Few senior leaders when making important strategic decisions consciously consider their cognitive biases. These systematic tendencies to deviate from rational calculations exist and being aware of these biases is very Important if we are to make the right strategic decisions about the business.
It’s easy to see why we don’t pay more attention to these biases because unlike in fields such as finance and marketing, where we can use psychology to make the most of the biases residing in others, in strategic decision-making we need to recognize our own biases. So, despite growing awareness of behavioral biases and numerous efforts by strategists to make the case for its impact, most senior leaders have a justifiably difficult time knowing how to deal with the issue.
One such bias is the stability bias. Stability biases make us less prone to depart from the status quo than we ought to. This category includes anchoring, the term given to the powerful impact an initial idea or number has on the subsequent strategic conversation. For example, last year’s numbers are an implicit but extremely powerful anchor in any budget review.
Stability biases also include loss aversion which refers to the well-documented tendency to feel losses more acutely than equivalent gains. This also applies to the sunk-cost fallacy, which can lead companies to hold on to businesses they should divest.
One way of diagnosing our susceptibility to stability biases is to compare our decisions over time. For example, reviewing our budget process year on year. Is it a case of simply adjusting for inflation or has there been a true assessment of the opportunity taking place? If our budget increase is a linear, incremental percentage but the divisions’ growth opportunities are not, this finding is cause for concern.
One way to help us as leaders to shake things up is to establish stretch targets that are impossible to achieve through “business as usual.” Zero-based (or clean-sheet) budgeting sounds promising, but often companies use this approach only when they are in dire straits. An alternative is to start by reducing each reporting unit’s budget by a fixed percentage – perhaps 10 percent. The resulting tough choices facilitate the redeployment of resources to more valuable opportunities. Finally, challenging budget allocations at a more granular level can help companies reprioritize their investments
To avoid this stability bias, the ability to “shake things up” is a key tool in our armory, it just takes a bit of courage and the ability to enable others to achieve more than they thought possible.
Good decision making requires practice. Recognizing our cognitive biases requires self-awareness. For us as individual leaders it is about recognizing our cognitive biases and then employing appropriate techniques to ensure that we consistently make the right strategic decisions…