This is part 2 of an introduction to core concepts from our book, Decision Strategy, that received 5 stars as the fifth best management book of the year globally. You can read the other parts here:
Part 2: How does our brain wreak havoc on strategy?
”When faced with a difficult question, we often answer an easier one instead”
Christine, who is a director of a mid-sized media company, is in doubt whether to fire Anna, the marketing director. In recent years Anna has not delivered more than minimum requirements. She is in every way talented, intelligent and has a knack for finding inexpensive powerful marketing solutions, but she rarely takes the initiative and is often critical towards other employees. The challenge is that Anna is difficult to replace and is the only one who can maintain the company’s critical partners. What would you advise Christine to do?
If you reflect a little about your mental activity while you reading this introduction, it is remarkable how quickly you formed an opinion. Maybe you advise her to fire Anna or have a chat with Anna for a final chance. But you are unlikely to be completely confused. Our consciousness is usually in a state where we have intuitive feelings towards almost everything we experience. We may like or dislike people long before we know anything special about them; we trust strangers without knowing why; we have the feeling that a company will succeed without further analyzing business. We simply put too much emphasis on the information that is readily available to us.
The ideal decision process has 6 steps starting with an assessment phase and ending with a decision phase, but we actually rarely use it:
- Define the problem
- Identify criteria
- Weigh criteria
- Generate alternatives
- Assess alternatives against each criterion
- Calculate the optimal decision
Instead 95% of our decisions are taken intuitively by fast thinking or system 1 as opposed to slow thinking or system 2, where we actually engage our minds in classic analysis. The brain is not literally divided in this way, but it is a useful analogue. System 1 is our faster, automatic, intuitive and emotional thinking and often goes under the name of the elephant – while System 2 is slower, more costly and conscious thinking – the one often referred to as the rider. For example our system 1 may tell us to buy Audi shares because we basically like Audi vehicles, but it does not mean that the shares have an attractive price compared to the actual value and alternative investments. This assessment requires system 2, but that pulls significantly more energy and these resources are quickly used up – and then you are back to system 1 decisions.
We have in the book structured the more than 200 biases currently identified into 6 distinct groups with 5 closely fitting with the key reasons for strategic failure according to McKinsey & Company:
- Availability bias was introduced in the beginning of this article. We put too much emphasis on the limited information we have and do not look new key pieces.
- Confirmation bias is when you get that great business idea and start investigating further only to find that every new piece of information seem to confirm your idea.
- Overconfidence is our tendency to underestimate competitors, timelines and budgets as well as overestimate our control over these.
- Emotional bias holds several different sub biases such as strong preference for status quo and is almost a category for itself, because it tends to reinforce the other biases.
- Loss aversion is the finding that we are on average twice as averse to losses as we are attracted to gains. Once vested in a strategy this feels like a loss we should avoid.
- Bounded ethics is not included in McKinseys study and focuses on how we slowly stretch our ethical code. The fake accounts in Wells Fargo is a recent example.
As we can see, there are plenty of ways for top management decisions to go wrong. But are these biases inherently bad or irrational? Not really – they were just invented for a different era and now we need to adjust for the situations, where they are not ideal:
- Identify the situations, where it is worth the effort – the rare high impact decisions such as strategy and many small decisions that over time has a large effect such as in core processes
- Identify the most likely bias to affect the decisions selected and their general effect on the process
- Decide on a new practice that either removes the bias from the equation or counter-effects the bias
This was part 2 on our book, Decision Strategy. Next week we will look at how our availability bias prevents us from bringing all key data to strategic decisions and what to do about it – stay tuned!
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