VOL. 127 | NO. 242 | Wednesday, December 12, 2012
Cognitive Biases Affect Strategic Decision Making
By Michael Graber & Jocelyn Atkinson
MICHAEL GRABER & JOCELYN ATKINSON
You are biased. Chances are very good that your team is also biased, no matter how talented or experienced they are in your industry. Human bias can blind you to real market demand and open opportunity.
It is crucial that business leaders become acutely aware of the biases we all share as human beings and design the strategic decision making process to correct for bias. In a recent McKinsey Quarterly survey of 2,207 executives, only 28 percent said that the quality of strategic decisions in their companies was generally good, 60 percent thought that bad decisions were about as frequent as good ones, and the remaining 12 percent thought good decisions were altogether infrequent. Human bias has been studied at length by behavioral psychologists and we include a few of the most relevant saboteurs on business growth here:
Anchoring: Human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.
The Bandwagon Effect: The probability of one person adopting a belief increases based on the number of people who hold that belief. This is a powerful form of groupthink. Groupthink is a psychological phenomenon that occurs within groups of people, in which the desire for harmony in a decision-making group overrides a realistic appraisal of alternatives. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas or viewpoints
Belief Bias: The tendency for one’s preexisting beliefs to distort logical reasoning, sometimes by making invalid conclusions seem valid, or valid conclusions seem invalid. This is a bias where people make faulty conclusions based on what they already believe or know. This is closely related to conservatism bias where people believe prior evidence more than new evidence and are slow to change their mindset. According to McKinsey’s study, senior executives are particularly imperiled as their deep experience boosts the odds that they will rely on analogies, from their own experience, that may turn out to be misleading.
Hindsight Bias: The tendency to see past events as predictable. This challenges our ability to learn from past failures.
Here is our advice for how to eradicate bias, minimize risk and make decisions faster:
1. In order to uncover growth opportunities you must study the market from multiple angles. Do not study it through your own eyes and from your desk chair. Collect and analyze many different types of primary and secondary data. Study your competitors’ moves. Analyze trends and growth in the industry as a whole. Then listen to all of the players of the value chain objectively and a new perspective will arise.
2. Take a hard look in the mirror – which of these biases is present in your organization?
3. Believe in the collective intelligence of your management team and strategic partners.
4. Do not assume that what has been always will be.
5. Embrace the devil’s advocate; he may be the only person in the room that is preventing the bandwagon effect from taking off.
6. Watch out for over confidence and over optimism – it is important to recognize the risks and shortcomings that are inherent in every decision.
7. Role play and reframe to analyze multiple scenarios, and then stress test them equally.
Jocelyn Atkinson and Michael Graber run the Southern Growth Studio, a strategic growth firm based in Memphis. Visit www.southerngrowthstudio.com to learn more.