How do you make smart business decisions?

Beware Mind Traps

Bad decisions can often be traced back to the way the decisions were made:

• the alternatives were not clearly defined
• the right information was not collected
• the costs and benefits were not accurately weighed

But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker:

The way the human brain works can sabotage the choices we make.

In one article, first published in 1998, John S. Hammond, Ralph L. Keeney, and Howard Raiffa examine eight psychological traps that can affect the way we make business decisions.

• The anchoring trap leads us to give disproportionate weight to the first information we receive.
• The status-quo trap biases us toward maintaining the current situation--even when better alternatives exist.
• The sunk-cost trap inclines us to perpetuate the mistakes of the past.
• The confirming-evidence trap leads us to seek out information supporting an existing predilection and to discount opposing information.
• The framing trap occurs when we misstate a problem, undermining the entire decision-making process.
• The overconfidence trap makes us overestimate the accuracy of our forecasts.
• The prudence trap leads us to be overcautious when we make estimates about uncertain events.

Finally, the recallability trap prompts us to give undue weight to recent, dramatic events.

The best way to avoid all the traps is awareness: forewarned is forearmed.

But executives can also take other simple steps to protect themselves and their organizations from these mental lapses to ensure that their important business decisions are sound and reliable, such as:

Don't automatically accept the initial frame, whether it was formulated by you or by someone else. Always try to reframe the problem in various ways. Look for distortions caused by the frames.

Try posing the problem in a neutral, redundant way that combines gains and losses or embraces different reference points. For example: Would you accept a fifty-fifty chance of either losing $300, resulting in a bank balance of $1,700, or winning $500, resulting in a bank balance of $2,500?

Think hard throughout your decision-making process about the framing of the problem. At points throughout the process, particularly near the end, ask yourself how your thinking might change if the framing changed.

When others recommend decisions, examine the way they framed the problem. Challenge them with different frames.

Delusions of Success

The evidence is disturbingly clear: Most major business initiatives--mergers and acquisition, capital investments, market entries--fail to pay off.

Economists would argue that the low success rate reflects a rational assessment of risk, with the returns from a few successes outweighing the losses of many failures.

But two distinguished scholars of decision making, Dan Lovallo of the University of New South Wales and Nobel laureate Daniel Kahnerman of Princeton University, provide a very different explanation.

They show that a combination of cognitive biases (including anchoring and competitor neglect) and organizational pressures lead managers to make overly optimistic forecasts in analyzing proposals for major investments.

By exaggerating the likely benefits of a project and ignoring the potential pitfalls, they lead their organizations into initiatives that are doomed to fall well short of expectations.

The biases and pressures cannot be escaped, the authors argue, but they can be tempered by applying a very different method of forecasting--one that takes as much more objective "outside view" of an initiative's likely outcome.

This outside view, also known as reference-class forecasting, completely ignores the details of the project at hand; instead , it encourages managers to examine the experiences of a class of similar projects, to lay out a rough distribution of outcomes for this reference class, and then to position the current project in that distribution.

Steps to put optimism in its place:

• Select a reference class
• Assess the distribution of outcomes
• Make an intuitive prediction of your project's position in the distribution
• Assess the reliability of your prediction
• Correct the intuitive estimate

Conquer a Culture of Indecision

How do you mitigate the failure to execute?

The single greatest cause of corporate underperformance is the failure to execute.

According to author Ram Charan, such failures usually result from misfires in personal interactions. And these faulty interactions rarely occur in isolation, Charan says in this article originally published in 2001.

More often than not, they're typical of the way large and small decisions are made (or not made) throughout an organization. The inability to take decisive action is rooted in a company's culture.

Leaders create this culture of indecisiveness, Charan says--and they can break it by doing three things:

First, they must engender intellectual honesty in the connections between people.

Second, they must see to it that the the organization's social operating mechanisms--the meetings, reviews, and other situations through which people in the corporation transaction business--have honest dialogue at their cores.

And third, leaders must ensure that feedback and follow-through are used to reward high achievers, coach those who are struggling, and discourage those whose behaviors are blocking the organization's progress.

By taking these three approaches and using every encounter as an opportunity to model open and honest dialogue, leaders can set the tone for an organization, moving it from paralysis to action.

Evidence-based management: Learn from medicine

For the most part, managers looking to cure their organizational ills rely on obsolete knowledge they picked up in school, long-standing but never proven traditions, patterns gleaned from experience, methods they happen to be skilled in applying, and information from vendors.

They could learn a thing or two from practitioners of evidence-based medicine, a movement that has taken the medical establishment by storm over the past decade. A growing number of the physicians are eschewing the usual, flawed resources and are instead identifying, disseminating, and applying research that is soundly conducted and clinically relevant.

It's time for managers to do the same. The challenge is, quite simply, to ground decisions in the latest and best knowledge of what actually works. In some ways, that's more difficult to do in business than in medicine.

The evidence is weaker in business; almost anyone can (and many people do) claim to be a management expert; and a motley crew of sources--Shakespeare, Billy Graham, Jack Welch, Attila the Hun--are used to generate management advice.

Still, it makes sense that when managers act on better logic and strong evidence, their companies will beat the competition.

Yet managers (like doctors) can practice their craft more effectively if they relentlessly seek new knowledge and insight, from both inside and outside their companies, so they can keep updating their assumptions, skills, and knowledge.

Seven questions you need to ask as you utilize evidence-based management:

1. Is there too much evidence? 
2. Is there not enough evidence? 
3. Does the evidence not quite apply?
4. Are people trying to mislead you?
5. Are you trying to mislead you?
6. Do the side effects outweigh the cure?
7. Do you make your stories more persuasive?

It's time to transform your decision-making approach

The quality of a leader’s decision can make or break him. Yet most of us get decision making all wrong. Why? We take the least productive approach: advocacy.

We argue our position with a passion that prevents us from weighing opposing views. We downplay our position’s weaknesses to boost our chances of “winning”. And we march into decision-making discussions armed for a battle of wills. 

The consequences?

Fractious exchanges that discourage innovative thinking and stifle diverse, valuable viewpoints. 

Contrast advocacy with inquiry—a much more productive decision-making approach. With inquiry, you carefully consider a variety of options, work with others to discover the best solutions, and stimulate creative thinking rather than suppressing dissension.

The payoff? 

High-quality decisions that advance your company’s objectives, and that you reach in a timely manner and implement effectively.

Inquiry isn't easy. You must promote constructive conflict and accept ambiguity. You also must balance divergence during early discussions with unity during implementation.

How to accomplish this feat? Mater the “three C’s” of decision making: conflict, consideration, and closure.

1. Constructive Conflict

Conflict during decision making takes two forms: 

• cognitive - relating to the substance of the work
• affective - stemming from interpersonal friction

The first is crucial to effective decision making; the second, destructive. To increase cognitive conflict while decreasing affective conflict, you can use the following strategies:

• Require vigorous debate. As a rule, ask tough questions and expect well-framed responses. Pose unexpected theoretical questions that stimulate productive thinking.
• Prohibit language that triggers defensiveness. Preface contradictory remarks or questions with phrases that remove blame and fault. (“Your arguments make good sense, but let me play devil’s advocate for a moment.”)
• Break up natural coalitions. Assign people to tasks without consideration of traditional loyalties. Require people with different interests to work together.
• Shift individuals out of well-worn grooves. During decision making, ask people to play functional or managerial roles different from their own; for example, lower-level employees assume a CEO’s perspective.
• Challenge stalemated participants to revisit key information. Ask them to examine underlying assumptions and gather more facts.

2. Consideration

To gain your team’s acceptance and support of a decision-making outcome—even if you’ve rejected their recommendations—ensure that they perceive the decision-making process as fair. How? Demonstrate consideration throughout the process:

At the outset, convey openness to new ideas and willingness to accept different views. Avoid indicating you’ve already made up your mind.

During the discussion, listen attentively. Make eye contact and show patience while others explain their positions. Take notes, ask questions, and probe for deeper explanations.

Afterward, explain the rationale behind your decision. Detail the criteria you used to select a course of action. Spell out how each participant’s arguments affected the final decision.

3. Closure

In addition to stimulating constructive conflict and showing consideration, bring the decision process to closure at the appropriate time. Watch for two problems:

Deciding too early. Worried about being dissenters, decision participants may readily accept the first plausible option rather than thoughtfully analyzing options. Unstated objections surface later—preventing cooperative action during the crucial implementation stage.

Watch for latent discontent in body language—furrowed brows, crossed arms, the curled-up posture of defiance. Call for a break, encourage each dissenter to speak up, then reconvene. Seek input from people known for raising hard questions and offering fresh perspectives.

Deciding too late. Warring factions face off, restating their positions repeatedly. Or, striving for fairness, people insist on hearing every view and resolving every question before reaching closure.

To escape these endless loops, announce a decision. Accept that the decision-making process is ambiguous and that you’ll never have complete, unequivocal data.

Summary

Decisions are the coin of the realm in business. Every success, every mishap, every opportunity seized or missed stems from a decision someone made—or failed to make. Yet in many firms, decisions routinely stall inside the organization—hurting the entire company’s performance.

The culprit?

Ambiguity over who’s accountable for which decisions. In one auto manufacturer that was missing milestones for rolling out new models, marketers and product developers each thought they were responsible for deciding new models’ standard features and colors.

Result?

Conflict over who had final say, endless revisiting of decisions—and missed deadlines that led to lost sales.

How to clarify decision accountability? Assign clear roles for the decisions that most affect your firm’s performance-such as which markets to enter, where to allocate capital, and how to drive product innovation. Think “RAPID.”

• Who should Recommend a course of action on a key decision?
• Who must Agree to a recommendation before it can move forward?
• Who will Perform the actions needed to implement the decision?
• Whose Input is needed to determine the proposal’s feasibility?
• Who Decides—brings the decision to closure and commits the organization to implement it?
• When you clarify decision roles, you make the right choices—swiftly and effectively.

Source: 2011. "Making Smart Decisions." Harvard Business Review.