The process you use to get to the future is the future you get.
| Myron Rogers
In the first essay in this series on Getting Strategic About Decision Making, I broke down the process of decision-making into its three parts:
fact-gathering and analysis, the insights and judgment of a defined group of people (stakeholders or advisors), and some process -- ranging between very formal to very informal -- for that group to make a decision, reflecting that analysis and judgment.
The research of Dan Lovallo and Olivier Sibony led to what might be a counterintuitive finding:
Our research indicates that, contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions
The researchers — after an analysis of over 1,000 major decisions in dozens of areas — determined that the third phase — process — mattered more than the first two by a factor of six. It turns out that well-designed processes for making strategic decisions are the most likely method to discover flaws in fact-finding and judgment, and then to correct them, or simply avoid making costly strategic errors.
I will be exploring some of the thoughts of Lovallo, Sibony, and Daniel Kahneman, a psychologist who received a 2002 Nobel Prize in Economics for his work, as the Nobel Committee put it,
for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.
One of the defining conditions of our time is uncertainty, as succinctly laid out by Kristalina Georgieva, the Managing Director of the International Monetary Fund:
If I had to identify a theme at the outset of the new decade, it would be increasing uncertainty.
Kahneman’s insights into the cross-wiring of the human mind when making decisions while uncertainty rules are essential to making our way, today. Let’s see how.
Untangling The Basic Process
One of the tricky things about cognitive biases is an inescapable fact: knowing about their existence will not, magically, make them disappear. Instead, we have to build into the decision-making process techniques to find them and minimize their effects.
The basic pattern of decision-making seems intuitive. First, fact-finding, which generally comes from talking to people are knowledgeable on the topic, and getting their recommendation. Then analysis which includes trying to determine if the recommendation makes sense relative to the facts, and if the facts are, in fact, facts.
The fundamental pitfall is that humans use two modes of thinking: intuitive and reflective. (Kahneman calls those System One and System Two, but I will use the more everyday terms.)
Intuitive thinking is what we use for everyday actions, like walking, talking, and reading. Its job is to create a representation of the world, so we can get from place to place, and contemplate other things at the same time.
Reflective thinking is monitoring in the background all the time, but comes to the foreground when we need to undertake activities that are not intuitive, like taking a math quiz, flying a plane, or writing an essay.
The two work in parallel, but most of the time we are thinking intuitively, and the simple stories that intuitively explain the world work well enough. Reflective thought ‘takes control’ when rule-based reasoning is called for, or when greater levels of risk and uncertainty are perceived.
One of the exceptions where the stories produced by intuitive thinking can trap us is cognitive bias. We are unaware that these biases are happening, and we are not helped by previous experience, since we were unaware of them, then, too.
In essence, untangling the process requires a checklist of questions to be answered by the decision-makers to compose a well-reasoned response to a proposed decision by those offering a course of action. Should we change our pricing, should we expand into Europe, should we hire this possible CMO candidate?
Like all the modern thought about checklists, it’s important to go through all the steps, and not sidestep any, which can undermine the foundational purpose.
I have adopted, more or less, the checklist of questions offered by Kahneman, along with contributors Dan Lovallo and Olivier Sibony, as detailed in *The Big Idea: Before You Make That Big Decision….*
The Three-Part Checklist
Here’s a diagram of the three-part process to be undertaken for strategically important decisions. It’s perhaps too heavy-weight to be applied for every decision — for example, allocation of resources for a department’s quarterly financial plan — but certainly should be applied for critical issues, such as a merger, or a major investment in new R&D.
Setting Context
The context for the decision is the subject of the first stage, and the goal is to basically clear a number of hurdles before examining the proposers’ fact-finding and analysis. Once again, the goal is to uncover and mitigate cognitive bias, as soon as possible in the process.
Is there evidence of motivated errors or errors of self-interest of those making the recommendation? This is a sensitive area, and should not — in general — be directly posed as a question to the proposers. First, in almost every proposal for taking action, those involved have preferences. It’s human nature to become invested in possible outcomes, but decision-makers need to confirm that those making the proposal aren’t proposing a course of action because it will benefit them unduly, such as accumulating organizational power. I’ve had a few experiences where people reporting to me were, in fact, making proposals for personal ambition. Ambition is fine, but needs to serve the company’s interests, especially when the stakes are high.
Are those making the recommendation overly optimistic? People easily fall into the trap of the affect heuristic, where we tend to play down the negatives and play up the positives of a desired proposal. It is quite hard to remain neutral when becoming immersed in the details of some complex, high-stakes course of action. It’s worthwhile to examine the possible biases in the context for the decision, not just analyzing the proposal itself.
Was there dissention in the proposing team? Kahneman and his colleagues warn us to be concerned if the proposing team offers a unanimous front:
In many corporate cultures, a team presenting a recommendation to a higher echelon will claim to be unanimous. The unanimity is sometimes genuine, but it could be sham unity imposed by the team’s leader or a case of groupthink—the tendency of groups to minimize conflict by converging on a decision because it appears to be gathering support. Groupthink is especially likely if there is little diversity of background and viewpoint within a team.
The best decisions arise from deliberative debate, where a diversity of views are heard. The absence of dissent — in whole or in part — is not a true positive. If no dissenting opinion are surfaced, more investigation may be needed, or others might need to be brought into the discussion. The decision-makers might need to have one-on-one discussions with individual members of thee team to find if dissent was silenced.
Challenging The Proposers
The second stage involves grilling the proposers, looking for ways that their biases have shaped their investigation and analysis process, from diagnosis through to their pitch.
Is there saliency bias? If the recommendation presented as building on a past success it may be an attempt to influence the decision-makers to approve the proposal by analogy. The counter is to ask for alternative analogies, and analysis of how relevant such analogies are. Or the decision-makers can ask the proposers for more and broader comparisons.
Have alternatives been considered? In a good decision-making process alternatives have to be considered and evaluated objectively, with relevant facts weighed and contrasted. There is a natural tendency to pursue one hypothesis and accumulate evidence to support it. One straightforward requirement is to ask for one of two alternatives, and their pros and cons, and then have the proposers detail how they evaluated the alternatives and when and why they discarded them. As Kahneman points out,
The challenge is to encourage a genuine admission of uncertainty and a sincere recognition of multiple options.
Have the proposers taken the long view? Ask the proposers ‘if you had to make this decision again in a year, what additional information would you want? Can you get more of that information now?’ We are trying to counter the intuitive mind’s tendency to come up with a story that makes some sort of sense of what we now know, it will not notice the absence of information not available. We need to approach this using the reflective mind, and always look to expand the field of information. Keep in mind the Von Foerster imperative:
Act always so as to increase the number of choices.
Look For Anchoring Bias. Ask where the numbers came from because they tell a tale. Which numbers are facts, which are estimates, and which have been generated by some manipulation of other numbers? Anchoring biases take several forms. Initial estimates are often embraced as baselines, which prove hard to displace with later numbers. Extrapolating from trends is dangerous, too, since the trends may not continue. If the proposal is anchored on the history of another project’s costs and returns, the decision-maker can reanchor the discussion by asking that the financials be recalculated based on a different approach.
Look For A Halo Effect. Is the proposal suffering from the glow of past successes, personalities involved, or reflected glory in an analogy? We are attuned to the halo around leaders in world-beater companies, but simply by making a comparison to a successful project or product introduction can sway the intuitive mind into incorporating that halo into the narrative. The key is to dissect these analogies, and determine whether they are actually pertinent.
Are The Proposers Stuck In The Past? It’s hard for people to let go of past decisions. The sunk-cost fallacy is one common error, where we should rationally disregard past investments when considering additional investment. As Kahneman and his colleagues characterize it,
History leads us astray when we evaluate options in reference to a past starting point instead of the future.
One approach is to sever the tie with the past, and ask the proposers to consider the proposal’s investment from the perspective of a new CEO: would they make that investment if they had no connection with the past course of events?
These first two steps in the three-part checklist have revealed ways to expose cognitive bias baked into the context of the decision to be made, and how to ask those proposing the solution to show their work leading up to the proposal itself. A minefield of biases are probed in the questions raised, showing the value of the approach.
The fundamental law of checklists cannot be repeated too many times: the entire checklist needs to be followed, even when the intuitive mind wants to take shortcuts.
In the next in this series, we will home in on the third stage: evaluating the proposal itself.
