly, so he ordered further tests. In this case, the doctor’s intuition saved a potentially deadly situation.
Communicating our intuition more effectively is one key to making good decisions. Organizational scholar Karl Weick (1995) has proposed a five-step process for communicating intuitive decisions and for garnering feedback so as to ensure clear understanding on the part of the group. His process is as follows:
Step 1—Describe the situation. “Here’s what I think we face.” Step 2—Describe your idea. “Here’s what I think we should do.” Step 3—Tell the group your reasoning. “Here’s why.” Step 4—Advise of potential pitfalls. “Here’s what we should keep our eye on.” Step 5—Garner feedback. “Now, talk to me.”
Following these five steps will at least expose your inner thoughts and feelings to a second party, lessening the chance of a hasty decision based solely on intuition.
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What is Escalation of Commitment and how can it be avoided?
Poor decisions are made every day and we as decision-makers have to accept that. However, once a bad decision is made, we need not compound the damage by sticking with the decision. In other words, if you’ve just steered your ship into an oncoming storm, it is never too late to try and change course. Unfortunately, people oftentimes feel an escalation of commitment when they happen to make one of these decision making blunders. This is similar to the sunk-cost bias mentioned earlier.
People do not want to admit to themselves or to others that they have made a mistake. They may even believe that an additional commitment of resources is justified, given how much has been spent in hopes of recouping some of the losses. According to Michael Hitt and colleagues (2006), the process of escalation of commitment goes something like this:
1. A decision maker initially makes a decision that results in some kind of loss or negative outcome.
2. Rather than change the course of action from the initial decision, the decision maker commits more time, money, and/or effort to the course of action.
3. Further losses are experienced because of this escalation of commitment to a failing course of action.
Since you now know this phenomenon exists, be sure to check yourself and your motives after any poor decision to make sure you are not just sticking to your guns because of pride.
How can we decide between individual and group decision making?
When making an individual decision you must be an expert on the subject, confident your co-workers will accept your decision and willing to take the blame if the decision turns out to be wrong. It is important to remember that the decision making process is affected by four factors:
1. The decision-making approach 2. The type of problem 3. Decision-making conditions 4. Your individual decision-making style.
As a guide, you should follow the general eight-step process outlined in chapter one in most decision-making situations. However, make sure you keep in mind that there are both internal and external factors playing a role in your decision making process.
Groups tend to follow the same decision making process that individuals do. However, there are dynamics and interpersonal processes that make group decision making very different from decisions made by an individual. For example, the group may be composed of individuals at different levels within the organization. Not only will these people have different perspectives, they may also have conflicting goals or expectations
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for the organization. Because of the varying group dynamics, there are several different techniques that a team of employees may use to arrive at a decision.
BRAInSTORMInG
Brainstorming is a technique used to generate a large number of ideas while deferring the evaluation of the ideas. Evaluation of the ideas is postponed until group members can no longer think of any new ideas. In this setting, imagination is a good thing, with no idea being deemed too unique or different. Building on the ideas of others is also encouraged. When using brainstorming, the group should nominate a person to record all ideas from the session. Another individual may be assigned the duty of task master, to ensure the group stays on the topic and remains focused on the issue at hand. The major caveat of group brainstorming is to never criticize any idea, no matter how bad it may seem at the time. Criticism introduces an element of risk for group members when putting forward an idea. This suppresses creativity and cripples the free running nature of a good brainstorming session.
nOMInAL GROUP TECHnIQUE
With this technique, individuals silently write down their ideas on a piece of paper. As described by Hitt and colleagues, when everyone is finished writing down their thoughts, each member presents one idea at a time, until all ideas are presented, without discussion. Ideas (from all group members) should then be recorded on a whiteboard or large flip chart. Discussion is used to clarify any details. After all ideas are explained, a silent and independent vote is done to develop a ranking of the group’s choices.
Group Decision Making
Common Informa�on
Bias Diversity-
based Infigh�ng
Risky Shi�
Devil's Advocate
Dialec�cal Inquiry
Delphi Technique
Nominal Group
Technique
Brainstorming
Groupthink
Figure 2.1 group Decision making phenomena
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DELPHI TECHnIQUE
The Delphi Technique, developed at the Rand Corporation, consists of a highly structured anonymous survey of group members regarding their opinions or judgments on a topic. It is imperative that the group has a facilitator who is willing to gather and redistribute all of the members’ opinions and ideas. The success of this process depends upon the members’ expertise and communication skills. Also, each response requires sufficient time for reflection and analysis. The four major merits of the Delphi process are:
1. The elimination of interpersonal problems 2. The efficient use of experts’ time 3. It generates a diversity of ideas 4. Solutions and predictions tend to be very accurate.
DIALECTICAL InQUIRy
This method is intended to overcome the tendency of a group to avoid conflict when they evaluate alternatives. To employ this technique, the leader should come prepared with at least two very different sets of recommendations and assumptions. The leader must force the group to fully discuss all options, even if members came into the session with preconceived notions. While the conflict of options and ideas will be brought to the forefront, it is more likely to result in a quality decision this way.
DEVIL’S ADVOCACY
As with dialectical inquiry, devil’s advocacy overcomes the tendency of groups to avoid conflicts when trying to come to a decision. With this technique, an individual or sub group is assigned to argue against the recommended actions put forth by other members of the group. This allows for an in-depth critique of the possible decision, ensuring that it is indeed the best solution for the organization.
What are some group decision making pitfalls?
According to Hitt and colleagues, groupthink occurs when group members maintain or seek consensus at the expense of identifying and debating honest disagreements. In other words, groupthink occurs when a group makes faulty decisions based on group pressure to conform and avoid disagreement at the expense of reason. Groups tend to be more vulnerable to groupthink when their members have similar backgrounds and when the group is insulated from outside opinions. Highly cohesive groups, with strong pressure to conform tend to fall prey to groupthink.
Groupthink was coined by social psychologist Irving Janis in 1972. Janis has documented eight symptoms of groupthink:
1. Illusion of invulnerability—creates excessive optimism that encourages taking extreme risks.
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2. Collective rationalization—members discount warnings and do not reconsider their assumptions.
3. Belief in inherent morality—members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions.
4. Stereotyped views of out-groups—negative views of out-groups as the enemy make effective responses to conflict seem unnecessary.
5. Direct pressure on dissenters—members are under pressure from other members not to express arguments against any of the group’s views.
6. Self-censorship—doubts and deviations from the perceived group consensus are not expressed.
7. Illusion of unanimity—the majority view and judgments are assumed to be unanimous. 8. Self-appointed mindguards—some members protect the group and the leader from
information that is problematic or contradictory to the group’s cohesiveness, views and/or decisions.
FamouS exampleS oF groupThiNk iNCluDe: • Failure to protect forces at Pearl Harbor in 1941 • Bay of Pigs fiasco in 1961 • US escalation of the Vietnam War • Failed rescue attempt of hostages at US Embassy in Iran
What are some ways to avoid groupthink?
The following is a list of ideas designed to help avoid the pitfalls of groupthink:
• The leader should assign the role of critical evaluator to someone. • The leader should avoid stating preferences and expectations at the outset. • Each member of the group should routinely discuss the group’s deliberations with a
trusted associate and report back to the group on the associate’s reactions. • One or more experts should be invited to each meeting on a staggered basis and
should be encouraged to challenge views of the members. • The leader should make sure that a sizeable block of time is set aside to survey warning
signals. • The leader and group members should challenge others to think. • The group may consider using dialectical inquiry or devil’s advocacy (discussed in
more detail earlier in this chapter) to avoid unquestioned consensus.
What are some common group decision making challenges beyond the pitfall?
Common information bias occurs when group members overemphasize information held by a majority, failing to heed the information or viewpoint held by one or more members of the group in the minority. When a team ignores alternate information too
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often, members will start to hold back their thoughts and opinions over time. Eventually this could lead to groupthink.
• Example: A group of five top-level executives meets to discuss the tardiness problem of one of their middle managers. Four of the five executives bring up how many times in the past month the employee has come in late to work, all the while complaining that they pay him too much to be taken advantage of like that. Because his ideas have been ignored in the past, the fifth executive decides not to mention all of the late nights the tardy employee has been working to communicate with a business partner overseas. The employee in question ends up wrongly accused.
Have you ever been in a group where individuals feel so strongly about their varying ideas that the group fractures into subgroups or verbal altercations occur? If so, you have experienced diversity-based infighting. According to Hitt and colleagues, this phenomenon usually takes place when individuals have strong feelings about their ideas and no mechanisms exist to channel the disagreement in a productive way. Remember, diversity of ideas is a good thing. It should be used to create rich discussions and insight but if no mechanism exists to do so, diversity of ideas may have the opposite effect.
• Example: An organization is deciding whether or not to eliminate the childcare program it has for its employees. One group of workers feels that it is an unnecessary cost to the company while another group currently utilizes the program on a weekly basis and is passionate about retaining it. As tempers flare, the arguments escalate and may turn personal. Unfortunately, leadership fails to keep things focused on making a quality decision.
When people are in groups, they make decisions about risk differently from when they are alone. In a group, they are likely to make riskier decisions, as the shared risk makes the individual risk less. In other words, if you had to make a multi-million dollar decision for your company, you’d probably feel more comfortable moving ahead if you had the input of others. In your mind, you most likely feel that if you happen to make the wrong decision, you can say “Hey, I’m not the only one responsible.”
• Example: Your company forms a committee on whether or not to buy from an up- and-coming vendor. The vendor has a lot of hype surrounding it, but no proven relationships as of yet. If you take the leap and spend the money, it is possible that you could be their flagship partner. If the vendor doesn’t live up to the hype however, your company could lose its money and tarnish its reputation. The committee openly discusses how great it would be to have the deal be a success and start pumping out new products. Ultimately, the committee takes a huge risk and purchases from the new vendor—something that the majority of the committee members wouldn’t have done if they had to make the decision on their own.
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What is the value of individual vs. group decision making?
According to Hitt and colleagues, there are several important considerations for judging the overall value of individual versus group decision making:
• Time—it is generally more time consuming to make a group decision. Therefore, if time is of the essence, an individual decision may be preferable.
• Cost—because of the time factor and logistical issues (getting everyone together), the out of pocket cost of group decision making is generally higher although conference calls and teleconferencing mitigate this concern somewhat.
• Nature of the problem—if there is one right answer to a problem, it’s generally not worth investing the time and money that a group decision requires.
• Satisfaction and commitment—a by-product of group decision making is a higher level of employee satisfaction and commitment to the solution/outcome.
• Personal growth—another by-product of group decision making is the personal growth experienced through participation in the group process and through exposure to the ideas of others in the group.
Due to these considerations, individual and group decision making have both positive and negative aspects and should be used accordingly.
It is important to remember that if you do decide to make a group decision, evidence indicates that groups of five or seven individuals are the most effective. Any larger and the group becomes unwieldy. Any smaller and the group loses the benefit of diverse opinions and insights. Also, having an odd number of group members helps avoid decision deadlocks. According to Robbins and Coulter, this size group is large enough for
Advantages of Group Decision Making/ Disadvantages of Individual Decision Making
Advantages of Individual Decision Making/Disadvantages of Group Decision Making
Groups generate more complete information and knowledge than individual decision making.
Group decisions almost always take more time to reach a solution than would an individual.
Groups lead to more diverse alternatives than individuals.
A dominant and vocal minority can heavily influence a group’s decision.
Group decision-making can result in growth of group members.
Groupthink can undermine critical thinking in a group and lower the quality of the decision.
Group decisions lead to a higher level of acceptance and satisfaction than would individual decisions.
Group members share responsibility, but the responsibility of any single member is ambiguous.
Group decisions are perceived as more legitimate than ones made by an individual.
Managers may rely too much on group decisions, leading to a loss of their own decision and implementation skills.
Tool 2.1 group vs individual Decision making guide
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members to shift roles and withdraw from unfavorable positions but still small enough for quieter members to participate actively in discussions.
When the time comes to make a decision, a leader must first decide if associate/ co-worker involvement is necessary. The Vroom-Yetton Decision-Making Model (1973) poses, questions to determine the level of associate involvement in decision making. The questions are:
• Is there a quality requirement such that one solution is likely to be more rational than another solution, or will any number of solutions work reasonably well?
• Is there sufficient information to make a high-quality decision without the group meeting?
• Is the problem adequately structured (do I know the question to ask and where to look for the relevant information)?
• Is acceptance of the decision by associates critical to effective implementation? • If I were to make the decision myself, is it reasonably certain that my associates would
accept it? • Do the associates share the organizational goals by solving this problem? • Is there likely to be conflict among subordinates over alternative solutions?
The Vroom-Yetton method defines five different decision procedures. Two are autocratic (A1 and A2), two are consultative (C1 and C2) and one is group based (G2):
A1: The leader takes known information and then decides alone. A2: The leader gets information from followers, and then decides alone. C1: The leader shares problems with followers individually, listens to ideas and then decides alone. C2: The leader shares problems with followers as a group, listens to ideas and then decides alone. G2: The leader shares problems with followers as a group and then seeks and accepts consensus agreement.
In general, a consultative or collaborative style is most appropriate when:
• You need information from others to solve a problem. • The problem definition isn’t clear. • Team members’ buy-in to the decision is important. • You have enough time to manage a group decision.
An autocratic or individual style is most efficient when:
• You have more expertise on the subject than others. • You are confident about acting alone. • The team will accept your decision. • There is little time available. • The problem is clearly defined.
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Mastering the art of successful decision making is fundamental to improving your life at home, at work or in your community. According to Robbins and Coulter, in order to make effective decisions in today’s fast-paced world you should follow some general guidelines:
• Understand cultural differences. People in both your organization and around the world are very diverse. Different beliefs, values, attitudes and behavioral patterns are present. Keeping this in mind, you should make the best decision possible based on the people involved.
• Don’t be afraid to call it quits. Although it is tough to swallow your pride, you can save yourself and your company lots of time and resources if you admit your initial decision was the wrong one. Because we live in a dynamic work environment, scenarios are constantly shifting, which may force you to change your mind after a decision has been made.
• Use an effective decision-making process that has the following characteristics: 1. It focuses on what’s important. 2. It’s logical and consistent. 3. It acknowledges both subjective and objective thinking and blends analytical
with intuitive thinking. 4. It requires only as much information and analysis as necessary to resolve the
problem. 5. It encourages the gathering of relevant information and informed opinions. 6. It’s straightforward, reliable, easy to use and flexible.
• Build an organization that can identify and adapt to unexpected changes in the environment. Organizational psychologist Karl Weick says that highly reliable organizations share five habits: 1. They are not tricked by their success. 2. They defer to the experts on the frontline, those who have day-to-day contact
with the customers. 3. They let unexpected circumstances provide the solution. 4. They embrace complexity. 5. They anticipate but also recognize their limits.
As previously mentioned, creativity and successful brainstorming can lead to more diverse alternatives and ultimately a higher success rate when it comes to decision making. IDEO, one of the world’s leading product design firms, is well known for their creative processes in making decisions. They have been the subject of several case studies due to their high success rate in making risky decisions. Some key items that make IDEO unique and successful in their creative processes are:
1. Everyone becomes an ethnographer. In other words, everyone in the company goes and observes how people are using their products in their natural settings. These observations are crucial in determining people’s needs, habits, etc.
2. They have a work environment that is fun and encourages free-flowing ideas. 3. They do not have much formal hierarchy or many symbols of status. 4. The ground rules for brainstorming sessions are written on the walls to serve as a
reminder.
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5. There are plentiful materials so that people can think visually and so that basic prototypes can be built.
6. They keep old failures around to remind people that you have to take risks to be creative and that you have to accept some rate of failure.
7. Leaders openly tell employees to disagree with them and do not tell people what to design.
In order to be successful in decision-making, creativity is vital. According to Roberto (2009), there are three important steps in this creative process. First, you must use experts and expert knowledge in the appropriate matter. Next, you have to wipe away old assumptions and beliefs, and unlearn old ways of working before you can creatively generate something new. Last, you have to frame problems in ways that do not constrict the debate or range of solutions that will be considered.
Additional Resources
Numerous books can provide insight on decision making: How We Decide by J. Lehrer gives you the decision-making tools you need, drawing
on cutting-edge research as well as the real-world experiences of a wide range of decision- makers from airplane pilots and hedge fund investors to serial killers and poker players. Lehrer shows how people are taking advantage of the new science to make better television shows, win more football games and improve military intelligence. His goal is to answer two questions that are of interest to just about anyone, from CEOs to firefighters. How does the human mind make decisions? And how can we make those decisions better?
M. Roberto’s book, Know What You Don’t Know: How Great Leaders Prevent Problems Before They Happen, shifts the focus from problem solving to the problem-finding capabilities of effective leaders. Roberto examines how leaders can unearth the small problems that are likely to lead to large-scale failures in their organizations and how leaders need to shift from fighting fires to detecting smoke, so that they can detect and interrupt the chain of errors that often precedes a major failure.
And finally, Winning Decisions: Getting it Right the First Time by E. Russo and P. Schoemaker provides an extensive discussion of many of the cognitive biases that affect individuals and provides some simple prescriptions for overcoming these traps.
An organization that can provide decision making resources is The Society for Judgment and Decision Making. It is an interdisciplinary academic organization dedicated to the study of normative, descriptive, and prescriptive theories of judgments and decisions. Its members include psychologists, economists, organizational researchers, decision analysts, and other decision researchers. The Society’s primary event is its Annual Meeting at which Society members present their research. It also publishes the journal Judgment and Decision Making.
References
Custer, R. L., Scarcella, J. A. and Stewart, B. R. (1999). The modified Delphi technique – A rotational modification. Journal of Vocational and Technical Education, 15(2).
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Gilovich, T., Griffin, D., and Kahneman, D. (2002). Hueristics and Biases: The Psychology of Intuitive Judgment. Cambridge, England: Cambridge University Press.
Hitt, M. A., Miller, C. C., and Colella, A. (2006). Decision making by individual or groups. In J. Heffler (ed.) et al., Organizational Behavior: A Strategic Approach (pp. 354–91). Hoboken, New Jersey: John Wiley & Sons, Inc.
Janis, Irving L. (1972). Victims of Groupthink. New York, NY: Houghton Mifflin. Miller, G. (2006). The emotional brain weights its options. Science, 313(5787), 600–01. Psychologists for Social Responsibility. (2010). What is Groupthink? Retrieved from http://www.
psysr.org/about/pubs_resources/groupthink%20overview.htm. Robbins, S. P. and Coulter, M. (2008). Management, (10th ed.). Upper Saddle Ridge, New Jersey:
Pearson Education, Inc. Roberto, M. A. (2009). The Art of Critical Decision Making. Chantilly, VA: The Teaching Company. Tversky, A. and Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science,
185(4157), 1124–31. USC Levan Institute Ethics Resource Center. (2010). Obstacles to Good Ethical Decision Making and
Behavior, and Some Things You Can Do to Overcome Them. Retrieved from http://college.usc.edu/ overcoming-obstacles-to-ethical-behavior/.
Vroom, V. H. and Yetton, P. W. (1973). Leadership and Decision-Making. Pittsburgh, PA: University of Pittsburgh Press.
Weick, K. (1995). Sensemaking in Organizations. Thousand Oaks, CA: Sage Publishing.
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Case 2/Mod2Background.html
Module 2 - Background
Decision-Making Biases and Pitfalls
Required Material
A good place to start is this short video that will give you an overview of decision making biases:
Lombardo, J. (2014). Common Biases and Judgment Errors in Decision Making Organizational Behavior. Education Portal https://www.youtube.com/watch?v=cAbdmV3VOwA
Now go through the following three readings to get a deeper understanding:
Bolland, E., & Fletcher, F. (2012). Solutions: Business problem solving. (Available from Trident Online Library. Read only the relevant chapters.)
Kourdi, J. (2011). Chapter 10: Avoiding the pitfalls and developing an action plan. Effective Decision Making: 10 Steps to Better Decision Making and Problem Solving. London: Marshall Cavendish International [Asia] Pte Ltd. [eBook Business Collection]
Hammond, J. S., Keeney, R. L., & Raiffa, H. (1998). The hidden traps in decision-making. Harvard Business Review, 76(5), 47-58. [Business Source Complete]
When you are done reading the above materials, review and test your knowledge with the following interactive tutorial which includes a quiz on decision-making biases:
Improving creativity in decision making. (2014). Pearson Learning Solutions, New York, NY.
Optional Material
Trevis Certo, S., Connelly, B. L., & Tihanyi, L. (2008). Managers and their not-so rational decisions. Business Horizons, 51(2), 113-119.
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Module 2 - Case
Decision-Making Biases and Pitfalls
Case Assignment
Even the most intelligent manager is prone to personal biases and pitfalls that can lead to bad decisions. We all carry biases based on our personal experiences. And we can all fall into various traps that lead to decisions that seem perfectly logical at the time but in retrospect, we see that we should have known better.
In the background materials, including Bolland and Fletcher (2012); Kourdi (2003); and Hammond, Keeney, and Raiffa (2008); several specific decision-making biases and pitfalls are discussed. Collectively these are known as cognitive biases. Some of the common pitfalls and biases discussed in these readings include overconfidence bias, confirmation (self-confirming) bias, sunk-cost bias, framing bias, and hindsight bias.
Carefully review all three of these readings and make sure you understand the different types of biases. Then read through the scenarios below and think about what kind of biases are demonstrated in each scenario. For each scenario, carefully explain which specific bias or biases is demonstrated by the decision and what can be done to avoid this bias in the future. Make sure to pick at least one specific bias that you read about for each scenario, and explain your reasoning. Use references to at least one of the three required readings from the background materials in your discussion of each scenario below. Your paper should be 4–5 pages in length:
- The Chief Financial Officer (CFO) of a corporation is of the strong belief that marketing is not a good use of the company’s money. Someone shows her data from several years ago showing that during a period of high spending on marketing, sales did not go up. She says, “See, I told you marketing is not a good use of our budget!” and cuts the marketing budget to almost zero. Following the cut in the marketing budget, sales also start to drop dramatically. When asked by an employee if the drop in sales is due to the cut in the marketing budget, she says, “No!” and insists there must be a different explanation. What kind of decision-making bias do you think this represents, and why? What steps would you recommend to this CEO to reduce this kind of bias? Support your answer with references to at least one of the three background readings.
- A CEO decides that he wants to greatly expand the company’s market by purchasing a major rival. This acquisition would double the company’s market share. However, several of his top managers warn him that such a purchase would require the company to take out a huge amount of debt to finance this merger, and that many of these large mergers have failed. They also point out that the organizational culture of the other company is very different and that managing this merger would be very difficult. Nonetheless, the CEO insists that he can overcome the odds and plans to go through with the merger. What kind of decision-making bias do you think this represents, and why? What steps should this leader take to avoid this bias? Support your answer with references to at least one of the three background readings.
- A CEO wants to purchase a new factory. He is currently deciding between two factories. The owner of Factory A brags that 94% of products produced at the factory are free of defects. The owner of Factory B cautions that his factory has a 5% defect rate but management and staff are working very hard to reduce the rate. The CEO decides to purchase Factory A citing its strong 94% rate of success in producing defect-free products even though Factory B actually has a 95% rate of success. What kind of decision-making bias do you think this represents, and why? What steps should this leader take to avoid this bias?
- A CEO of an automobile company decides to introduce a new hybrid vehicle using cutting-edge technology. A huge amount of money is spent in research and development as well as advertising. But when the car is completed sales are very slow and the price has to be cut so low that the company is losing money on every hybrid vehicle sold. She is advised to simply abandon the car to avoid further losses in profits, and focus her energy on selling profitable vehicles. However, she insists it is unwise to abandon the hybrid vehicle given that so much money has already been put into the project. What kind of decision-making bias do you think this represents, and why? What steps should this leader take to avoid this bias? Support your answer with references to at least one of the three background readings.
- Conclude the paper with a discussion about which one of the decision-making biases you think is the most dangerous to a leader, and explain your reasoning.
Assignment Expectations
- Follow the assignment instructions closely and follow all steps listed in the instructions.
- Stay focused on the precise assignment questions; don’t go off on tangents or devote a lot of space to summarizing general background materials.
- Make sure to cite readings from the background materials page. Rely primarily on the required background readings as your sources of information.
Include both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 13 and 14 on in-text citations.
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