Sway: The Irresistible Pull of Irrational Behavior has been getting good reviews.
An age-old question that small business owners face all the time is, “Why do intelligent people make stupid choices?” Sway: The Irresistible Pull of Irrational Behavior
HBS has published a Working Paper by Chugh, Milkman, and Bazerman on How Can Decision Making Be Improved?
They pose the problem as follows:
If we all behaved optimally, costs and benefits would always be accurately weighed, impatience would not exist, gains would never be foregone in order to spite others, no relevant information would ever be overlooked, and moral behavior would always be aligned with moral attitudes. Unfortunately, we have little understanding of how to help people overcome their many biases and behave optimally.
The article discusses System 1 and System 2 thinking and how we can move from one to the other.
System 1 refers to our intuitive system, which is typically fast, automatic, effortless, implicit, and emotional. System 2 refers to reasoning that is slower, conscious, effortful, explicit, and logical.
Ideally you should regularly reflect on your experiences and the lessons you have learned. But if you do not have a process for this, our calendar provides one in the form of the New Year.
In business, waiting for the New Year (or your annual holiday) may be sufficient to "recharge your batteries" but your learning and improvement cycle needs to be much shorter: you need to learn from each project or encounter with a customer.
There are different techniques for this including:
The common element in these techniques is that you have to look back and learn before you can improve in the future.
How do you know when it's the right time to make a decision?
Michael Useem in a Knowledge@Wharton article and podcast discusses his work on the topic in researching his book The Go Point: When It's Time to Decide -- Knowing What to Do and When to Do It.
In writing this book, Useem asked more than 100 leading decision-makers to analyze decisions they had made, to name their best and worst decisions, to describe how they reached them, and to comment on what, if anything, they would change about how the decisions were arrived at.
Useem says that "leadership often comes down to decision making...[it takes] time to do that. And that is a constitution to know you've got to face a decision, you've got to see both sides, you've got to hear from the various parties and then you have to act."
So what makes a great decision-maker?
Here's his "executive summary" on good decision-making:
"I think the basic premise that underlies the book -- I think it just underlies reality -- is that decision making as a skill is learned really by making decisions. Critically though, [it means] looking back on those decisions, to make certain we don't make the same mistake twice, that you have some sense for what went right as well."
But don't be paralyzed by analysis.
The article sums up:
The movie An Inconvenient Truth has opened in Australia with a big promotion by Al Gore and mixed reactions from politicians.
What do businesses think about global warming?
At a recent International Financial Ombudsmans Conference, Bill Peck, AON's General Manager Risk Management and Compliance, delivered a paper on Global Warming-Impact on Financial Services.
Whilst the link is not the full speech, the notes themselves are sobering (starting with a tsunami crashing over the Opera House) and clearly indicate that some industries are acknowledging global warming as a growing risk and are planning for it.
Often negotiations get stuck in "positions" each party holds. In 3-D Negotiation authors James Sebenius and David Lax describe how you can shape important deals through the 3 dimensions of tactics, deal design, and set-up.
In this interview, the authors describe a "3-D barriers audit" for negotiations:
"First, you should ask whether it is a tactical or people-related barrier like communication, trust, misperceptions, or the like. Second, you should ask whether the problem is deal-related: Does the proposed agreement offer sufficient value to the parties to be more attractive than no deal? Does it accomplish their objectives? Third, are there set-up problems such as wrong parties, interests, no-deal options, sequence, or basic process choices?"
The article gives the following example :
Consider an example of both kinds of mistakes from the U.S. Midwest. In this case, environmentalists and farmers opposed a power company's plans to build a dam. On the surface, the parties appeared to have deep, irreconcilable positions, which had resulted in a long stalemate. Yet a superior deal could be designed if the parties looked past their stubborn bargaining positions to their underlying interests.
By stepping back and mapping the parties' real interests, it emerged that the farmers were worried about reduced water flow below the dam, the environmentalists were focused on the downstream habitat of the endangered whooping crane, and the power company urgently needed new generating capacity and a greener image. After a costly legal impasse that threatened to last for years, the three groups designed a better deal that included a smaller dam built on a fast track, water-flow guarantees, downstream habitat protection, and a trust fund to enhance whooping crane habitats elsewhere.
Decision-making is not always linear: it can evolve using a combination of facts and personal biases.
In How We Really Make Decisions David Maister suggests that "nearly all the time, rhetoric triumphs over reason, personality over substance, politics over merits, neuroses over facts."
He refers to Lovaglia’s Law: The more important the outcome of a decision, the more people will resist using evidence to make it.
Bob Sutton also comments on Lovaglia's Law: the more is at stake, the more that people will be motivated to push for solutions that increase their power and decrease other’s power.
It's an interesting proposition. If you want more discussion, read the comments after David Maister's post.
UPDATE: Coincidentally, I've just read this post on how some angel investors make their investment decisions: before they even get to the financial analysis, they go through an initial meeting and then a getting to know you period to establish trust and an understanding of the people they are dealing with ("gut feel"), and only then comes the rational decision process.
The bracket of evidence about the Government's knowledge about AWB's oil-for-food contracts has ended with the examination this week of the Deputy Prime Minister and Minister for Trade Mark Vaile (here, p75), the Foreign Minister Alexander Downer (here, p46) and the Prime Minister John Howard (here, p2).
Regardless of the political consequences (some performed better as witnesses than others and the administrative failings of some were exposed), the bottom line is that AWB did not get much comfort from the evidence as shown by an exchange during Mr Downer's examination and an interview Mr Howard gave to the 7.30 Report on 13 April, both of which suggest the Commission may find that AWB mislead the Government.
This exchange during Mr Downer's examination (asking why his office didn't follow up inquiries with AWB):
"Q. The evidence, as I understand it, is that the inquiry extended to reading to him or conveying to him the contents of the Moules cable and receiving a response, "This is bullshit", together with an emphatic denial, and that was the extent of the inquiries made by Mr Bowker. Do you
regard that as satisfactory conduct?
MR ROBERTSON: I object to that question.
MR AGIUS: I object to that question, Mr Commissioner. That question may have relevance if there was any possibility at that time that, if Mr Bowker had conducted his inquiry differently, AWB would have given him a different response. The problem with all of this examination is, if I may say so, with respect, which is why I did not embark upon it, all through this time AWB was denying that it had done anything wrong. In my respectful submission, it sets the bar too high to say and to suggest in the course of the examination that, in the face of that denial, the Commonwealth ought to have rejected the denial, and now be criticised for not conducting a different inquiry when the only inference available is that, if the different inquiry had been made, AWB would have made the same response, that it was not acting in breach of sanctions. The answer to that question can't possibly assist you, Mr Commissioner.
MR JUDD: On behalf of AWB, that is rejected as a proposition. My learned friend knows, as his questioning has indicated during the course of the examination of some of these witnesses, including the ministers, that, had specific questions been asked, there may have been specific answers. My friend has asked those questions and he's put it to witnesses on the assumption, presumably, that such questions might have elicited a different answer. Of course we don't have the answers because the questions were never asked. But it's not right, in our submission, to draw, as our friend does, the conclusion that, had the questions been asked, nothing would have been said to enlighten the questioner. That is unfair and wrong.
THE COMMISSIONER: I had thought, maybe wrongly, that up until at least 4 October 2005, and possibly later, AWB maintained that it had done nothing wrong.
MR JUDD: It did make general denials of wrongdoing, but if one looks carefully --
THE COMMISSIONER: Not just general denials, specific denials. We have a folder here of correspondence between AWB and the various departments. It will no doubt be collated at some point of time and addressed. We have the evidence of what they told the Volcker committee. We now know from the brief which was produced the other day that they had a deal of information which they withheld from the Volcker committee. The Volcker committee's report may well have been quite different if that material had been made available to them.
MR JUDD: It's rejected that material was withheld. Material was provided to the committee on exactly the same basis as it was by government. That's a matter which is established by this inquiry.
MR AGIUS: As my learned friend knows, the Hogan/Borlase trip report was not provided to the committee. My learned friend knows that the fact that the last two contracts had their prices inflated so as to conceal the Tigris debt was not provided to the committee. Not only was it not provided to the committee; it was not provided to counsel, from whom advice was sought. It's ridiculous to suggest that AWB was in the same position as the government. I'm not here to defend the government, but I'm certainly not going to sit here and hear misrepresentations put as submissions. AWB was denying that it had done anything wrong right up until at least October of 1995. To suggest that if Mr McConville had been asked any other question in any other way it would have suddenly decided to tell the truth is preposterous, in my submission.
THE COMMISSIONER: In any event, we've had enough of that. That can be the subject of submissions in due course. Your question is rejected, Mr Forrest."
From the ABC's 7.30 Report on 13 April:
"JOHN HOWARD: No, well, the reality is - and I choose my words carefully - I don't want to say something that I shouldn't be saying at this particular time but I think I can say this - that AWB has misled the following: it misled the Department of Foreign Affairs and Trade; it misled Mr Volcker because it didn't provide all of the information it wanted; it's misled the United Nations; it appears to have misled a former chief justice of Australia, Sir Anthony Mason, whose opinion - I understand this is now in the public domain - provided very strong legal exculpation in relation to the behaviour of AWB; it's misled the wheat export authority; and misled Ferrier Hodson. I mean, AWB, every time ministers rang them, they were going through denials. You asked me directly, "All you had to do was pick up the phone". What's wrong, Michael. "If you'd have picked up the phone", Michael, I mean that's said, that's said glibly as though it's all easy, "Just pick up the phone". The point I'm making is that if a company systematically and successfully is able to mislead people in that, of that list I've just given you and leave the Government out of it - but Sir Anthony Mason is no slouch. "
This is an index of my postings on AWB and the Oil for Food Inquiry conducted by Commissioner Cole ("the Cole Inquiry"):
Australian companies and Iraq Oil For Food Inquiry (19 Jan)
Reputation risk: the AWB experience (31 Jan)
Oil-for-Food Inquiry: expansion of terms of reference (3 Feb)
AWB and Oil for Food Inquiry: Managing Director resigns and corporate governance to be reviewed (9 Feb)
AWB and Oil for Food Inquiry: who knows what and where is it kept? (16 Feb)
AWB: monopoly and governance issues (22 Feb)
Cole Inquiry: what did the AWB Board know and when and why is it important? (11 March)
Cole Inquiry terms of reference amended (3) (20 March)
Cole Inquiry: isn't there a summary of AWB facts and where are the missing emails? (25 March)
Cole Inquiry: AWB risk management advice is not legally privileged (6 April)
AWB challenges Cole (6 April)
Cole Inquiry : AWB corporate secretaries resign (12 April)
Cole Inquiry: what the Government knew about AWB contracts (14 April)
Cole Inquiry and AWB: corporate culture and criminal responsibility (25 April)
What offences might AWB have committed? (27 April)
Cole: no action over political comments (28 April)
AWB Inquiry update (12 May)
Federal Court decision on AWB apology (17 May)
Cole publishes AWB document (18 May)
Royal Commissions Act to be amended (24 May)
Cole Inquiry: AWB goes back to court (30 May)
Royal Commissions Act amended (13 June)
AWB obtains injunction against Cole (21 June)
AWB Oil for Food Inquiry reporting date extended (22 June)
US class action against AWB (11 July)
AWB v Cole update (19 July)
Cole Inquiry and AWB update (10 August)
AWB: case study in the difficulty of apologising (17 August)
Cole Inquiry hearings resume (24 August)
Federal Court decides on AWB's claim for privilege (18 September)
Cole Inquiry reporting date extended (22 September)
What makes an executive make a risky strategic decision even though it is based on "trust" and "gut instinct" rather than facts and research?
CFO.com have published a McKinsey article co-written by Dan Lovallo a professor at the Australian Graduate School of Management of the University of New South Wales with Olivier Sibony, Distortions and Deceptions in Strategic Decisions (via Business Pundit) which argues that :
Strategic decisions are never simple to make, and they sometimes go wrong because of human shortcomings. Behavioral economics teaches us that a host of universal human biases, such as overoptimism about the likelihood of success, can affect strategic decisions. Such decisions are also vulnerable to what economists call the "principal-agent problem": when the incentives of certain employees are misaligned with the interests of their companies, they tend to look out for themselves in deceptive ways...
Of all the documented cognitive distortions, overoptimism and loss aversion (the human tendency to experience losses more acutely than gains) are the most likely to lead people who make strategic decisions astray, because decisions with an element of risk — all strategic ones — have two essential components. The first is a judgment about the likelihood of a given outcome, the second a value or utility placed on it.
The article gives practical examples of bad decisions from each aspect: going ahead or not going ahead with a project because of overoptimism or loss aversion.
It talks about "sunflower management": the inclination of people in organizations to align themselves with the leader's real or assumed viewpoint.
The article proposes that:
Corporate leaders can improve an organization's decision-making ability by identifying the prevalent biases and using the relevant tools to shape a productive decision-making culture.
McKinseys emphasise the need for review and feedback and constructive debate: A fresh pair of eyes with no emotional connections can sometimes see things that escape the notice of more knowledgeable colleagues.
This is fascinating and useful article which will improve your chances of making good decisions.
