By: Will Phillips
Founder of REX Roundtables
Recent research points out that the common mental shortcuts (called heuristics) that we use in making decisions lead to faulty decisions. Of even greater concern is the research that shows the faults can be amplified in a group, and spiral into an even worse decision than an individual would make. The real challenge is that even the best and brightest CEOs cannot see these weaknesses. They self-report that they have excellent decision making skills. Here are the executive heuristics that have been researched and reported in a recent Harvard Business Review Article.
The planning fallacy leads us to always underestimate how much time something will take and how much money it will cost. One executive in a company that made dozens of acquisitions each year said that they knew about the planning fallacy so after they did their due diligence on the acquisition they multiplied key factors by three, yet they still always found it took longer and cost more.
The overconfidence fallacy leads us to believe our forecasts are more accurate and precise than they are.
The availability fallacy leads us to seize on whatever springs most readily to your mind as a solution either because it’s memorable we recently experienced it. Doctors tend to diagnose what they have been seeing recently so that the same signs and symptoms get widely different diagnoses.
The egocentric fallacy leads us to exaggerate the extent which our tastes and preferences and insights are typical. This explains why so many new products/services and businesses fail. The leader thinks he or she knows what the customer wants.
The sunk cost fallacy leads us to stick with hopeless projects because we have already invested so much and if we quit now we will lose that investment.
The framing fallacy where decisions are affected by how the options are presented. People are more likely to agree to an operation if they are told that 90% of the people are alive after five years than if they are told that 10% of the people are dead after five years.
All the above fallacies are in play when a leader makes a decision. They operate in the back ground of the mind so the thinker is rarely aware of their influence. When the leader is aware of them, he or she experiences them as ‘my intuition’ or ‘my experience’ coming into play to help me make a good decision.
Business thinking for the last few decades has encouraged leaders to make decisions with their teams to improve the quality of the decision and the engagement of the managers. Engagement usually occurs, but improved decisions do not.
The above six individual fallacies are exacerbated in a management team setting. We ‘go a long to get along’ because we want to be liked, so we agree regardless of whether it makes sense.
In the 1970s an experiment would have seven people sitting in a U-shaped table. Perceptual illusions were shown on a screen. They were all told to answer the opposite of what they thought was true. At this point the last participant entered, and was not briefed on answering the opposite. Again and again the un-briefed member caved in close to 95% of the time and agreed with an answer that fit the group but did not make sense to them. Most of us care so much what others think that it is very difficult for us to be truly honest in the face of disapproval. This phenomenon was labeled Group Think.
The loyalty fallacy occurs naturally in ever hierarchy. Good employees want to be loyal to the boss at best and are fearful of stepping out of line at worst. Everyone is thoughtful about making waves and going against the grain. The recent spate of millions of car recalls by GM was caused by the ‘loyalty’ fallacy and the ‘go along to get along’ fallacy. A culture of niceness which has persisted for over three decades at GM.
There are five specific ways to largely avoid these fallacies and the poor decisions they produce. REX trains all of its Roundtable chairs in these tools. We will cover them in future articles.
Will Philips is the founder of REX Roundtables serving 150 of the world’s best clubs with 5,000 sites and 30,000,000 members. Improving performance of their clubs and the quality of the leader’s lives.