by Jim Karrh
Posted 8/20/2012 12:00 am
Updated 2 years ago
The legendary editor H.L. Mencken once observed, "There is always an easy solution to every human problem - neat, plausible and wrong."
In my last column, I began to outline the biases - "decision-busters" - that unfortunately serve to skew the solutions formulated by business executives and teams. Because organizations of all stripes around Arkansas are setting and reviewing plans this time of year, it makes sense to recognize these biases and try to keep them at bay.
Although we see biases rear their ugly heads in many marketing-related areas - e.g., introducing or retiring products, going after a new market segment, changing messages - they also mess up decisions regarding major capital outlays, acquisitions, divestitures and other business-critical areas.
Last month I introduced the first half of the dozen Decision-Busters: 1) rationalizing self-interests, 2) falling in love with one's own recommendations, 3) rushing toward consensus at the expense of dissenting opinions, 4) ignoring credible alternatives, 5) failing to adequately consider evidence that isn't right in front of us, and 6) giving too much weight to examples that are vivid even if not particularly relevant.
Here are the rest:
- Over-optimism. Many planning teams underestimate the time and resources that will be needed just to reach the base case or most likely scenario.
- Too much caution. "Wait a minute, Jim. Didn't you just say teams are prone to over-optimism? Now you're saying they can be too cautious. What gives?" Yes, managers and teams can indeed be too optimistic while at the same time individuals usually place much more weight on avoiding losses than on achieving gains (the bias of "loss aversion"). No one wants the career-limiting tag that comes with responsibility for a failed project. Still, companies need new ideas and innovations if they hope to grow. To counter the bias of loss aversion in planning new products or technologies, some companies (as GM famously did with Saturn) spread the risk by creating separate organizational units.
- Failure to play out the scenarios. Teams often overlook competitors' reactions to their moves as well as "domino effects" from a bad-case scenario.
- Not knowing where the numbers came from. Over time, teams lose track of (or never really knew) the source of numbers in important assumptions. Because we're all subject to "anchoring bias," where the first number on the table carries undue influence, executives need to know the details.
- Seeing a halo. "Halo effects" typically occur when people attribute successes and failures of companies to the personalities of their leaders. We also see teams use the moves of other companies with great reputations as a guide to their own decisions. But even excellent companies mess up.
- Falling for the sunk-cost fallacy. If I remember nothing else from my undergraduate finance training, I remember to ignore sunk costs. Executive teams should make decisions today without regard to money spent yesterday. The reality is that neither people nor companies start from scratch, and organizational history plays a role. The best advice I've heard is to imagine you are a brand new CEO who had no involvement in previous investment decisions and then ask yourself, is the project still worthy of more care and feeding?
In a Harvard Business Review article, Daniel Kahneman, Dan Lovallo and Olivier Sibony point out that effective executive decision-making seems simple enough. First, get the relevant facts (from people who know the most about the details). Second, figure out whether people making recommendations are clouding the facts and decision criteria. Third, apply experience and good reasoning to evaluate recommendations. It isn't that neat and easy, of course, because each stage is potentially full of biases and distortions.
The news isn't all scary. In a dynamic and competitive world, no company has to make perfect marketing decisions. If you can make consistently good ones (that are usually better than your competitors' decisions), then the balance of 2012 should provide a solid foundation for 2013.