Decision Strategy – chapter 3

spotlight

Bounded awareness allow razor sharp focus – but it also means tunnel vision, so you do not see, what is just outside your field of focus.

When bounded awareness narrows our vision

””Facts matter not at all. Perception is everything. It’s certainty”

Steven Colbert

On 28 January 1986, all employees at the Kennedy Space Center in Florida were busy preparing the launch of The Challenger space shuttle. A thorough review of the spaceship aviation readiness had been undertaken and it had been cleared. The lift off had been postponed five times due to bad weather, but today was a clear day albeit also the coldest for NASA ever to launch a rocket. The event was highly televised as a civilian was onboard for the first time ever to help NASA regain financial support. At 11:38 the Challenge left Pad 39B and almost immediately struck disaster. 73 seconds into the trip, the Challenger exploded in a ball of fire, immediately killing all crew. How could this happen to one of the most professional and highly regarded organizations?

Highly focused on saving the space program and using the Challenger as a key marketing vehicle for this purpose, management had under analyzed the risk situation and overheard engineering concerns around O-ring temperature requirements. Now you would think such an everyday reason could not happen in such a critical situation, but bounded awareness contributes to people even in the same organization with similar skills and knowledge can draw different conclusions. Because we have a limited bandwidth, we can in a mix of chaotic information quickly come to see important communication as trivial and thus underestimate risks. In NASA it was not technical skills or knowledge that separated the leaders from the engineers, but rather the narrow vision, which comes in the wake of strong focus – management on saving the space program and previous successes – engineering on recent O-ring reviews.

colour-changing-card-trick

If you are in doubt about whether this applies to you, then watch the colour changing card trick video and honestly answer yourself, whether you are one of the few, who gets it…

Bounded awareness can occur in various stages of your decision making and we like to distinguish between seeing, seeking, selecting and sharing information – or 4SI for short:

Error in Seeing Information

Our ability to focus on one task is undoubtedly useful, but it can also limit our awareness of peripheral threats and opportunities in your business environment and thus your ability to craft a strategic response.

Now, if you do not see it often, you often do not see it, but we can learn to become more aware of changes in our environment: Military personnel can be trained to scan a crowd for suspicious behavior, leaders can hone their awareness of critical information and organizations can set up early warning signals of key environmental change.

Error in Seeking Information

The Challenger disaster demonstrates what can potentially happen when professional and well-meaning leaders limit their analysis and fail to seek out the most relevant information. It is not difficult to make the connection to the recent acquisition of Nokia, where the CEO exclaimed: “we did nothing wrong, yet we lost”.

That said, how can we be expected to seek information which by its nature is beyond our awareness? The most important thing is that you are vigilant in your reflections on what information is actually relevant for the decision you must make. As a manager you often experience recommendations reaching your desk supported by a significant amount of data – a quick trick here is to be skeptical about the absence of contradictory evidence.

Error in Selection Information

It may be hard to believe, but we ignore many valuable and accessible pieces of information about changes to customers, competitors and other stakeholders, when making important decisions – particularly, when we are successful. The Swiss watchmakers held 50 percent market share before 1960 and despite being the first to develop quartz technology, the watchmakers were in less than 10 years reduced by two thirds from foreign competition in quartz technology.

One way you can determine if the information you have at your disposal is useful, is to think about how the other parties involved will act. If you are in a negotiation, how will the counterpart assess the business you are negotiating? One method is to understand the links between all the relevant information by not only focusing on the cause-effect relationship, but also to bringing other contextual factors in to play.

Error in Sharing Information

If we succeed to seeing, searching and selecting the right information in a non-biased way, research suggests that we still have a problem: Our cognitive limitations prevent us from unrestricted exchange of information. When team members discuss available information, they omit the unique pieces, that can make the difference. Why? Because it is much easier to discuss common information and it is often better rewarded.

There are many ways to integrate diverse knowledge in groups, but one of the simplest approaches is to set agendas for meetings with specific points to ask individual views or make a person/department responsible for valuable knowledge sharing.

6s-model

6S Model

There are many individual approaches to avoid or limit bounded awareness. We use the 6S model to apply the right type of method to the right type of problem. Are we dealing with an issue within Strategy, Structure, Steps (aka process), Systems, Skills or Style (aka culture)?

For example in Strategy a strong approach is to counter bounded awareness with a highly focused megatrend analysis on the company and industry in question to showcase key issues and relevant scenarios facing the company in the next +5 years, so strategy is based on solid ground.

Another example in Structure companies may have a tendency for proliferation, inequitable resource allocation or absence of significant branches. The best thing to do is run periodic due diligence on your structure: reasonable number of organizational layers, average span of control, a relevant mandate in each role etc.

A final example is Systems that are configured incorrectly has the special ability to get you very far away from your goal very quickly. This is because the system’s primary purpose is to solve tasks fast, but if “the GPS” is set incorrectly, you can quickly end up somewhere completely different than you expected. Your best option here is to think both lead and lag indicators measuring both the end result and the process of getting there similarly to Balanced Scorecard etc. It allows you to create an Early Warning System to correct course at the right time but the trick is to focus on a handful of KPIs – if you focus on everything, you focus on nothing.

Bounded awareness can break organizations in industries undergoing significant change. The solution is not surprising both systematically and continuously work to expand awareness of the organization.

This was the summary of chapter 3 in our book, Decision Strategy. Next week we will look at how your Confirmation Bias keeps your bad ideas alive far beyond disaster and what to do about it – stay tuned!

As always if you prefer to wait for disaster to strike, then do not contact brian@behaviouralstrategygroup.com or +45-23103206:)

Decision Strategy – chapter 2

rationality

95% of our 35,000 daily decisions are taken subconsciously by our system 1

How does our brain wreak havoc on strategy?

”When faced with a difficult question, we often answer an easier one instead”

Daniel Kahneman

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:

  1. Define the problem
  2. Identify criteria
  3. Weigh criteria
  4. Generate alternatives
  5. Assess alternatives against each criterion
  6. 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:

70% failure rate

  • Availability bias was introduced in the beginning of this article. We put too much emphasis on the limited information we have and do not see 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 in 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 McKinsey’s 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:

  1. 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
  2. Identify the most likely bias to affect the decisions selected and their general effect on the process
  3. Decide on a new practice that either removes the bias from the equation or counters the bias

This was the short version of chapter 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!

If you cannot wait until next week and need support in strategic decisions or daily business decision making processes, please contact me at brian@behaviouralstrategygroup.com or +45-23103206

Decision Strategy – chapter 1

book

This is a series of core points from our book, Decision Strategy. It won 5th place in global management books in 2016.

Why do we need Behavioural Strategy?

”Take a simple idea, then take it seriously”

Warren Buffet

The last 50 years we have witnessed a revolution in strategic thinking. Ground-breaking work of great thinkers like Michael Porter and Henry Mintzberg has paved the way for a solid management tradition. Today, most senior managers are trained in strategic management, and large companies often have their own strategy teams.

Yet business is filled with examples of bad strategy and strategy execution with disastrous consequences. 70% of all strategic initiatives fail according McKinsey, and what is worse, many companies will look at one moment to a promising future and the next find themselves brought to their knees. Almost half of the 25 companies that originally went through Tom Peters and Robert Waterman In Search of Excellence needle’s eye, either no longer exist, are bankrupt or are faring poorly.

We all know the countless examples of poor strategic decisions; Kodak, who missed opportunities in digital photography, a technology they had invented; the Swiss national airline, Swissair, which was so financially stable that it was known as “the flying bank”, but as a result of a failed M & A strategy succumbed to debt, or Nokia that chose market retention over innovation and dropped out of competition with the words: “we did not do anything wrong, and yet we lost.”

The question is why talented executives are backing flawed strategies in a time when we have access to so much information? Misinterpreting opportunities, poor strategy design and lack of follow through are some of the key reasons according McKinsey research. But they are all fairly everyday reasons that should not get in the way of a solid strategy right?

Wrong. We are simply not as rational as we like to think. 95% of our decisions are taken on pure intuition based on a brain developed thousands of years ago and by no means equipped to handle the speed, pressure and diversity of decisions of today. It has developed shortcuts and simplifications that may have helped early humans to survive on the savannas of Africa like “if it looks like a deer, and everyone else chases it, it must be lunch.”

The strength of behavioral economics is that it brings the real world into the strategy process and thus all strategists should take an interest in behavioral economics. It is not about the next fad or adding a new organizational unit. As in the Buffet quote at the top, it is all about taking a simple idea – that we are systematically irrational – very seriously to build systems and organizations that will be flexible and robust enough to handle human excesses – and it is this agility and robustness that will separate your organization from the competition.

The idea is simple yet not easy. A few first mover investment funds have incorporated behavioral economics to counteract systematic biases, but strategy has not yet been penetrated. And it is not hard to guess why: unlike marketing, where the biases and irrational behaviour of others are used routinely to increase sales, strategy requires us to recognize our own biases.

This was from chapter 1 on our book, Decision Strategy. Next week we will look into how our brain works, how that can wreak havoc on strategy and what to do about it – stay tuned!

If you cannot wait to learn more or want to avoid strategic disaster in your company, contact me at brian@behaviouralstrategygroup.com or +45-23103206.

5 year anniversary!!!

Our acclaimed book Decision Strategy (translated from Danish Beslutningsstrategi)

Time flies, when you are working 100 hours per week (or so I heard from my younger self – but that is story for another time)! In 2016 I coauthored my first book and cofounded my first company – and never looked back (ok actually I did, but I noticed all these cool entrepreneurs never seem to do so on Linkedin, so sue me!).

Our book Decision Strategy received five stars in the most prestigious business paper in Denmark and went on to win global 5th place just shy of McKinsey, Bain and MITs books that year (and some ridiculous re-re-retelling of the business disaster in EAC – you will be forgiven for not remembering). It was the only time someone managed to not only structure your +200 biases into a comprehensible concept but also match them up against the right business tools – absolutely critical in a time flush with rebottled old concepts and no way of telling the difference (at least if you ask us, and we are certainly not biased…:)

I also left the comfort of corporate life that year. Boldly striking out on my own with many interested potential clients in our concept and exactly… zero signing up… OK I was a bit scared there for a month or so! But then Behavioural Strategy Group took on our first client with a growth strategy for an IT company. And a second. And a third. We combined megatrend analysis to avoid the availability bias group with a twist on Playing To Win strategy to minimize especially the confirmation bias group together with some deep dives and early warning systems to keep the overconfidence, emotional and loss aversion bias groups at bay. You never forget your first love!

It has been a blast despite the many ups and downs of entrepreneurship, but after a horrible 2020 I believe this year will be the best yet in terms of intriguing clients and challenging projects, so I can hardly wait to see the next 5 years. To celebrate the anniversary of our book and to give you all some exciting summer reading, I thought I would share the key learnings from the book one chapter every week for the next 10 weeks – stay tuned!

And if you cannot wait that long to learn the secret sauce behind our strategies, contact me at brian@behaviouralstrategygroup.com or +45-23103206.

The upside of irrationality – Bounded Ethics bias

The towels were so thick there I could hardly close my suitcase.

Yogi Berra, Baseball athlete & accidental satirist

You lie, steal and cheat all the time. Well not you of course – just everybody you have ever met. Some more than others though. Or at least they are the ones who get caught:)

So bounded ethics is your tendency to act unethically, whenever there is a conflict between doing what is right – and what is right for you. It can be small things like taking a pencil from work, crossing a pedestrian street at red light or dressing up your story a bit. Try googling and taking the online test: “How unethical are you?” and share your results if you dare!

In fact most of this is small, but that is also the problem, because once you cross that line, you are entering a very slippery slope, where it is easy to lose your bearings and keep going a little further all the time – and before you know it, you have destroyed a +100 year old financial institution and created the largest financial crisis in almost a century just as a completely hypothetical example (or not – check out the case of Lehman Brothers).

Sometimes it is you hiring a board member from your trusted network or as a 40ish male Caucasian simply just preferring other 40ish male Caucasians for your team, because – well – they just seem very trustworthy and competent. And it is not to pick on 40ish male Caucasians – 20ish female Asians also trust 20ish female Asians the most. Nobody means any harm, but you need to find a debiased recruitment process.

Another interesting trick is to take page out of Amazons playbook with assigning a chair in every meeting to a customer – in this case assign it to the newspaper, you are most concerned about ending up on the frontpage of. But it can also be as easy as posting your values on a poster – in fact you do not even have to have any values written down – research shows that if you just refer to the values of the organization, then people will automatically behave better!

One of my favorite professors Dan Ariely is here to tell you the honest truth about dishonesty:

Now if you know someone, who knows someone, who might have some “issues”, they need to fix in this arena contact me a brian@behaviouralstrategygroup.com or +45-23103206.

Have a wonderful week!

The upside of irrationality – Emotional bias

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

Jonathan Swift, Author

Have you noticed how some days your ideas are just all approved by your manager and other times none of them? You probably put the same effort and approach into them, yet the result is different. The reason is simple. When people are happy they take a positive view on everything and vice versa!

This is a kink in your emotional bias – it basically works with somatic markers, where if you have encountered a similar situation before, then how you felt about it last time, will determine your response. If you had a good experience AND is having a good day, then this will further accelerate it.

This also works the other way with bad experiences and bad days of course. But it gets worse. A study of parole hearings in the US with three judges working through a bunch of cases in a day showed that the likelihood of parole was decent at the beginning of the day and then it immediately started dropping. Suddenly it would swing back up and then immediately started dropping again before taking one more dramatic increase and drop. What happened at those times of drastic improvement in the likelihood of parole? Lunch and afternoon snacks. That is it. Your life may be decided based on whether people remembered to bring their lunch pack. Because when people run out of energy they immediately return to the base choice – status quo – no parole.

In behavioral economics we call this lack of energy for ego depletion. And the effect is dramatic not just on your motivation for breaking status quo – it impairs your judgement. If you have not gotten a night of sleep it is the equivalent to a 15% reduction on IQ tests. That means that if you are smart, you become normal – and if you are normal you will now have trouble tying your shoes.

Even on an average day with good energy our emotions – and thus our decisions – can be hijacked, as you will experience in this short video clip:

Now I dare you to say that this does not touch you. And that is the point. Because anti smoking campaigns, where people are informed about how smoking ruins their life almost acts as motivators. But this works.

If you want to learn more about how to use behavioral economics to build and execute better business strategies, please contact me at brian@behaviouralstrategygroup.com or +45-23103206.

The upside of irrationality – Loss Aversion bias

“If there is a 50-50 chance that something will go wrong, then 9 times out of ten it will.”

Paul Harvey, Journalist

If someone approaches you with a bet of USD 100 at a flip of a coin – if you win you get 100 and if you lose you pay 100, then you are not going to take it. Whether it takes increasing your winning option to 150 or 250 depends on your specific risk appetite, but on average you need twice as much back as you have in risk. Twice!

Daniel Kahneman – the nobel price winner and author of Thinking Fast & Slow – calls this the most significant contribution of psychology to behavioural economics. The applications in all business, negotiations and not least stock trading cannot be overestimated – any place there is anything less than perfect information on both sides of a deal, there will be manipulation (consciously or not).

Here is Dan Ariely – one of the most popular authors and professors in behavioural economics – giving you some really sharp pointers and tricks on loss aversion:

If you enjoyed this you will love next time, where your own emotional bias will be tested if you dare… And if you have too much of an appetite, then contact me at brian@behaviouralstrategygroup.com or +45-23103206.

None of your decisions are rational

I had the pleasure of my first live Linkedin interview on behavioural economics and why none – yes none – of your decisions are rational a few weeks ago with national Linkedin celebrity Giovanni Niese.

Giovanni managed to make me look both smart and funny most of the time, when speaking about the six main bias problems all humans face and the secret tricks to avoid them before disaster strikes, so sit back and enjoy (in Danish)!

I hope you had just half as much fun watching as Giovanni and I did making this video for you. If you want to learn more about how to avoid irrational business disasters, feel free to contact me at +45-23103206 or brian@behaviouralstrategygroup.com.

The upside of irrationality – Overconfidence bias

“A very disturbing feature of overconfidence is that it often appears to be poorly associated with knowledge – that is, the more ignorant the individual, the more confident he or she might be.”

Robert Trivers, Sociobioligist

Duke University has been asking CFOs of large companies over a number of years to assess the return on Standard & Poor’s stock index over the coming year. Over time, the researchers collected 11,600 projections and thus had a good basis for assessing whether the CFOs were able to predict developments. Their conclusion was that CFOs of large companies have no idea about the development of the stock market a year ahead. In fact, the correlation between their estimates and price was in fact less than 0. This means that when they said, for example, that the shares would fall, the shares were more likely to rise. But the surprising thing was that CFOs were not aware that their forecasts were complete rubbish. This discrepancy between the CFOs self-perception and their real abilities is a good example of overconfidence.

Can overconfidence be a good thing? Well your tendency towards overconfidence damages your learning process and the quality of your decisions. Positive illusions and overconfidence lead to and escalate conflicts, reinforce arrogant and careless behavior, take undue credit for successes and blame others for failures, plan projects and set goals out of step with reality. Otherwise it is a great thing.

Here is a fun video with a very interesting hypothesis at the end about why you do all that:

Next up is Emotional bias – if you liked this, you will love that!

If you want to learn more about how to avoid this in your business, contact me at brian@behaviouralstrategygroup.com.

The upside of irrationality – Confirmation bias

“If you torture the data long enough, it will confess to anything.”

Ronald Coase, Professor in Economics at Chicago Business School

The power of your brain never ceases to amaze me.

You make snap decisions on very little real content and instead respond disproportionally to authoritativeness and approachability. You jump to superficial and quite stable conclusions such as when you have started to favor one prime minister candidate over another, no amount of evidence will change your opinion. This is the reason that televised political debates are pretty much a waste of time.

But how far can you actually take it? That was the question that spawned this hilarious video – watch it to the end for the big surprise:

Normally, you would hear something like: “dont try this at home – we are trained professionals”. Well firstly I guess this is why behavioural economics is the funniest profession and these vidoes are the upside of irrationality – and secondly why not give it a try at home? Let me know how it works out!

Next up is Overconfidence bias, where I have yet to find a great video, so feel free to hit me with ideas at brian@behaviouralstrategygroup.com – stay tuned!