Decision Strategy – chapter 7

Emotional bias enhance other bias groups and make your decisions for you

It is useless to attempt to reason a man out of a thing he was never reasoned into

Jonathan Swift

At the end of the 1970ies a genious entrepreneur decided to beat IBM as the world leading tech company within the next decade. You will be forgiven thinking it was Steve Jobs, but it was actually Chinese inventor Dr. An Wang. Wang Labs was one of the first tech companies to advertise on TV and their first add showed Wang Labs as David and IBM as Goliath. From there on a series of “Giant Killer” stories were aired with the grand finale of a Wang helichopter shooting the smug IBM CEO.

Wang was as known for his butterflys as his ingenioius inventions based on 40 patents and 23 honorable degrees. He was born in Shangai in 1920 and entered the Chinese version of MIT at 16. During his studies Japan invaded China and young Wang lost his entire family, but he finalized with top marks and immigrated dirt poor to the US, where he got a PhD from Harvard. He opened up a one-man company and invented memory core, which revolutionized pocket calculators and later mini computers including word processers to replace type writers. His company grew 60% annually in the 1980ies into a USD 2bn Fortune 500 company with 80% of the 2000 largest US companies as clients, but disaster was lurking.

Until now Wang had capably foreseen technological developments, but now the company was against all trends pouring all resources into the competitive word processing market – in fact only IBM was spending more on marketing. Meanwhile the personal computer market was booming, where Wang held several critical patents, but he refused to change course: “personal computers is the dumbest thing ever!”. Wang loved word processing. His feelings went far beyond pride and commercial interest – he was emotional and protective like a parent. When he finally saw the writing on the wall it was last shot and he blew it on a proprietary operating system, when everybody else used IBM compatible systems. Sales nose dived and Wang Labs was bankrupt in 1990.

Wang’s problems were self inflicted and more personal than business related. Wang hated IBM after the company according to his own biography had cheated and humiliated him, when he sold his memory-core patent to IBM as a young man. He was determined to beat IBM, even if it would cost him everything. And so, it did.

Emotional bias – your emotions decide for you

A leading neuroscientist conducted an experiment on the role of emotions in decision making – the Iowa Gambling Task. Particpants sat down at tables with four decks of cards and were given USD 2000 to try to grow. They were told that some cards would pay say USD 100 and others would cost say USD 100. What they did not know was that half the decks were stacked to create a surplus and the other half a deficit. As the players started drawing good and bad cards, their emotions were measured, and they were asked about their feelings. In the beginning they drew random cards and just made notes, but as soon as they started drawing the cards that cost something, their emotions were activated, heart and pulse beating faster. After a while it was possible to observe higher emotional activity BEFORE picking from the bad decks. In fact, they started going after the good decks without being able to articulate why.

It might seem strange, that we can have emotions that make our decisions without us realizing it, but this is exactly what happens. Many scientists believe that our brains store memories of actions and associate emotions with that – known as emotional tagging. When we encounter similar situations, we recall our last action and our emotions – the emotions will then promote or warn us against these actions and thereby drive our decision – exactly like Wang. Until recently behavioral economics focused only on cognitive decision processes, but now researchers have found that not only do emotions drive our decisions directly through emotional tagging and enhance our existing cognitive biases like confirmation bias, but we also have a whole host of individual emotional biases:

Status quo bias is our irrational preference for the current situation – any change from that feels like a loss and shows why some companies never innovate or change. In fact, according to McKinsey the best way to predict your competitors strategy is to look at what they have done recently. As you run out of energy from making decisions in a day, then your tendency to stay with status quo also increases.

Avoidance of regret describes how it is more painful to make a change and be wrong, than stick with current actions and then be wrong – it can be seen when leaders stick with poor decisions, but a version of it also exist in competitive sports: Everybody prefers the gold medal, but silver medalists are actually more dissatisfied than bronze winners – they are just happy they got something, but silver is soooo close to gold.

Insensitivity to numbers shows that we are for example less focused on savings human lives as the number of people in danger grows. Saving one life can seem huge, but saving 88 vs 87 lives seem relatively unimportant, which is the reason that news outlets focus on stories and not statistics: people relate to people and not to numbers.

Hyperbolic discounting means that we prefer to get a reward earlier rather than later to the extent that even small delays cause us to discount the value of the reward substantially, whereas a much longer delay does not discount much more. So, if you are offered the choice between USD 100 now or USD 200 in 1 year, most take the money now, although you could earn the equivalent of 100% interest. But if you are offered USD 100 in 1 year or USD 200 in two years (also 100% interest), you would normally pick the USD 200.

Multiple selves are our tendency to have two opposite preferences for both immediate satisfaction and future rewards. On the one hand you want to stay healthy and accelerate your career – on the other hand pizza and some easy work tasks sound great. On the one hand you want to watch that new French intelligent drama – on the other hand Rocky 5000 sounds so alluring.

Self serving bias attribute positive events to our own personality or effort, while negative events are attributed to external factors. For example, if your project goes well, then of course it is because of you – but if it goes wrong, then the reason is external like poor partners or too few resources. If you are sued and win, then 85% of you will expect the plaintiff to pay trial costs – but if you sue someone and lose, then only 44% of you believe you should pay trial costs.

6S model – building checks and balances

Management literature has recently gone through a theoretical discussion about whether employees should park their emotions at the office front door. Our opinion is that you cannot be split in two. Not only is it physically impossible, but it is probably incredibly difficult to make any decisions at all without emotions to guide you and nothing great has ever come without passion. But we all have our strengths and weaknesses, where even strengths can backfire, and we need to keep it under control. Generally, you want to create checks and balances between different actors and activities in the organization and here are a few examples:

Strategy: When planning for an emotional organization, there are three things that are particularly critical: First, you need to look broadly to minimize the chance of falling in love with a specific scenario. Second, the process must be fact-based specifically on critical areas that determine the direction of the company. Finally, your processes must be coherent so that decisions somewhere in the process are followed up with changes elsewhere. Thus, you avoid an emotional decision about sub-elements instead of the overall strategy. In practice, this can be done with qualitative and quantitative megatrend analyzes, where the status quo can be challenged through assessment of alternatives. Coupled with the overall Playing to Win process, which just excels with its cohesiveness, this is a powerful solution.

Steps: Facts, facts, facts. That’s how easy it can be said. And yet not, because you can use Wisdom of Crowds to remove yourself from an emotional and towards a factual estimate. Many studies show that our bias can be balanced in groups so that we get close to the right solution, and this is what Wisdom of Crowds is about: When you want to learn about past facts, you ask an expert, but if you want to forecast the future, experts are as bad a chimp throwing darts – instead take the average opinion of 20 average people. This does not mean that intuitive and emotional decisions have to be parked, they are actually very important as long as they are connected to fact-based systems, and you choose from both – the best way is maybe a 50-50 average of your intuitive estimate and what comes out of a model.

Skills: There are two competencies that are critical here. On the one hand, key people must be trained in classical problem solving with the ability to razor-sharply define the problem, break it down into smaller parts, develop solution trees, priorities, analyses, and pyramid-structured presentations. On the other hand, people responsible for change must be well versed in behavioral change management and not least think in implementation solutions as soon as the analysis phase starts.

I hope you enjoyed this short version of chapter 7 in 5th best management book of 2016. Next up is Bounded Ethics – a scary look at the dark side of business and people. Contact or +45-23103206 if you are too concerned to wait.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s