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Distracting Distortions

Mark Crocker - November 6, 2023 - 0 comments

Strategic decision making is not easy and many times they go wrong due to the fact that as human beings, we have shortcomings. Behavioural economics provides crucial insight into the fact that there are a host of human biases and these impact our decision making – such as being over optimistic about the likelihood of success.

On top of this issue is the matter of the principal agent scenario where incentives or motivations of certain individuals are misaligned with those of the organization. While most organizations understand these concepts, few are able to deal with them in an appropriate way resulting in failed strategies or less than expected results.

In our experience this principal agent element is widespread at the senior level, be that senior leaders jostling for supremacy, senior leaders positioning themselves to be anointed as the CEO successor or simply to fulfill their narcissistic needs. These behaviours nearly always compound cognitive imperfections within the group, creating harmful patterns of distortion and deceptions. This leads to hard to reverse decisions which ultimately destroy value within the enterprise and indeed strewn throughout corporate history are legendary tales of total corporate collapse.

So what can we do about this issue and ensure that cognitive biases and misaligned agendas don’t bring the organization to its knees?

Strategy is just about the bottom line and the trade-offs that an organization needs to make to add value to the bottom line – however you define ‘bottom line’. Strategic decisions are plagued by our human nature which results in us being over optimistic or overconfident. As an example, most people asked, believe they are in the top ten percent of drivers in terms of capability and yet spending one or two miles on any busy road proves that this cannot be the case.

In business, misplaced optimism results in overly aggressive and unrealistic forecasts and a lack of due diligence in evaluating potential risks. This matter is often compounded by the fact that senior executives sometimes place more reliance on the reputation of the person putting forward a proposal rather than assessing the proposal objectively regardless of the source. Basing strategic decisions on this factor rather than an objective understanding of the payback and rationally factoring risk into the equation is a form of corporate deception and is sometimes labeled as ‘Champion Bias’.

Knowing that human bias is playing a key role in any strategic decision making allows effective leaders to accommodate these factors and to understand their potential impact. As an example, realizing there is overconfidence in play can be mitigated by rigorous analysis of the stated assumptions and the data put forward to support the decision. Additionally, engendering a culture of conducive friction, respectful debate and affirmative feedback provides an environment where over optimism can be challenged and be accepted as a route to better decision making.

It is a critical requirement that the senior leadership diagnose and recognize the prevailing biases which exist within the organization. In understanding the biases in play, organizations can take action to minimize the distortions and deceptions resulting from them.

Ultimately the quality of an organization’s strategic decision making comes down to the quality of the debate which can be generated around any material decision that needs to be made. This cannot happen unless the organization has a culture of open and honest discourse. If multiple agendas are in play, cards are being held close to the chest, limited information is being shared and challenge is seen as an attack, results will be problematic.

Ultimately no business can afford to ignore the human factor in making strategic decisions and so to improve the chance of making the right decisions, the organization needs to be aware of the biases that exist and establish a culture of constructive debate.

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