decision seminar slides dave litwiller - dec 2013

Making Better DecisionsIndividual Executives and Groups

Dave LitwillerExecutive-in-Residence

December 4, 2013

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Copyright, David J. Litwiller 2013 2

Introduction

• Individual and Group Biases– Idea Generation– Decision Making

• Techniques to Counteract those Biases

• Frameworks and Disciplines for Making Better Decisions


Self-Interest

• Form:– Mankind tends to game all human systems, often serving himself at

the expense of others

• To Counteract:– Review proposals with an eye to individual and group self-interest– Pay attention particularly to over-optimism– Drill down into assumptions and dependencies– Obtain greater diversity of input about those assumptions and

dependencies– Regularly revisit how to realign individual incentives with larger goals


Affect

• Form:– People fall in love with an idea because it is theirs or their group’s, or it

is associated with something of which they are fond– Initial value judgments go on to colour subsequent analysis

• To Counteract:– Develop and rigorously use detailed check-lists for how costs and

benefits are to be evaluated, to maintain consistent evaluation– Contemplate a range of outcomes and describing the scenarios which

would signal for a mid-course change– Identify and consider contrary evidence


Groupthink

• Forms:– Individuals often abdicate responsibility when in a group – Fear of dissent leading to ostracism– Taking riskier decisions as a group than any individual would make– Blindly following a leader

• To Counteract:– Explore if there were dissenting opinions, discreetly if need be 1:1– Insist on adequate exploration of countervailing views


Saliency and Narrative Fallacy

• Form:– Humans are summarily influenced by analogy to a memorable event– We favour vivid and easy to remember stories– Induction bias to over-generalize from an insufficient base fact set

• To Counteract:– Drill into the completeness of analogy– Investigate weaknesses in the abstractions relative to the matter at

hand– Press for more detail than the simple form of the narrative– Get enough detail that differences in analogy emerge, and

relationships between those differences can be understood


Availability

• Form:– Decisions tend to be based on information which is readily available

(often from memory), rather than on the best attainable data– People are satisfied with the solution that comes to them most easily

• To Counteract:– Ask yourself, if you had to make this decision in a year’s time, what

information over the interim would you seek to make the best decision? – Get that data now, or a close and fast proxy– Stick to a checklist of the kind of data needed to make such a decision

properly– Get a diversity of views about what a range of solutions may be– Highlight disconfirming evidence


Confirmation• Form:

– Seek information which confirms earlier beliefs; avoid or misinterpret information which call earlier beliefs into question

– Consistency bias, path dependency– Often strongest when earlier beliefs have been communicated to others

• To Counteract:– Require credible alternatives to be presented at the same time as a

preferred recommendation– Seek facts and arguments which could call earlier beliefs into question– Write down disconfirming facts and hypotheses, don’t just verbalize them– Keep hypotheses somewhat private until they’ve undergone testing


Anchoring

• Form:– People are influenced to stay near an initial position or number, even if

the basis for that anchor is weak or later proven to be weak– Contrast mis-reaction; high pass filter frame of reference

• To Counteract:– Get varied input on what the range of initial anchors should be and how

they were arrived at, particularly in cases of• Extrapolation from history• Motivations to use certain anchors• Poorly substantiated numbers

– Actively solicit counterarguments to the initial anchor– Seek information about what exists just beyond the frame boundary, to

better understand the validity of the frame of reference


Halo Effect

• Form:– Assuming that people, organizations or approaches which were

successful in the past will be just as successful in a different situation– Things look easy in hindsight– But, context changes (almost) everything

• To Counteract:– Get additional comparable examples– Get into the details, where appreciable differences usually emerge– Eliminate false or specious inferences


Endowment Effect, Sunk-Cost Fallacy, Loss Aversion

• Form:– Recommenders overly attached to past decisions– Aversion to crystallizing losses, especially in public view– Willingness to take excessive risk to try to avoid absorbing a loss– The hardest thing to change is a manger who has had past success with a

certain way of doing things

• To Counteract:– Ask what a new CEO would do, or another outsider– Get input from knowledgeable outsiders who have no emotional, financial

or credibility investment in the earlier decisions– Intentionally seek countervailing views– Occasionally change incentives to decouple rewards for upcoming

performance from past decisions


Overconfidence, Planning Fallacy, Competitor or Disaster Neglect

• Form:– Base case which is too upbeat– Premature belief in having found the winning solution– Underestimating competitors because of dislike or hubris– Inadequate consideration for how bad the worst case could be

• To Counteract:– War game scenario planning or thought experiments– Outsider perspectives on plausible models for how the future could unfold– Map out decision trees, at least as far as some of the leading branches– Be especially wary of strategy premised on the failure of others– Pre-mortem: Imagine the effort has gone to term, and failed. Map out the

leading ways it could have failed, and then work back to improve the factual basis, decision alternatives and decision being taken now


Frameworks and Disciplines for Making Better Decisions


To Generate Better Ideas

• Reach out to get diversity of:– Anchors– Assumptions and beliefs– Participants– “Easy” solutions


To Better Evaluate Ideas

• Require evaluators to temporarily set aside:– The simplest expected cause and effect, to go

deeper for how events could play out– Pleasing patterns, and go on to identify other

relevant, instructive patterns– Initial risk profile, to look at alternate risk models– Short term issues, to put more weight on longer

term effects which people often excessively discount


To Better Evaluate Ideas

• Always consider the opposite, as one of the most important de-biasing techniques– Best done individually, and in balance with positive

advocacy– In group decisions, appointing an individual to be

devil’s advocate can weaken decision making

• Similarly, ask yourself how else you could prove or disprove the main tenets of a decision


To Better Evaluate Ideas in Groups

• Intentionally introduce constructive conflict– As leader, signal that conflict is welcome– Create two or more heterogeneous subgroups,

and give them the same task– Require individuals to anonymously submit in

writing before a group decision meeting his or her best decision option, driving issues, and even leading agenda items for the group decision meeting

– Get more than one option from each member


Caution About Statistics and Probability

• Humans generally have a poor intuition about statistics, probability, and confidence intervals

• Action:– Get statistically significant data sets to inform the base rate of success – Include internal, external in-sector, and external out-of-sector models,

a.k.a. reference class analysis– Beware of survivor and selection biases in data availability– Remember that not everything follows a Gaussian distribution. Many

phenomena in technology and business follow a Paretian distribution


Influence of Variables• Humans judgment ascribes too much weight to some variables, and

not enough to others– Overgeneralize from personal experience– Overly influenced by most recent events– Biased by superficial factors

• Statistics over larger time windows and data sets tend, when analyzed through the correct models, to generally outperform human intuition

• It takes courage for executives and businesses to discount intuition and put more weight on data

• Linear models for making predictions often outperform humans


Groups vs. Individuals

• Groups are better for idea generation than evaluation• Groups work well when there are many ideas to consider, but

their implications are straightforward to assess• Individuals are better for decisions when there are few ideas

to choose from, but the consequences are complex and difficult to model

• Groups can set policy, but individuals need to administer policy


Group Decisions

• When deciding a thorny matter with a group:– Keep meeting proceedings secret (no publicity)• Improves flexibility• Reduces extremity of early positions from individuals

– No recorded vote until the final vote– Everything is reversible until everything is finalized– One voting event, yes or no, on everything as a

package


Don’t Bury Failures• Decision autopsies

• Force yourself and your team to revisit major efforts after the fact– This is the only way to learn about errors in human judgment, information

access, and deliberation which led to difficulties– Start with written documents at the time of the decision, since recollections

shift to more favourable or forgivable interpretations over time

• Encourages bad news to come forward, curtailing “shoot the messenger” syndrome from taking hold

• Make the cardinal failing being the omission of not revisiting and not learning from mistakes, rather than mistakes themselves


Open Outcry Auctions Drive the Least Rational Buy-Side Behaviour

• Confluence of self-reinforcing detrimental tendencies:– Loss aversion– Consistency bias (showing up to bid, earlier bids)– Social proof (most recent bid, other bidders)– Stress-induced judgment errors; people make

more extreme errors when stressed or pressed for time


The Power of Why

• Curiosity and the ability to ask the question Why?

• Mankind’s best natural antidote to disadvantageous psychological decision tendencies

• To be able to start to answer the question Why?, observe and record meticulously


Social Proof: Perils and Antidotes

• Social proof: Powerful evolutionary shorthand in decision making

• Learn and keep in mind how smart people have made dumb decisions

• Manage which peers to involve, far more than exhorting behaviour

• Be most alert when strong or charismatic leaders are involved– Authority mis-influence – people have followed

powerful leaders to horrific outcomes


Commitment Limits

• Tendency to escalate commitments to justify past actions– Generally stronger in individuals than groups– However, for groups with a tendency to escalate, they do

so even more strongly than individuals– Social pressure that consistency is usually seen as a virtue

• At the outset of a major and risky project, know your limit of investment, write it down, and don’t raise it without a sufficiently objective basis for doing so


Periodically Review Decision Processes

• Consider the steps followed for major decisions• Look particularly at the time allocated to each step,

and the biases which emerged• Look for where a greater proportion of time should

have been allocated, to shape future decision processes

• Almost always, in hindsight more time should have been spent developing alterative ideas, getting critical data, and considering alternate perspectives


In Closing

• One thing to remember:

– Humans are not naturally economically rational decision makers

– Just knowing this makes decision makers less presumptive and more likely to ask the right questions to reach better decisions


In Closing

• And a second thing:

– Markets are not fully efficient (financial, talent, resources, other scarce assets)

– A sustained informational advantage and ability to execute on that advantage in decision skill can confer a significant competitive advantage


References“Before You Make that Big Decision…”, Kahneman et al, HBR, June 2011http://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf

“The Ascent of Money”, Niall Ferguson, Penguin, 2008http://www.niallferguson.com/publications/the-ascent-of-money

“Don’t Trust Your Gut”, Bonabeau, HBR, May 2003http://people.icoserver.com/users/eric/hbr_gut.pdf

“The Psychology of Human Misjudgment”, Munger, 1992-2005http://law.indiana.edu/instruction/profession/doc/16_1.pdf

http://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf



http://www.niallferguson.com/publications/the-ascent-of-money

http://www.niallferguson.com/publications/the-ascent-of-money

http://people.icoserver.com/users/eric/hbr_gut.pdf

http://people.icoserver.com/users/eric/hbr_gut.pdf

http://law.indiana.edu/instruction/profession/doc/16_1.pdf

http://law.indiana.edu/instruction/profession/doc/16_1.pdf


References“Judgment in Managerial Decision Making, 8th Ed.”, Bazerman et al, Wiley, 2012http://ca.wiley.com/WileyCDA/WileyTitle/productCd-EHEP002487.html

“Winning Decisions”, Russo et al, Doubleday, 2001http://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker

“Thinking Fast and Slow”, Kahneman, Doubleday, 2011http://us.macmillan.com/thinkingfastandslow/DanielKahneman

http://ca.wiley.com/WileyCDA/WileyTitle/productCd-EHEP002487.html

http://ca.wiley.com/WileyCDA/WileyTitle/productCd-EHEP002487.html

http://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker

http://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker

http://us.macmillan.com/thinkingfastandslow/DanielKahneman

http://us.macmillan.com/thinkingfastandslow/DanielKahneman


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