Tag Archives: decision-making

Pitfalls of Leadership: Loss Aversion

ZOMBIES!!!

The year is 2012. All of those Mayan calendar people you thought were wackos turned out to be right, and the world as we know it is falling apart. Zombies roam the countryside, infecting people with a heretofore unknown disease. As the President of Yourfirstnamehere-istan, you have been approached with two plans and must make a choice that will have far-reaching implications for the 600 citizens of your once-fair land. The two plans presented to you are as follows:

Plan A – If adopted, 200 people will be saved.

Plan B – If adopted, there is a 1/3 chance that all 600 citizens will be saved and a 2/3 chance that none will be saved.

Have you made your decision El Presidente? When you have, stand at your desk, pound your fists on the table and shout, “As the most high sovereign ruler of Yourfirstnamehere-istan, I declare that it shall be Plan ____!” But wait, a messenger has arrived with a second set of options, they are:

Plan C – If adopted, 400 people will die.

Plan D – If adopted, there is a 1/3 chance that no people will die and a 2/3 chance that 600 people will die.

So, which plan did you initially choose – A or B? What about from the second set of alternatives – C or D? If you are like most people the decisions you made have a great deal to do with your fear of loss.

AFRAID TO FAIL

If you take a minute to consider the options put before you above, you’ll notice that options A and C are identical probabilities, as are B and D. That being the case, why is it that people choose A over B at a 3 to 1 ratio, and D over C at a 4 to 1 ratio? Doesn’t make sense does it? Until you consider the framing of the questions – questions framed as a loss are avoided in both cases. Social psychologists who study loss aversion find that people are typically twice as upset about a loss as they are pleased about a gain. I’m sure it took a decade and millions of dollars to tell you what my Dad, a financial advisor with Morgan Stanley/Smith Barney could have told you. His phone doesn’t ring much when he is making people money, but he got a lot of calls in 2008 and 2009.

LIFE AND LOSS

It goes without saying that no one likes to lose (and leaders hate it more than most); in this sense our fear of loss is natural and can be protective at times. However, it can also be damaging at times when it distorts our view of the world or leads us to not even play the game. I’d like for you to consider the most meaningful thing you have ever done. I’m not sure what it is, probably couldn’t even get in the ballpark. What I would wager however, is that it took a measure of risk, uncertainty, and hard work to achieve. To strive for certainty is to doom oneself to mediocrity. The irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them. The only way to never risk heartbreak is to never love, but what could be more heartbreaking than that? The only way to never risk failing is to never try, but not trying is the greatest failure of all.

Source: http://incblot.org/uncategorized/loss-aversion/

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Pitfalls of Leadership: Groupthink

ALL I REALLY NEED TO KNOW I LEARNED AT A GAUDY HOLE IN THE WALL

I am privileged to be a part of the Speaker’s Bureau for Guardian/RS Funds and recently found myself with members of the RS team in San Antonio, TX for the Advisor Group Women’s Conference. Before my presentation on The Art and Science of Persuasion the next day, a few of us decided to grab dinner along San Antonio’s historic Riverwalk. The Riverwalk is beautiful; tucked one level below the automobile street and lined with restaurants, shops, and hotels, it offers no shortage of options for the hungry traveler in search of some good TexMex cuisine. After meeting my colleagues at a nearby hotel, we began to wander the labyrinthine streets of Paseo del Rio, passing a number of excellent restaurants but never stopping.

Having not determined any clear criteria for selecting a dinner spot, we continued to wander until we were accosted by an enthusiastic host at a garish Mexican restaurant. After rattling off a list of run-of-the-mill TexMex offerings, he moved on to describing the house drink specials, which sounded similarly unspectacular. So how was it, that just moments later, our five-person party of foodies was seated at a sticky table at this culinary also-ran? The answer lies in our propensity to try and read others’ minds and act in ways that are consistent with their desires – somehow, someway, everyone in our party got the idea that everyone else in the party wanted to eat at this tacky dive, and dared not speak up lest they offend the others. The result is is what social scientists call“mismanaged agreement”, as illustrated by The Abilene Paradox (what’s up with Texas and poor decisions anyway?). Our tendency to want to read minds and our inability to do so, can result in something much more dire than a stomach full of stale chips – this propensity to engage in groupthink is the sort of behavior that creates and eventually bursts financial bubbles.

YOU ARE LAZY

Ok, maybe not you, but your brain is definitely lazy. As a student of human behavior, there are precious few things that I would state as approximating a law. One of the few ideas that come close for me is that people are cognitively lazy and will consistently use decision-making rules of thumb rather than reinvent the decisional wheel each time. After all, every day of your life is filled with decisions to be made – Diet Coke or Diet Pepsi (Answer: Coke)? Should I run or stay in bed? Do I wear the black or the grey suit? Without heuristics, or experientially based rules of thumb for making decisions, life would become paralyzing and we would get very little done. Although there is considerable upside to decision-making heuristics, one of our most common fallbacks is to rely on the decisions of others, a trend that can cause leaders to make poor decisions.

A LESSON FROM THE STREET (NO, NOT WALL STREET)

Consider the last time you were asked for money by a person on the street. Perhaps this individual approached you with a cup or a tin, which may or may not have had any money in it already. Stop for a moment and consider with me who you would more likely donate money to – a person whose cup was empty or someone whose cup showed evidence of the generosity of previous passersby? It seems intuitive, that all other things being equal, the person with the least money in their cup is the one more deserving of your largesse. After all, if they are begging, they may not have adequate financial means to meet their basic human needs. The less money they have, the more they could benefit from your donation, right?

This being the case, why is it that researchers consistently find that passersby give more money to those whose cups already have money? The answer is simple – an empty cup is seen as a judgment of unworthiness by previous onlookers. Although we may not fully comprehend all of the reasons they are unworthy of our donation, we are likely to follow the lead of those who have gone before and withhold our offering. Switch gears here with me – by basing our decision on the decisions of others, we have overlooked a logical component of decision-making (in this case, need) and relied instead on a choice strategy that may have little to do with what ought to be our primary concern.

RISKY BUSINESS

We have discussed the ways in which groupthink can lead us to make unsatisfying decisions (like nasty salsa) and illogical decisions (like helping the wrong person asking for money), but can it also lead us to make risky decisions? Prior to the 1980ʹs, the conventional logic said that when groups of people got together, the decisions they made would look something like the average of the risk tolerance of the group as a whole. However, what research has borne out time and again is that groups tend to make decisions that are far riskier than the decisions that would be made by the individuals themselves (ever heard of a soccer hooligan?). It turns out that as group size increases, the perceived responsibility for outcomes lessens. With this lessened degree of felt responsibility, it becomes easier to make decisions that may risk personal or financial wellbeing, since after all, it wasn’t just MY decision.

Building consensus around a big decision has a number of positives – leveraging the ideas of the crowd, getting buy in to drive the initiative, and so on. However, some leaders get pseudo-buy-in as a means of protecting their delicate egos. After all, if things fall apart, they weren’t the only dummy who went that direction. But be careful dear reader, because while groupthink may offer a soft landing for your ego, I promise that it has precious little solace to offer a broken business.

Source: http://incblot.org/uncategorized/groupthink/


 

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Pitfalls of Leadership: Personal Fables

Is your partner out of the room? Good. Let your mind wander for a second back to your first high school love. Do you remember how intense your feelings for them were? Do you recall that sick feeling in your gut when you were apart from them? The profound, undeniable, sense you had that no one had ever experienced a love as deep or as pure as what you were now feeling for John Q. Quarterback/Suzie Q. Cheerleader?

But along the way, something happened and your love went unrequited. You searched for solace from friends, siblings, parents, perhaps even a shrink, all to no avail. Because no matter how many trees you killed in Kleenex form and no matter how many times you told the story of your heartbreak, NO ONE EVER GOT IT. How could they after all? Mere mortals could never understand the unique splendor of what you had experienced with your Schnookums! Psychologists call this illusion of uniqueness personal fable, and it hurts leaders at least as much as twitterpated adolescents.

SURE THAT COULD HAPPEN – TO THEM!

Cook College performed a study in which people were asked to rate the likelihood that a number of positive (e.g., win the lottery, marry for life, etc…) and negative (e.g., die of cancer, get divorced) events would impact their lives. What they found was hardly surprising – participants overguessed the likelihood of positive events by 15% and underguessed the probability of negative events by 20%. What this tells us is that we tend to personalize the positive and delegate the dangerous. I might win the lottery, she might die of cancer. We might live happily ever after, they might get divorced.We understand that bad things happen, but in service of living a happy life, we tend to think about those things in the abstract.

The risk management implications of perceived uniqueness are obvious – if leaders make decisions with the mindset that they are a unique snowflake, they are likely to ignore potential risks. If we feel that we are special, we inevitably ignore lessons from history and from watching others. Worse still, if we perceive upside potential to be “all us” and losing to be the birthright of those other schmucks, we’re bound to do stupid things.

GOOD AND BAD NEWS

So, if you missed the sarcasm dripping from the top of the page, let me point out to you that your relationship with Mr. Hunkyface was probably not as unique as you imagined it to be at the time. What’s more, you’re a lot less likely to hit the jackpot than you might expect. But here’s the trick, by understanding that you’re not all that special, you put yourself in a position to make excellent leadership decisions that might just make your organization, well, special.

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Pitfalls of Leadership: The Illusion of Control

YOU GOTTA KNOW WHEN TO FOLD ‘EM

Perhaps nowhere is human fallibility more prominently displayed than in Vegas. Novelty alcoholic beverages, garish lights, and smoke-filled labyrinths aren’t just a good time, they also teach a lot about how we make decisions. So what can the City of Sin teach us about a leader’s tendency to want control?

Obviously, people have a vested interest in feeling competent and in control. In fact, the definition of stress that I find most useful is “the loss of perceived control over an event.” So while the obvious upside of this tendency to feel in control is a perception of personal competence, the downside is that we tend to think we can control random events as well.

Let’s say I offered to sell you a lotto ticket that provided you a 1 in 50 chance of winning a prize. How much would you pay if I told you that I’d take your money, select a ticket randomly, and that would be your number? Now how much would you pay if I offered to let you choose your ticket from among the 50 available, allowing you to pick your daughter’s birthday or the number of Twinkies you ate to win that contest (ah, glory days).

When psychologists run this experiment, people pay $1.96 on average for the tickets that are given to them and $8.67 on average for the tickets where they are allowed to choose the number! Obviously, the odds are the same in both conditions, 1 in 50, but our confidence that we control the universe is such that we are willing to pay 4.5 times more to be in charge.

WHO’S THE BOSS?

Another example of our propensity to overvalue our own influence is the tendency of people to overinvest in their own organization’s stock for the stated reason that they can directly impact the stock price. So, Suzie from accounting is going to invest in Coca-Cola because she feels the valuation of the world’s greatest brand lives and dies on the skill of her beancounting. HINT: If you, in isolation, can directly impact the rise and fall of your stock, and make personal investment decisions accordingly – you might be going to jail soon. For the rest of us in middle management, our daily travails don’t matter much one way or the other in the ultimate success or failure of a publicly traded company and it’s best not to invest as though they do.

WHAT NOW?

But Dr. Crosby, now that I know that I don’t control the universe, what do I do now? First off, you can stop blaming yourself for every little thing that has gone wrong on your watch, because you didn’t control that either. Take responsibility where it is rightfully yours, and let the rest roll off. Second, you can embrace the uncertainty inherent in being a business leader. In fact, the volatility of it all is what provides significant upside risk. Finally, exert your energy in areas that matter – study true thought leaders in your industry, build relationships internally, take time to evaluate yourself as well as those with whom you work. The bad news is, your presence alone may not make or break your organization, leaders typically get too much credit and too much blame. However, knowing your limits can help you understand where you are powerful, and give you a sense of self-efficacy without all the megalomania.

Source: http://incblot.org/uncategorized/illusion-of-control/

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Pitfalls of Leadership: The Affect Heuristic

Notwithstanding the fact that you’re grandma thinks that you are such a nice boy and your Mom thinks you are handsome – we have already established that you are a biased leader. In my last post, we discussed the availability heuristic as it impacts your ability to lead impartially. Today, I’d like to touch on how mood impacts leadership.

DEBBIE DOWNER

When giving a seminars on leadership bias, I often ask participants to write down the word, that if it were spelled phonetically, would be “dahy”. Go on, write it down and don’t overthink it. It turns out the way you spelled the word has a lot to do with the kind of day you are having. Those that spelled the word as “die” may need a hug, while those that spelled the word “dye” are probably doing alright. The reason this is the case is that our mood has a great deal to do with how we retrieve memories and consequently, how we lead.

ROSE COLORED GLASSES OR “I WEAR MY SUNGLASSES AT NIGHT?”

One of the reasons psychologists can charge $200/hr to ask, “How does that make you feel?” is that we have gotten great at putting fancypants labels on things that would otherwise be very intuitive. Take for instance the tongue-twisting affect heuristic, which is simply a reference to our tendency to perceive the world through the lens of whatever mood we are in.

Ask someone having a bad day (those that wrote “die”, I’m looking at you) about their childhood and they are likely to tell you how they were chubby, had pimples, and never got picked first at kickball. Conversely, ask someone having a good day about their childhood and they are likely to recall summers in Nantucket and triple dips from the Tastee Freeze. Memory and perception are moving targets colored by our mood, NOT infallible retrieval and evaluation machines through which you make unbiased decisions.

WHO CARES?

So what is the moral of all of this psychobabble for the average leader? Think back on the last time that you went shopping when you were hungry. Once you’ve brought that to mind, think back on the contents of your shopping cart. If you’re like me, you probably had a whole mess of HoHos, Ding Dongs, Nutty Buddies, and Diet Coke (you don’t wanna get fat, after all), but nothing very healthy or substantive.

The same rules apply to making decisions that impact your business and the people that make comprise it; if you try to make decisions about the riskiness or viability of a given choice when you are happy/sad/angry/in love/anxious/ worried/euphoric, you are likely to end up with a junk food organization. So, the next time you are about to call a subordinate into your office in a fit of rage, take a step back, breath deeply, and come back down to Earth. After all, shopping while you’re hungry can make you sick.

Source: http://incblot.org/uncategorized/affect-heuristic/

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Pitfalls of Leadership: The Availability Heuristic

You are a biased leader. There, I said it! The thing is, I’m biased too. People in general are prone to a number of errors in judgment, and while being aware of them is no sure fix against leading poorly, it’s at least a start. This will be Part One of a six part series on leadership bias; I hope our coverage of this topic gives you some tools with which to adjust your thought process the next time you find yourself needing to make an important decision.

ALPHABET SOUP

Let’s begin by having you name all the words you can that begin with the letter “K.” Go on, I’m not listening. How many were you able to come up with? Now, let’s have you name all of the words in which K is the third letter. How many could you name? If you are like most people, you found it easier to generate a list of words that begin with K – the words probably came to you more quickly and were more plentiful in number. But, did you know that there are three times as many words in which K is the third letter? If that’s the case, why is it so much easier to create a list of words that start with K?

It turns out that our mind’s retrieval process is far from perfect, and that a number of biases play into our ability to recall information (and thus, use that information to lead objectively). Our memory is better for things at the beginning and the end of a list (like the letter K), things that are scary, and things that are incomplete. If asked to assess the prevalence of Words Beginning With K vs. Words With K As The Third Letter, you likely would have picked the former because of this fallibility in your memory retrieval mechanism. Psychologists call this the “availability heuristic”, which simply means that we predict the likelihood of an event based on things we can easily call to mind. Unfortunately for us, the imperfections of the availability heuristic are hard at work as we go about our management responsibilities and make decisions that impact the business.

DUH NUH DUH NUH DUH NUH DUH NUH DUH NUH

Roughly five years ago, I had just recently married my wife and we had moved to the North Shore of Hawaii for a six month internship. Although our lodging was humble, we were thrilled to be together in Paradise and were eager to immerse ourselves in all the local culture and natural beauty had to offer.That is, until I turned on Shark Week. For the uninitiated, Shark Week is the Discovery Channel’s seven day binge of all things finned and scary. A typical program begins by detailing sharks’ predatory powers, refined over aeons of evolution, as they are brought to bear on the lives of some unlucky surfers (FYI – surfers look like seals from below). As the show nears it’s end, the narrator typically makes the requisite plea for appreciating these noble beasts, a message that has inevitably been overridden by the previous 58 minutes of fear-mongering.

For one week straight, I sat transfixed by the accounts of one-legged surfers undeterred by their ill fortune and waders who had narrowly escaped with their lives. Heretofore an excellent swimmer and ocean lover, I resolved at the end of that week that I would not set foot in Hawaiian waters, and indeed I did not. So traumatized was I by the availability of bad news, that I found myself unable to muster the courage to snorkel, dive, or do any of the other activities I’d so looked forward to just a week ago.

JUST THE FACTS MA’AM

The parallels between a tourist surrounded by water watching Shark Week, and a leader glued to the latest Doomsday Prophet on cable news are almost too obvious to mention. Just as Shark Week is Discovery’s Sweeps Week darling, the dour and naysaying have become the bread and butter of the 24 hour cable news cycle. But whether your favorite talking head is bullish or bearish, the fact is that their opinion looms larger in your mind than it ought to, and impacts the way you lead your organization. To return briefly to my cowardice, consider the facts about the likelihood of a shark attack – the odds of me getting away with murder (1 in 2), being made a Saint (1 in 20 million), and having my pajamas catch on fire (1 in 30 million), were all exponentially greater than me being bitten by a shark (1 in 300 million). My perception of risk was warped wildly by my choice to watch a program that played on human fear for ratings and my actions played out accordingly.

LIVED LEARNING

Obviously, learning about the availability heuristic and its contorting effect on risk perception is only worthwhile if we apply it in our lives as leaders. I suggest the following as a jumping off point:

Be an informed viewer – When you do choose to watch TV, grab a paper and pencil and make a note of every time fear-based, sensational, or cliffhanger (e.g., “Could your dinner kill you? Find out at 10!”) techniques are used to drive ratings and grab your attention. Television can be a valuable source of information, but should be watched with a critical eye.

Become a student – Do not rely solely on your preferred talking head or pet network to provide 100% of your decision-making data. Consult people of various dispositions, political leanings, and views on the economy. Seek out a diversity of opinions among team members and media and examine the assumptions underlying their various prognostications.

Source: http://incblot.org/uncategorized/leadership-fail/

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RISK MANAGEMENT | The BP Oil Spill and The Power of Negative Thinking

If you want a textbook example of how negative thinking can help prevent errors, look no further than the BP oil spill in the Gulf of Mexico. As an editorial in New York Times makes clear, “BP’s disjointed response suggested it had given little thought to the possibility of a blowout at 5,000 feet.”

And it’s not just BP that gave little thought to a blowout. The same could be said of many Wall Street firms. They, too, failed to give serious thought to the possibility of a blowout of the U.S. housing market. In testimony earlier this year, for instance, JP Morgan CEO Jamie Dimon made this admission: “In mortgage underwriting,” he said, “somehow, we just missed that home prices don’t go up forever…”

Nobody likes to think negatively (by which I mean thinking seriously and deeply on the front end of a problem about what can go wrong). We prefer to think there will always be blue sky.

But in any serious endeavor, negative thinking is absolutely necessary. Eisenhower thought so. That’s why, when planning the invasion of Normandy, he went so far as to draft a letter taking responsibility for the failure of the D-Day invasion.

More recently, Lloyd Blankfein, the head of Goldman Sachs, testified about the essential importance of negative thinking, which at Goldman takes the form of stress tests.

“…The one thing that we constantly learn from every crisis,” he said. “is the need for more stress tests.”

“What a stress test does is it says, ‘Don’t tell me that this is unlikely. What if it did happen?’

“’But, it’s not going to happen.’”

“’What if it did’”?

What if it did? That’s the key question every negative thinker needs to ask — and it’s one that BP clearly avoided.

But there’s a natural impediment to negative thinking. Researchers call this impediment a confirmation bias. But The Wall Street Journal, in a recent article, referred to it as the “yes-man in your head.” Either way, it amounts to the same thing: when we have a decision to make and set out to gather information, our search isn’t neutral. As the Journal piece points out, we are twice as likely to seek information that confirms our original belief as we are to seek information that contradicts it.

In other words, the more we know, the more certain we become that we are right. And we go on believing that — right up to the blowout.

Source: http://whywemakemistakes.blogspot.com/2010/05/power-of-negative-thinking.html

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