Organisational Decision-Making

When talking about decision-making biases, (ref. last week’s article), it is one thing to recognize them and then another for an individual to adapt to mitigate their effects; however what about at the organisational level? A recent McKinsey study of more than 1,000 major business investments showed that “when organisations worked at reducing the effect of bias in their decision-making processes, they achieved returns up to seven percentage points higher” (ref. “The Case for Behavioral Strategy,” McKinsey Quarterly, March 2010). How to ensure better decision-making at the organizational level is the main focus of Daniel Kahneman (the Nobel prize-winning economist) along with Dan Lovallo, and Olivier Sibony (two McKinsey consultants) in their June 2011 HBR article “Before You Make That Big Decision...”

Here’s what to do before you make that big decision, followed by further considerations (“et alors”)

Organisational Decsion-Making

At the organizational level, a review process should be put in place so that executives can assure the quality of decisions by thinking through not just the content of the proposals but the biases that may have distorted the reasoning of the people who created them. That review will comprise of the following 12 questions which check for:

Self-interested bisases

·         Is there any reason to suspect errors motivated by self-interest?

·         Review the proposal with extra care, especially for over-optimism

The “Affect Heuristic”

·         Has the team fallen in love with its proposal?

·         Rigorously apply all the organisation’s quality controls

Groupthink

·         Were there dissenting opinions within the team? Were they adequately explored?

·         Solicit dissenting views, discreetly if necessary

Saliency Bias

·         Could the diagnosis be overly influenced by an analogy to memorable success?

·         Ask for more analogies, and rigorously analyse their similarity to the current situation

Confirmation Bias

·         Are credible alternatives included along with the recommendation?

·         Request additional options

Availability Bias

·         If you had to make this decision again in a year’s time, what information would you want, and can you get more of it now?

·         Use checklists of the data needed for each kind of decision

Anchoring

·         Do you know where the numbers came from? Can there be unsubstantiated numbers, extrapolations from history and/or a motivation to use a certain anchor?

·         “Reanchor” with figures generated by other models or benchmarks and request new analysis

“Halo Effect”

·         Is the team assuming that a person, organisation, or approach that is successful in one area will be just as successful in another?

·         Eliminate false inferences, and ask the team to seek additional comparable examples

Sunk Cost Fallacy

·         Are the recommenders overly attached to a history of past decisions?

·         Consider the issue as if you were a new CEO

Overconfidence

·         Is the base case overly optimistic (eg. “planning fallacy” and “competitor neglect”)

·         Have the team build a case taking an outside view. Use scenarios

Disaster Neglect

·         Is the worst case bad enough?

·         Have the team conduct a pre-mortem. Imagine the worst has happened and develop a story about the causes

Loss Aversion

·         Is the recommending team overly cautious?

·         Realign incentives to share responsibility for the risk or to remove the risk.

Note: the goal is not to create bureaucratic procedures; rather it is to stimulate discussion and debate. For sundry reasons, the review is best performed by “ad hoc” critique teams assembled from a diverse pool of talent within the organisation.

Et alors

To accomplish any of the above, as the authors state, “organizations must tolerate and even encourage disagreements”: hence the need for the persons conducting the review to be independent of the executives responsible for the decision. It is not only independence which is required but diversity. If everyone thinks, acts and behaves the same way then the review process is going to be limited in effectiveness. To implement all of the above checks is incredibly challenging but also very rewarding when done “properly”: organizations that have achieved such discipline have not only yielded better returns for shareholders but also consider their decision-making process to be a competitive advantage in itself!