Are you ready to decide?
Good managers—even great ones—can make spectacularly bad
choices. Some of them result from bad luck or poor timing, but a large body of
research suggests that many are caused by cognitive and behavioral biases.
While techniques to “debias” decision making do exist, it’s often difficult for
executives, whose own biases may be part of the problem, to know when they are
worth applying. In this article, we propose a simple, checklist-based approach
that can help flag times when the decision-making process may have gone awry
and interventions are necessary. Our early research, which we explain later,
suggests that is the case roughly 75 percent of the time.
Biases in action
In our experience, two particular types of bias
weigh heavily on the decisions of large corporations—confirmation bias and
overconfidence bias. The former describes our unconscious tendency to attach
more weight than we should to information that is consistent with our beliefs,
hypotheses, and recent experiences and to discount information that contradicts
them. Overconfidence bias frequently makes executives misjudge their own
abilities, as well as the competencies of the business. It leads them to take
risks they should not take, in the mistaken belief that they will be able to
control outcomes.
The combination of
misreading the environment and overestimating skill and control can lead to
dire consequences. Consider, for instance, a decision made by Blockbuster, the
video-rental giant, in the spring of 2000. A promising start-up approached
Blockbuster’s management with an offer to sell itself for $50 million and join
forces to create a “click-and-mortar” video-rental model. Its name? Netflix. As
a former Netflix executive recalled, Blockbuster “just about laughed [us] out
of their office. Netflix is now worth over $25 billion. Blockbuster filed
for bankruptcy in 2010 and has since been liquidated.
In retrospect, it is easy to ascribe this
decision to a lack of vision by Blockbuster’s leadership. But at the time,
things must have looked very different. Netflix was not, then, the
video-on-demand business it has since become: there were nearly no high-speed
broadband connections of the kind we now take for granted, and widespread use
of video streaming would have seemed like a futuristic idea. In Blockbuster’s
eyes, Netflix, with its trademark red envelope, was merely one of several
players occupying a small (and thus far unprofitable) mail-order niche in the
video business.
Furthermore, this was the very time when the
dot-com bubble had burst: as the Nasdaq Composite Index quickly collapsed from
its March 2000 high, many managers of traditional companies felt vindicated in
their belief that investors had grossly overestimated the potential of
Internet-based models. Through the lens of the confirmation bias, Blockbuster’s
executives likely concluded that the approach Netflix had made to them was
evidence of its desperation. And it did not take a lot of overconfidence for
them to assume that they could replicate Netflix’s mail-order model themselves,
should they ever decide to do so.
The overconfidence and
confirmation biases weren’t the only ones at work at Blockbuster, of course,
just as in most organizations. But they are important enough to warrant
special attention.
An intractable problem?
Fortunately, debiasing techniques can help
organizations overcome such biases. These techniques aim to limit the effects
of overconfidence by forcing the decision maker to consider downside risks that
may have been overlooked or underestimated. And they can mitigate the dangers
of confirmation bias by encouraging executives to consider different points of
view.
Examples of such
techniques include either the systematic use of a devil’s advocate or a
“premortem” (individuals project themselves into a future where the decision
has failed and imagine, in prospective “hindsight,” what failed and
why). Another technique is to organize a formal scenario-planning
exercise—expanding the range of assumptions underpinning a plan—or even a war
game, in which executives put themselves in their competitors’ shoes. One study
of investment decisions showed that when a company uses a range of
debiasing techniques, its return on investment rises considerably. For
high-impact, repetitive decisions, such as large investments, it is sensible to
embed debiasing techniques in a company’s formal decision-making processes.
But this doesn’t solve things for the myriad
daily decisions that are the bread and butter of executives. A war game or a
scenario-planning exercise entails a significant investment of time; how are
senior leaders to know when that is worthwhile? Furthermore, the very nature of
biases means that the person driving the decision process generally cannot
judge whether further debiasing is needed. Indeed, that executive may be
experiencing the confirmation bias and overconfidence at the crucial time. When
managers make an ordinary mistake, such as a calculation error, they can learn
from their experience and avoid repeating it. But when biases lead them astray,
they are not aware of what’s happening, so experience does not help them become
better at debiasing themselves, and they cannot “just watch out” to keep their
biases in check.
Two tests of decision readiness
Since executives won’t
get very far by focusing directly on biases, they should consider instead
whether safeguards against them have been used. In other words, leaders should
ask about the process used to develop the proposal, not about
the proposal itself or the degree of confidence it inspires. Exhibit 1 (SEE
ORIGINAL ARTICLE)suggests questions for evaluating the process in the context
of the two main categories of biases described earlier:
·
The first set of
questions (“Consideration of different points of view”) aims to determine
whether the confirmation bias has been kept in check. These questions focus on
the sources of assumptions and the diversity of opinions expressed. A broad set
of sources (including outside views) or a diverse set of opinions is a good
indicator that the initial assumptions of the decision process have not gone
unchallenged.
·
A second set of
questions (“Consideration of downside risk”) asks whether the possibility of
negative outcomes—including company-, industry-, and macro-level downsides—has
been thoroughly evaluated. Such an evaluation can act as a safeguard against
overconfidence.
On each dimension, the
questions are designed to be flexible, so that the circumstances of the
decision at hand can be taken into account. Once the questions have been
answered (with a simple yes or no), the responses can be transcribed on a
matrix (Exhibit 2 IN THE ORIGINAL ARTICLE). This scoring will place the
proposed decision in one of four quadrants, leading to different courses of
action:
·
Decide. This quadrant represents the most
favorable outcome: the process that led to such a decision appears to have
included safeguards against both confirmation bias and overconfidence.
·
Reach
out. Proposals that
fall in this quadrant have been tested for their resilience to downside risks
but may still be based on overly narrow assumptions. Decision makers should
consider techniques that broaden their perspectives and help them generate meaningful
alternatives. One such technique is the vanishing-options test: executives
force themselves to generate new ideas by imagining that none of the proposals
on the table are available.7
·
Stress-test. Decisions in this quadrant reflect a
variety of viewpoints but, nevertheless, may not have been sufficiently
challenged and could therefore be tainted by overoptimism. Executives should
consider a thorough outside review of the possible risks—for instance, by
conducting a premortem or asking an outside challenger to play the role of
devil’s advocate.
·
Reconsider. When a decision appears in the
bottom-left quadrant, the process has probably not been comprehensive. Decision
makers should therefore follow a dual strategy that generates both new
perspectives and new reviews of risks.
By using this decision-screening tool, a
company can learn if it needs to expand its focus and options in the strategy
process. We recently applied a version of the tool together with 26 senior
executives of European corporations from a variety of industries, ranging from
construction to manufacturing, services, and retail. We asked these executives
to analyze a strategic-decision proposal that a project team within their own
organization (but not the participants) had recently made.
Only just over a quarter of the proposals, it
emerged, were truly decision ready. The bar for readiness on each dimension
(three positive answers out of six questions) was relatively low. Yet a
striking 73 percent of the respondents judged that the decisions they were
reviewing did not pass these tests. They then used the prescriptions of the
matrix to revisit the decisions.
How to use the decision-screening tool
A key question
is who answers the questions in the tool. Since individuals
developing a recommendation will not be aware of their biases, they cannot be
expected to assess their own decision readiness. The answers must therefore
come from the outside: not the executive who has driven the decision process,
but others who have a more neutral view.
In practice, decision makers will be in one of
two situations. In the first, and easiest, they reviewed recommendations
prepared by others but had minimal involvement in developing them. In that
case, decision makers are well placed to address the screening tool questions
themselves.
But in the second and more frequent case, the
decision makers were actively involved in studying decisions that have now reached
the final stage. In this case, they no longer have an outside view of the
process and will need to seek out answers from informed observers: staff
members, such as the CFO; colleagues from other parts of the organization; or
outside advisers. Some companies will wish to define this role in advance and
make it a formal part of their decision-making process, to avoid having a
respondent who shares the decision maker’s point of view.
In an environment of change and disruption,
many leaders fear—rightly—that their companies do not take enough risks or will
fall prey to “analysis paralysis” and let opportunities slip away. Hence the
popularity of start-ups as role models of fast, iterative decision making. As
Reid Hoffmann’s often retweeted quote goes, “If you are not embarrassed by the
first version of your product, you’ve launched too late.”
While this “better sorry than safe” mind-set
characterizes many successful start-ups, it may not be the best inspiration for
the strategic decisions of mature companies. Some risks are worth taking: those
taken knowingly, in pursuit of commensurate rewards. But some risks are taken
recklessly because the risk takers are blind to their own overconfidence or
have failed to consider alternative viewpoints.
The disciplined use of decision aids such as
this screening tool offers a way to spot bad decisions before they happen,
without significantly slowing down the decision process. Executives who adopt
this approach will free up resources for value-creating projects—and improve
their chances of keeping the names of their companies off the roll call of
organizations that made notorious blunders.
by Philip Meissner, Olivier Sibony, and Torsten Wulf
FOR EXHIBITS AND THE FULL ARTICLE SEE http://www.mckinsey.com/Insights/Strategy/Are_you_ready_to_decide?cid=other-eml-alt-mkq-mck-oth-1504
