Decision seminar slides dave litwiller - dec 2013

Making Better Decisions
Individual Executives and Groups

Dave Litwiller
Executive-in-Residence
December 4, 2013

Introduction
• Individual and Group Biases
– Idea Generation
– Decision Making

• Techniques to Counteract those Biases
• Frameworks and Disciplines for Making Better Decisions

Copyright, David J. Litwiller 2013

2

Self-Interest
• Form:
– Mankind tends to game all human systems, often serving himself at
the expense of others

• To Counteract:
–
–
–
–

Review proposals with an eye to individual and group self-interest
Pay attention particularly to over-optimism
Drill down into assumptions and dependencies
Obtain greater diversity of input about those assumptions and
dependencies
– Regularly revisit how to realign individual incentives with larger goals


3

Affect
• Form:
– People fall in love with an idea because it is theirs or their group’s, or it
is associated with something of which they are fond
– Initial value judgments go on to colour subsequent analysis

• To Counteract:
– Develop and rigorously use detailed check-lists for how costs and
benefits are to be evaluated, to maintain consistent evaluation
– Contemplate a range of outcomes and describing the scenarios which
would signal for a mid-course change
– Identify and consider contrary evidence


4

Groupthink
• Forms:
–
–
–
–

Individuals often abdicate responsibility when in a group
Fear of dissent leading to ostracism
Taking riskier decisions as a group than any individual would make
Blindly following a leader

• To Counteract:
– Explore if there were dissenting opinions, discreetly if need be 1:1
– Insist on adequate exploration of countervailing views


5

Saliency and Narrative Fallacy
• Form:
– Humans are summarily influenced by analogy to a memorable event
– We favour vivid and easy to remember stories
– Induction bias to over-generalize from an insufficient base fact set

• To Counteract:
– Drill into the completeness of analogy
– Investigate weaknesses in the abstractions relative to the matter at
hand
– Press for more detail than the simple form of the narrative
– Get enough detail that differences in analogy emerge, and
relationships between those differences can be understood

6

Availability
• Form:
– Decisions tend to be based on information which is readily available (often
from memory), rather than on the best attainable data
– People are satisfied with the solution that comes to them most easily

• To Counteract:
– Ask yourself, if you had to make this decision in a year’s time, what
information over the interim would you seek to make the best decision?
– Get that data now, or a close and fast proxy
– Stick to a checklist of the kind of data needed to make such a decision
properly
– Get a diversity of views about what a range of solutions may be
– Highlight disconfirming evidence

7

Confirmation
• Form:
– Seek information which confirms earlier beliefs; avoid or misinterpret
information which call earlier beliefs into question
– Consistency bias, path dependency
– Often strongest when earlier beliefs have been communicated to others

• To Counteract:
– Require credible alternatives to be presented at the same time as a
preferred recommendation
– Seek facts and arguments which could call earlier beliefs into question
– Write down disconfirming facts and hypotheses, don’t just verbalize them
– Keep hypotheses somewhat private until they’ve undergone testing


8

Anchoring
• Form:
– People are influenced to stay near an initial position or number, even if
the basis for that anchor is weak or later proven to be weak
– Contrast mis-reaction; high pass filter frame of reference

• To Counteract:
– Get varied input on what the range of initial anchors should be and
how they were arrived at, particularly in cases of
• Extrapolation from history
• Motivations to use certain anchors
• Poorly substantiated numbers

– Actively solicit counterarguments to the initial anchor
– Seek information about what exists just beyond the frame
boundary, to better understand the validity of the frame of reference

9

Halo Effect
• Form:
– Assuming that people, organizations or approaches which were
successful in the past will be just as successful in a different situation
– Things look easy in hindsight
– But, context changes (almost) everything

• To Counteract:
– Get additional comparable examples
– Get into the details, where appreciable differences usually emerge
– Eliminate false or specious inferences


10

Endowment Effect, Sunk-Cost
Fallacy, Loss Aversion
• Form:
–
–
–
–

Recommenders overly attached to past decisions
Aversion to crystallizing losses, especially in public view
Willingness to take excessive risk to try to avoid absorbing a loss
The hardest thing to change is a manger who has had past success with a
certain way of doing things

• To Counteract:
– Ask what a new CEO would do, or another outsider
– Get input from knowledgeable outsiders who have no emotional, financial
or credibility investment in the earlier decisions
– Intentionally seek countervailing views
– Occasionally change incentives to decouple rewards for upcoming
performance from past decisions

11

Overconfidence, Planning
Fallacy, Competitor or Disaster Neglect
• Form:
–
–
–
–

Base case which is too upbeat
Premature belief in having found the winning solution
Underestimating competitors because of dislike or hubris
Inadequate consideration for how bad the worst case could be

• To Counteract:
–
–
–
–
–

War game scenario planning or thought experiments
Outsider perspectives on plausible models for how the future could unfold
Map out decision trees, at least as far as some of the leading branches
Be especially wary of strategy premised on the failure of others
Pre-mortem: Imagine the effort has gone to term, and failed. Map out the
leading ways it could have failed, and then work back to improve the
factual basis, decision alternatives and decision being taken now

12

Frameworks and Disciplines for
Making Better Decisions


13

To Generate Better Ideas
• Reach out to get diversity of:
– Anchors
– Assumptions and beliefs
– Participants
– “Easy” solutions


14

To Better Evaluate Ideas
• Require evaluators to temporarily set aside:
– The simplest expected cause and effect, to go
deeper for how events could play out
– Pleasing patterns, and go on to identify other
relevant, instructive patterns
– Initial risk profile, to look at alternate risk models
– Short term issues, to put more weight on longer
term effects which people often excessively
discount

15

To Better Evaluate Ideas
• Always consider the opposite, as one of the most
important de-biasing techniques
– Best done individually, and in balance with positive
advocacy
– In group decisions, appointing an individual to be
devil’s advocate can weaken decision making

• Similarly, ask yourself how else you could prove
or disprove the main tenets of a decision

16

To Better Evaluate Ideas in Groups
• Intentionally introduce constructive conflict
– As leader, signal that conflict is welcome
– Create two or more heterogeneous
subgroups, and give them the same task
– Require individuals to anonymously submit in
writing before a group decision meeting his or her
best decision option, driving issues, and even
leading agenda items for the group decision
meeting
– Get more than one option from each member

17

Caution About Statistics and
Probability
• Humans generally have a poor intuition about
statistics, probability, and confidence intervals
• Action:
– Get statistically significant data sets to inform the base rate of success
– Include internal, external in-sector, and external out-of-sector
models, a.k.a. reference class analysis
– Beware of survivor and selection biases in data availability
– Remember that not everything follows a Gaussian distribution. Many
phenomena in technology and business follow a Paretian distribution


18

Influence of Variables
• Humans judgment ascribes too much weight to some variables, and
not enough to others
– Overgeneralize from personal experience
– Overly influenced by most recent events
– Biased by superficial factors

• Statistics over larger time windows and data sets tend, when
analyzed through the correct models, to generally outperform
human intuition
• It takes courage for executives and businesses to discount intuition
and put more weight on data
• Linear models for making predictions often outperform humans

19

Groups vs. Individuals
• Groups are better for idea generation than evaluation
• Groups work well when there are many ideas to consider, but
their implications are straightforward to assess
• Individuals are better for decisions when there are few ideas
to choose from, but the consequences are complex and
difficult to model
• Groups can set policy, but individuals need to administer
policy


20

Group Decisions
• When deciding a thorny matter with a group:
– Keep meeting proceedings secret (no publicity)
• Improves flexibility
• Reduces extremity of early positions from individuals

– No recorded vote until the final vote
– Everything is reversible until everything is finalized
– One voting event, yes or no, on everything as a
package


21

Don’t Bury Failures
• Decision autopsies

• Force yourself and your team to revisit major efforts after the fact
– This is the only way to learn about errors in human
judgment, information access, and deliberation which led to
difficulties
– Start with written documents at the time of the decision, since
recollections shift to more favourable or forgivable interpretations
over time

• Encourages bad news to come forward, curtailing “shoot the
messenger” syndrome from taking hold
• Make the cardinal failing being the omission of not revisiting and
not learning from mistakes, rather than mistakes themselves

22

Open Outcry Auctions Drive the Least
Rational Buy-Side Behaviour
• Confluence of self-reinforcing detrimental
tendencies:
– Loss aversion
– Consistency bias (showing up to bid, earlier bids)
– Social proof (most recent bid, other bidders)
– Stress-induced judgment errors; people make
more extreme errors when stressed or pressed for
time


23

The Power of Why
• Curiosity and the ability to ask the question
Why?
• Mankind’s best natural antidote to
disadvantageous psychological decision
tendencies
• To be able to start to answer the question
Why?, observe and record meticulously

24

Social Proof: Perils and Antidotes
• Social proof: Powerful evolutionary shorthand in
decision making
• Learn and keep in mind how smart people have
made dumb decisions
• Manage which peers to involve, far more than
exhorting behaviour
• Be most alert when strong or charismatic leaders
are involved
– Authority mis-influence – people have followed
powerful leaders to horrific outcomes

25

Commitment Limits
• Tendency to escalate commitments to justify past
actions
– Generally stronger in individuals than groups
– However, for groups with a tendency to escalate, they do
so even more strongly than individuals
– Social pressure that consistency is usually seen as a virtue

• At the outset of a major and risky project, know your
limit of investment, write it down, and don’t raise it
without a sufficiently objective basis for doing so


26

Periodically Review Decision Processes
• Consider the steps followed for major decisions
• Look particularly at the time allocated to each
step, and the biases which emerged
• Look for where a greater proportion of time should
have been allocated, to shape future decision
processes
• Almost always, in hindsight more time should have
been spent developing alterative ideas, getting
critical data, and considering alternate perspectives

27

In Closing
• One thing to remember:
– Humans are not naturally economically rational
decision makers
– Just knowing this makes decision makers less
presumptive and more likely to ask the right
questions to reach better decisions


28

In Closing
• And a second thing:
– Markets are not fully efficient
(financial, talent, resources, other scarce assets)
– A sustained informational advantage and ability to
execute on that advantage in decision skill can
confer a significant competitive advantage


29

References
“Before You Make that Big Decision…”, Kahneman et al, HBR, June 2011
http://www.paginasprodigy.com.mx/RPA1958/BigDecision.pdf
“The Ascent of Money”, Niall Ferguson, Penguin, 2008
http://www.niallferguson.com/publications/the-ascent-of-money

“Don’t Trust Your Gut”, Bonabeau, HBR, May 2003
http://people.icoserver.com/users/eric/hbr_gut.pdf
“The Psychology of Human Misjudgment”, Munger, 1992-2005
http://law.indiana.edu/instruction/profession/doc/16_1.pdf


30

References
“Judgment in Managerial Decision Making, 8th Ed.”, Bazerman et
al, Wiley, 2012
http://ca.wiley.com/WileyCDA/WileyTitle/productCd-EHEP002487.html
“Winning Decisions”, Russo et al, Doubleday, 2001
http://www.randomhouse.com/book/159138/winning-decisions-by-j-edward-russo-and-paul-jh-schoemaker

“Thinking Fast and Slow”, Kahneman, Doubleday, 2011
http://us.macmillan.com/thinkingfastandslow/DanielKahneman


31

Questions?


32

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