I’ve been reading and rereading Daniel Kahneman’s engrossing book, Thinking Fast and Slow. Psychologist Kahneman won the Nobel Prize in Economics for his work challenging the rational theory of decision-making. I came away with a better understanding of how the brain works and how easy it is to influence decisions – good stuff! But also with the sad realization that business managers develop and implement plans, secure in the knowledge that they are using all their insight and expertise to achieve success, only to fall victim to common fallacies. It’s a hamster wheel of activity, all of us ever-so-busy.
What You See Is All There Is (WYSIATI): Picture the senior leaders in their monthly meeting, discussing the downward sales trends. They bat around the reasons an potential actions. Different incentives for the sales team? Better marketing communications – maybe a new ad agency? Competition? Economic factors? The conventional wisdom is trotted out, the plan is tweaked, everybody goes off to implement as charged. But nobody takes an outside view, nobody takes a systematic approach to questioning the assumptions. Secure in the WYSIATI fallacy, confidence continues at a high level until a crisis sets in. Good example: Hostess Brands and the long-overdue death of the Twinkie.
The Illusion of Validity: If experts are quick to assume that they know all the factors that have an impact, they also have an amazing ability to trust their own judgment. Which candidate to hire? Which potential new product should move forward, and which should be killed? Where should our money be invested for the highest return? Even when we know our judgments are little better than random guesses, we trust ourselves. It just feels right to do so. Look at the huge numbers of investors who think they can pick funds that will give them a better return than the market overall. But as this Forbes article demonstrates, in the long run, plain vanilla index funds – with no application of personal judgment at all – will do better.
Narrative Fallacy: People want stories. We really, really want them. We want causality, not correlation, and we really hate the idea of randomness. So we’ll build them. Sales are up? It’s the new ad campaign – so much more creative! New business comes out of nowhere? It’s the insight and charisma of the wunderkind CEO! We extrapolate from minimal information; apply “learnings” from one situation to another, unrelated situation; over-emphasize recently acquired information; and overlook regression to the mean, that is, that situations that are below par have a tendency to improve and those that are above average have a tendency to decline, unrelated to any actions that might be taken. Jim Collins’ Good to Great looked for and delivered stories, and How the Mighty Fall uses much the same hindsight analysis approach to construct new stories to assess why great companies don’t stay great.
Optimistic Bias: But perhaps the most disconcerting tendency of leadership teams is to have a bias towards optimism. The likelihood that a small business will survive for five years is about 35%. But as Kahneman notes, people think that success for “a business like mine” will be about 60% and “my own business” has about an 81% chance of success. Once you’ve set a goal (usually arbitrarily), developed a plan (using your inside perspective), received approval (basking in mutual regard for our own expertise), spent money and effort (sunk costs, but oh-so-hard to give up), and run into many, many setbacks (all easily explained on a case-by-case basis), you are still deep into implementation and plowing ahead. This HBR blog post from Rosabeth Moss Kanter is like a wake-up call, with 12 questions you should ask in order to impose some rationality.
Takeaways:
- Definitely, read the book.
- Be on the lookout for fallacies in your own professional life.
- Institute systems to minimize the continued pursuit of unattainable goals. A goal is not a strategy.
Sticky Business 