5 things you need to know about decision making...in january 2012, kodak filed for bankruptcy (after...

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5 Things You Need to Know About Decision Making

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Five Things You Need to Know about Decision Making We Hate Ambiguity Humans hate ambiguity. Uncertainty makes us emotionally and physiologically uncomfortable. It’s not our fault; it’s how we’re wired. In the past, the reptilian brain (the oldest part of the human brain (where many of our instincts reside) literally kept us alive by allowing instantaneous decisions such as—is that creature moving in the bush something I can eat or something that will eat me?

While most of us no longer need to make life-or-death decisions on a daily basis, we still dislike uncertainty because this old, reptilian part of our brain influences our emotions and reactions. In business, this aversion to uncertainty often compromises our judgment.

The decline of former film titan Kodak makes the point. Kodak dominated the film market to the point where “Kodak Moment” became part of the American vernacular. In January 2012, Kodak filed for bankruptcy (After emerging from bankruptcy in 2013, the company emerged in much reduced form as Kodak Alaris.) What happened?

It’s now common knowledge that Kodak was slayed by the digital dragon. The strange part of this story is that Kodak saw the digital revolution 25 years before it came to pass. Indeed, company leaders were able to imagine customers’ desire to crop their own photos, easily remove red-eye, and print photos at home.

Our survival instincts can lead to the company’s death.

Where Kodak went wrong was their inability to see that digital technology would fundamentally alter photography. Instead, thought Kodak execs, digital would simply be another way to produce prints. In fact, Kodak went so far as to manufacture the Advantix, a camera with a digital preview but that still required film to get an actual print. Decisive authors Chip and Dan Heath liken this approach to selling a smartphone that must be plugged into the wall to make a call.

By staying true to film and print, Kodak leaders avoided ambiguity and went bankrupt. Their survival instincts led to the company’s death.

Solutions

Show and Tell but Skip the Tell While we likely enjoyed show and tell in kindergarten, we know that showing usually carries the day. Adobe employees made the point when they realized that customers were struggling to buy multiple copies of software licenses. Rather than complain to I/T or plead to upper management for support, they staged a demonstration. They politely asked executives to log on and buy several copies of a license for one of the Adobe product suites, something that the system did not allow at that time. When executives experienced the same frustration as Adobe customers, they quickly ordered their staff to fix the problem.


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Become an Active Problem Seeker A second way to manage our aversion to uncertainty is to become an active problem seeker. This idea may sound counterintuitive. Why would we look for problems? Don’t we already have enough to deal with? In truth, however, organizations that seek problems often demonstrate impressive performance. Examples include air traffic control centers in the U.S. and the navy’s aircraft carriers, both of which have incredibly low error and failure rates. Experts refer to them as high-reliability organizations (HROs).

As decision expert Michael Roberto explains, leaders of HROs do not wall themselves off from the possibility that failure might occur. On the contrary, they pre-occupy themselves with failure. For example, they:

• Do not simplify explanations.

• Remain sensitive and attentive to their front-line operations.

• Demonstrate a deference to those who have the local, specialized knowledge as opposed to those who simply have authority in the hierarchy.

• Commit to resilience, to the notion that you cannot prevent all small problems. Rather, the goal is to focus on fixing these small problems before they mushroom into large problems.

Good decision makers are pre-occupied with failures of all sizes and shapes but not in order to point fingers. Rather, these decision makers treat each failure as a potential indication of a much larger problem.

The point is that problems are not the enemy; hidden problems are because these hidden problems become serious threats down the road. By actively seeking problems, leaders and decision makers reduce and manage ambiguity while all the while demolishing barriers to sound, evidence-based decisions.

Confirmation Bias Unchecked, our aversion to ambiguity drives us straight into the welcoming arms of the confirmation bias, the tendency to favor information that reinforces our existing beliefs. The confirmation bias seems to wrap us in the warm glow of certainty when, in reality, it warps our assessments and decisions.

This bias often emerges when we gather facts and data selectively meaning that we tend to pursue self-serving information.

For example, Jane, a marketing director is about to interview three candidates for an open position. While attending a conference her colleagues heap praise upon one candidate leading Jane to believe that this person is highly qualified and possibly the best candidate for the position. When the candidate arrives for the interview Jane is positively disposed toward this individual. With these glowing recommendations in mind, Jane is likely to sub-consciously ignore what someone else might see as a red flag such as a gruff manner or a tendency to make excuses rather than accept responsibility for mistakes.

Like all of us, Jane seeks to tamp down cognitive dissonance, the feeling of discomfort that emerges when emotions and events do not align with what we already believe to be true, in this case that the candidate is highly qualified.

The confirmation bias seems to wrap us in the warm glow of certainty when, in reality, it warps our assessments and decisions.


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Solutions

Find A Skeptic One straightforward solution to this problem is to find the counterargument by actively seeking a different opinion. Find the person in your organization who often disagrees with your point-of-view and ask him to counter. Seeking a different point-of-view is worth the effort because a bad hire imposes direct costs such as wasted time and training dollars if it turns out that the candidate has to be fired and replaced with someone more suitable.

Look Ahead Grab a coffee with a colleague and spend twenty minutes discussing a future scenario as one way to assess the value of moving forward with a new project or initiative. For example, is the decision to move forward with the project the right decision if either of the following comes to pass?

• Just as the project nears completion, the firm loses its biggest client.

• The project comes in on time but over budget.

The Optimism Bias “We are more optimistic than realistic, and we are oblivious to the fact.” Dr. Tali Sharot

Cognitive bias is not limited to evaluating the present; it also influences our ability to assess the future. The optimism bias refers to our tendency to rely on the best-case scenario. As optimism bias expert Tali Sharot explains: “We are more optimistic than realistic, and we are oblivious to the fact.”

When we act on this tendency, we overlook potential problems. Let us imagine, for example, that our company has a lucrative contract with the federal government that accounts for 25% of annual revenue. Let us further imagine that this contract has been in place for the past five years.

When composing a business plan for the upcoming fiscal year, it might be tempting to assume that this contract will continue meaning a steady income stream and ignore the possibility of losing the contract due to elections results and budgetary shifts.

Why does this happen? Why do we assume the best-case scenario when planning projects or making revenue projections? The reason is our tendency to see the future as a variant of the present meaning that we can’t quite bring ourselves to imagine truly radical threats or dramatic changes such as the loss of a major government contract. We tend to assume that things will go on more or less as they have.

As author David DiSalvo explains in his book What Makes Your Brain Happy and Why You Should Do the Opposite, “We tend to simulate the future by re-constructing the past, and the re-construction is rarely accurate.”

The optimism biased is related to the overconfidence bias; both contribute to dangerous assumptions and unrealistic expectations about revenue, profits, and the success of important projects and initiatives.

Solution Psychologist Gary Klein outlines a technique for reducing the impact of the optimism bias. Klein’s “pre-mortem” is simple, yet powerful:

When the organization has almost come to an important decision but hasn’t yet committed, gather a group of people knowledgeable about the decision to listen to a brief speech: “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome has been a disaster. We missed our quarterly revenue targets by $5 million. Please take five to ten minutes to write a brief history of that disaster.”


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This pre-mortem technique:

• Legitimizes doubt by providing a safe space for asking questions and expressing concerns about the decision.

• Encourages even supporters of the decision to search for threats not previously considered.

By remaining aware of our tendency to engage in the optimism bias we are more likely to identify its effects at work and address its consequences, quite possibly averting disaster and lost revenue.

The Overconfidence Bias A high level of confidence is good for your health, right? Wrong! A study of patients who died in a hospital ICU compared the doctor’s diagnosis to the actual autopsy results. The doctors who were completely confident in their diagnosis were wrong 40% of the time.*

We tend to trust highly confident experts such as doctors, scientists, executives, and financial analysts because we believe that their extensive training and experience serve as a solid basis for making accurate predictions.

Unfortunately, this confidence is misplaced, and not only in hospital ICUs. We need only recall the absurd stock prices in the late 1990s or the disastrous bet on rising real estate prices before the 2008 housing crash. Space and weapons programs are notorious for budget over-runs as are construction projects from kitchen remodels to skyscrapers.

Relying on an expert’s judgment seems logical, even intuitive. The problem is two-fold:

1. Like all of us, experts are subject to the overconfidence bias. As demonstrated by the ICU study and similar studies testing college students’ ability to accurately assess their general knowledge, our confidence often exceeds accuracy, implying that most of us are more sure about our knowledge and judgment than we deserve to be.

2. The expert’s situation, however, is exacerbated by us, the clients, customers, and patients who expect, even encourage, overconfidence. Who wants a surgeon who expresses doubt about the outcome of a difficult procedure or a stock analyst who confesses that his estimates may be off by 30%?

Confidence is valued over uncertainty, and, as psychologist Daniel Kahneman explains, there is a prevailing censure against disclosing uncertainty. Experts who acknowledge the full extent of their ignorance may expect to be replaced by more confident competitors who are better able to gain their clients’ trust. The irony is thick. Experts who honestly acknowledge the limitations of their ability to predict outcomes are shunned in favor of overconfident experts whose attitude can literally prove fatal.

Solutions We can mitigate the effects of overconfidence bias by seeking data and reference points outside our immediate context. For example:

• By shifting the focus from our own project to external factors such as other projects, we expand our point of reference and gain insight into how others approach problems and challenges.

• Consulting the past. If similar projects took three years and consumed five million dollars, these numbers will likely apply to our project as well. In this light, no matter how carefully we plan, two years and two million dollars is not a realistic estimate.

Flawed Corporate Cultures Lead to Bad Decisions The cognitive biases discussed above are further complicated by flawed corporate cultures. Mandates, heavy-handed decision making, and employees who feel disempowered present yet another set of barriers to good decisions.

The risks of this approach to decision making were evident when Jurgen Schrempp took over as CEO of Daimler. His first goal was to tame the fiercely independent Benz CEO and board by folding the Mercedes subsidiary back into the Daimler corporate structure.


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But, Schrempp did not want to present his preferred solution for the Benz board as the only option. For this reason, he offered a variety of choices to stimulate discussion, allowing people to talk while all along steering the discussion to the option he wanted.

Schrempp believed that providing multiple options would dispel the notion that he was somehow forcing a decision onto the junior executives. In reality, however, his junior executives recognized the manipulation, resented it, and responded by not only opposing Schrempp’s decision but by refusing to implement it. A serious situation in and of itself, but the story does not end there.

Jürgen Erich Schrempp: Former CEO DaimlerChrylser

Rather than learn his lesson, Schrempp repeated this same heavy-handed approach to decision making during the Chrysler merger deliberations. This approach may explain, at least in part, why Daimler encountered so many difficulties during the integration process.

By failing to conduct rigorous analysis and provide an open, honest decision-making process, Schrempp alienated the very staff responsible for working on the merger.

The lesson is clear; people won’t commit to a process they perceive as irrational, incomplete, or just plain sloppy. In other words, manipulation, or what scholar Michael Watkins calls a “charade of consultation,” leads employees to perceive the decision-making process as illegitimate. When this happens, they are unlikely to work hard to implement the executive’s decision and might even undermine it.

If you want employee buy-in, avoid a “charade of consultation.”

Solution—Micro-Decisions The need for buy-in often feels like a one-way street with employees required to make the drive without a corresponding requirement for senior management. As illustrated by the fate of DaimlerChrysler under Jurgen Schrempp, the result is a sense of disempowerment among staff and junior leadership.

One way to empower employees, of course, is to grant them the authority to make decisions. I propose that we consider the power of micro-decisions. A micro-decision is a choice made by an individual within a context that he or she controls.

For example, when Wal-Mart opened a store in Sao Paolo, Brazil, they offered most of the same products sold in their U.S. stores. The thinking seemed to be, “Peoria, Sao Paolo, what’s the difference?” Well, for one thing, Brazilians had no interest in American footballs.

This football fiasco could have been easily solved by allowing the Sao Paolo store manager to make choices about at least some of the product offerings. After all, wouldn’t a native Brazilian with retail experience understand the needs of Sao Paolo residents better than executives in Arkansas? In short, a few micro-decisions could have a large impact.


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While we may not be managing the world’s largest retailers, we all make similar decisions about price, product inventory, hiring, and delegation.

Whether Wal-Mart or a three-person startup, we must decide how to empower ourselves and our employees as we pursue a sound decision-making process for the current stage of our business.

Summary While the vagaries of the human brain present challenges to sound decision-making, you can surmount these challenges with time-tested solutions:

• Expand the decision landscape by actively seeking and resolving small problems before they balloon into large problems.

• Avoid falling prey to the confirmation bias by finding a skeptic to counter your decision.

• Temper the optimism bias by engaging in a pre-mortem, a projection of the worst-case scenario and how you got there.

• Check your confidence at the door as you compare the current project to previous endeavors in order to see what you or your team may have missed.

• Empower employees and colleagues by encouraging them to make micro-decisions, choices within a context they understand and control.

Endnotes * “diagnosis antemortem”: Eta S. Berner and Mark L. Graber, “Overconfidence as a Cause of Diagnostic Error in Medicine” American Journal of Medicine 121 (2008): S2-S23. Cited in Thinking Fast and Slow by Daniel Kahneman.

5 things you need to know about decision making...in january 2012, kodak filed for bankruptcy (after...

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