Faces with the new situation, the brain makes assumptions based on prior experiences and judgements that have been stored in memory
Whilst it might be discouraging to discover that our brains predispose us to some errors of judgement in our decision-making, leaders can take heart
Decision making lies at the heart of every organization. What does it take to be productive in decisions and to minimize errors? Events in global finance over the last six months have provided an abundance of examples of how organizations’ super heroes – as they were hailed until recently – can simply get it wrong. However, bad decisions affect not only our banking system, but the broader world of business and politics – for example, the decision by Bush and Blair to invade Iraq. Starting from our premise that most good leaders intend to make good decisions, we set out, some four years ago, to explore why so many make bad ones.
How our brain can let us down
People often ask, with incredulity, how experienced and clever people can make such bad decisions. Bad decisions are often simply the result of the downside of brain processes that have served humankind well and are usually – but not always – reliable. Decision neuroscience reveals that the brain depends primarily on two hardwired processes for decision-making: pattern recognition and emotional tagging.
Pattern recognition is a complex process that integrates information from many parts of the brain. Faced with a new situation, the brain makes assumptions based on prior experiences and judgments that have been stored in memory. If success has come in the past from cutting costs, we will probably be biased towards a cost-cutting strategy. If success has come from growing the business, we will invest to grow.
Many leaders will have had similar experiences. How many times, on moving to a new organization, have we instinctively resorted to imposing solutions and approaches that were successful in our previous organization and with our previous team, only to discover that they simply don’t work this time round?
Emotional tagging is the process by which emotional information attaches itself to the thoughts and experiences stored in our memories. This emotional information tells us whether to pay attention to something or not, and it tells us what sort of action we should be contemplating (immediate or postponed, fight or flight). If parts of our brain controlling emotions are damaged, even though we retain the capacity for objective analysis, we become slow and incompetent decision makers.
Emotional tagging was at play in the case of Wang Laboratories, the most successful company in the word-processing industry in the 1980s. Founder An Wang believed he had been cheated by IBM over a new technology he invented early in his career. His dislike of the IBM led him to create a proprietary operating system even though the IBM PC was clearly becoming the dominant standard in the industry. This flawed decision led to the company’s demise in the 1990s.
If we recognize that our brains can lead us to arrive at flawed decisions, what can leaders do to increase their chances of avoiding pitfalls? First, recognize the conditions under which decisions are more likely to be flawed. We have identified four “red flag conditions” that are likely to lead to distortions in the decision maker’s judgment.
Red flag conditions
The first is misleading experiences and occurs when we are faced with an unfamiliar situation—especially if it appears familiar. Under these conditions we can think we recognize something when we do not. William D. Smithburg became CEO of Quaker in 1981 where he executed the successful acquisition of Gatorade – the sports drink company – in 1983. In 1994, the expanding company sought to repeat the success by acquiring another successful but underexploited drinks company – Snapple. Smithburg failed to recognize that whereas Gatorade was promoted and distributed in a traditional fashion and a rising star in its market, Snapple was a quirky, entrepreneurial organization producing an image drink that was already losing market share. The acquisition was disastrous, leading to the downfall of both Smithburg and Quaker.
Another red flag condition is when our thinking has been primed before we begin to evaluate the situation, by previous judgments or decisions we have made that connect with the current situation. We refer to these as misleading prejudgments. Steve Russell, the CEO of Boots between 2000 and 2004, had prejudgment that Boots needed to grow and that health-care services were an attractive opportunity. In his own words, “I had been formulating this ambition for Boots since I was merchandising director of Boots the Chemist in the late 1980s. So, when I became CEO, I was determined to make it happen.” Other managers suggested that many of the services Boots tried to enter were inherently low-margin businesses. A turbulent trading period ensued and Russell resigned in 2004.
The third red flag condition is inappropriate self-interest which can be a very powerful and often unconscious influence even among professionals who are highly ethical. Prescriptions that doctors write have been shown to be influenced by the favors they have received from drug companies.
The fourth red flag condition is inappropriate attachments, such as the attachment we might feel to colleagues or a business when considering cost reductions. A striking example of inappropriate attachments is that of Sir Derek Rayner, CEO of Marks and Spencer in the 1980s. He paid $750 million for Brooks Brothers – the iconic US retail chain famous for its button-down shirts - even though his team said it was worth only $450 million. Why?
As Judi Bevan describes in her book The Rise and Fall of Marks & Spencer , Rayner “..was enamored with Brooks Brothers clothing, which was in large part aimed at men of Rayner’s age and taste.” Although his advisers had presented six possible acquisition targets, Rayner ignored all the others and “went straight for the preppy, up market Brooks Brothers chain.”
We can all cite examples from our own professional lives in which “Red Flag” conditions have existed. We urge all those involved in important decisions to consider whether Red Flags exist. If they don’t, decisions perhaps need fewer checks and balances. But if they do, the decisions with the highest stakes should be subjected to more robust safeguards.
We have identified many process “safeguards” – additions to any standard decision process that can counterbalance the effects of distorted thinking. Most safeguards are well known – the challenge is to pick the right ones for the particular red flag condition. For example, a presentation from an expert consultant might be a suitable safeguard for a decision maker who has misleading experiences about a new market entry. However, if that decision maker is a CEO with strong prejudgments, they might need a stronger challenge – perhaps from the Chairman or Board.
Safeguards can be grouped into four categories:
- Experience, data, and analysis. In business, there are many ways data can be collected and experience broadened. A discussion with a key customer can provide valuable feedback on a proposed new product. Market research might evaluate the risks of entering a new market. Consultants could be brought in, partly for their expertise and readily available manpower, but also because they are relatively objective. BP sometimes employs two firms of lawyers to get contrasting views for very important decisions, such as major acquisitions.
- Debate and challenge. Creating a debate which challenges biases need not involve an elaborate process. It could mean simply chatting through an issue with a friend or colleague. However, in large organizations a typical approach is to form a decision group. The choices of who is in the group, the leader of the group and the process for the group to follow are all important choices. While many such groups operate with simple guidelines, there are a host of more elaborate approaches – such as splitting the authorizer, evaluator, and proposer roles, allocating “hats” to different people (as suggested by the lateral thinker, Edward de Bono), role-playing; or the devil’s advocate method (in which a subgroup attacks the proposed option).
- Governance. Someone with power and strong prejudgments, such as Russell, may be resistant to new analysis or a group process. In this case it may be necessary to strengthen the governance process – perhaps by setting up a special subcommittee of the Board to review the proposal in detail.
- Monitoring. Finally, particularly when there is a risk that all these safeguards are still insufficient, it may be sensible to beef up the monitoring process – for example, by setting clear milestones, monitoring performance and adjusting the strategy accordingly.
Whilst it might be discouraging to discover that our brains predispose us to some errors of judgment in our decision-making, leaders can take heart. If you are prepared to be more reflective about the decision-making processes, you can identify where there are red flag conditions. Once aware of these, you can introduce extra safeguards which counterbalance the risks of a flawed decision. Whilst you can’t ever eliminate the risk of errors in your decision-making, you can reduce the odds!
Further ideas are discussed in our book Think Again and our website, www.thinkagain-book.com.