In the current business environment, bias in decision-making is to be expected given that we have operated in a business-as-usual environment for stretches of decades-with only a few recessions and other small bumps along the way. There are dozens of biases that affect our decision making, but some of these biases affect our perceptions more than others in dynamic environments. One such bias is optimism. We have a tendency to overrate our own self-efficacy or ability to meet the challenges ahead. We also tend to be overly optimistic about the future.
Over-optimism bias
When hiring a sales manager, over-optimism might be a positive trait that can contribute to success. But in decision making, bravado can cause strategic and contingency plans to fall short of dealing with the challenges in front of us. Fortunately, analysts and shareholders are two rational stakeholders, who may force us to act in a more rational manner. This could partly explain why, tempered by more rational heads, public companies outperform private companies. Similarly, companies supported by the active and rational influences of private equity investors, such as buyout or venture capital funds, outperform other private peers. These private equity investors exert a significant influence on rational behavior.
Rational decision making
As a recent McKinsey article The Case for Behavioral Strategy saliently points out, rationality and behavior are explored regularly in the investment market and, arguably, have improved predictability and probabilities in the financial markets. Yet we do not apply the same rigorous behavioral analysis to our leadership decisions. When the market exhibits a certain pattern, a trading algorithm helps us decide whether to sell or buy. However, as the economy ebbs and flows, we have no black box or hard-and-fast rules to help us improve our forecasting abilities. Strategic decision makers are more influenced by, yet fail to understand, the cognitive biases that inform their decision making, concludes the McKinsey study.
De-biasing Your Strategic Planning
Before embarking on external business environment scanning, behavioral economists argue, we need to let go of preconceptions and biases that can negatively influence our strategic decision making. In addition to optimism, examples of other decision-making biases that you should consider in the strategic planning process include loss aversion, risk aversion, the principal-agent problem, the framing effect (taking a narrow view), and the illusion of control.
An overarching failure in today's decision-making is screening out the normalcy bias, made all the more complex by the fact that we do not yet know what the new normal is. Under each bias, consider making lists of bias traps that you may be prone to fall into:
- Are you underestimating the rate at which your business can be commoditized?
- Is recent history now the new normal?
- Is your competitive advantage being commoditized?
- Can you continue to compete with outsourced services?
- Have you adequately accounted for the effects of new regulation on your business?
- Is your product development and innovation advancing at a pace that can compete with the unknown competition ahead?
- Have you adequately accounted for risks? Cumulative and dynamic measures of risk?
Other de-biasing strategies:
- Debate ALL ideas and strategies
- Gather current research to support prevailing and alternative views
- Leave the door open for peers and subordinates to challenge you
No comments:
Post a Comment