Improving strategic decision making
Executives make decisions. Yes, they do a few other things too, often on their BlackBerry handsets, but unlike the managers who work for them and often draft the proposals, the executives are the ones who actually get to make the really big “bet the business” type decisions – and are held accountable for the outcomes.
Recent behavioural economics research is providing much needed guidance for those in positions of power to make better strategic decisions. Drawing on the work of Nobel prize winner Daniel Kahneman, a number of books and articles are now talking about the differences between intuitive thinking and reflective thinking. The former is our default operating mode that allows us to live our lives. It could be referred to as ‘autopilot’ or ‘unconscious competence’. Intuitive thinking allows busy executives to get things done, but it may not be the most useful approach when considering whether to acquire a company, open an office in Kigali or launch a ‘fighter’ brand in a new consumer category.
Reflective thinking is more deliberate. It involves looking at information with new eyes and being aware of one’s actions. It is not most people’s default operating mode – and is a fairly unsociable way of approaching life for those who do adopt it all the time at work, home or on the golf course. Research suggests, however, that a more reflective approach to decision making, by questioning both the content of a strategic proposal as well as the process used to get to it, may hold the key to more profitable executive decisions.
Using behavioural economics, Daniel Kahneman, Dan Lovallo and Olivier Sibony have recently proposed a 12-question checklist to overcome the cognitive biases that distort reasoning in business – in other words to use our reflective thinking to identity errors in the intuitive thinking of others. For an executive that needs to objectively decide on a strategic proposal prepared by her team, there are three questions that the decision maker should ask herself, six questions to use to challenge those making the proposal, and three questions aimed at evaluating the proposal.
Questions that decision makers should ask themselves
Question 1: Is there any reason to suspect errors driven by self-interest of the recommending team? A preference for a particular decision is built into almost every recommendation. This question allows decision makers to assess whether the risk of ‘motivated error’ is significant – whether the individuals proposing the decision stand to gain more than usual from the positive outcome. Should this be the case, executives should review the proposal with extra care, especially for over optimism.
Question 2: Have the people making the recommendation fallen in love with it? Executives should be aware of proposals with strong emotional content, including those concerning employees, brands or locations. Risks may have been minimised and benefits exaggerated.
Question 3: Were there dissenting opinions with the recommending team? A unanimous proposal may be possible, but could be sham unity imposed by the team’s leader or a case of groupthink, especially if the power dynamics in the group are unbalanced or there is a lack of diversity. Were the disagreements fully considered? Private meetings may be required to discreetly solicit dissenting views.
Questions that decision makers should ask the team making recommendations
Question 1: Could the diagnosis be overly influenced by an analogy to a memorable success? Often recommendations refer to a past success story, which the decision maker is encouraged to repeat. The danger is that the analogy may be less relevant to the current deal than it appears. A broader set of comparisons and more rigorous analysis may be required.
Question 2: Are credible alternatives included along with the recommendation? Some groups may generate only one plausible proposal and seek only evidence that supports it. A number of real alternatives with pros and cons explained should be encouraged.
Question 3: If you had to make this decision again in a year’s time, what information would you want and can you get more of it now? The intuitive mind constructs a coherent narrative based on available evidence, overlooking what is missing. Asking this question may uncover useful information not fully considered.
Question 4: Do you know where the numbers come from? Business decisions are often based on initial estimates, whose accuracy is not challenged. They may also be based on extrapolations from history, with little relevance. The proposal may need to be stress-tested against a different set of assumptions.
Question 5: Is the team assuming that a person, organisation, or approach that is successful in one area will be just as successful in another? The halo effect often sees companies, which are branded as ‘excellent’ in one area, viewed as exemplary in all their practices. The relevance of the comparison should be assessed, while examples from less successful companies may be required.
Question 6: Are the people making the recommendation overly attached to past decisions? Past expenditures that don’t affect future costs or revenues should be disregarded. Viewing the decision the way a new CEO might would be useful.
Questions focused on evaluating the proposal
Question 1: Is the base case overly optimistic? Forecasts may be prone to excessive optimism and overconfidence, while not taking competitor responses into account. Realistic comparisons with similar proposal implementations may provide more accurate projections.
Question 2: Is the worst case bad enough? Prepared scenarios may not take risks that have not been experienced before into account. Reassessing proposals in terms of ‘perfect storm’ scenarios may allow additional risks to be mitigated.
Question 3: Is the recommending team overly cautious? Many executives complain that their team’s plans aren’t creative or ambitious enough. Shifting higher risk projects outside ‘ordinary’ operations may create the space and safety for managers to experiment.
Adopting a more reflective decision-making approach involves time and discipline. It includes the recognition that highly experienced, superbly competent, and well-intentioned managers are fallible. The rewards from reducing bias, however, are increasingly higher returns from better strategic decisions.