Decision-making & Analytics
1 Solving new problems based on past experience The human brain continuously tries to map past experiences onto the present. This means that when we are presented with new problems or challenges, our mind immediately asks: “Did I face something similar in the past and, if yes, what did I do then?” or “What do other people do in situations like this?” The brain is seeking out ‘precedents’, like a lawyer examining past legal cases. This type of thinking, which is sometimes referred to as ‘example- based’ or ‘case-based’ thinking, often leads to successful actions in situations that closely match past cases: what worked before will probably work again. But in new scenarios or in cases that only partly resemble previously encountered problems, precedent- based thinking can be a significant source of bias. And thinking we’ve ‘seen it all before’ can lead us to make the wrong decision, often with great confidence, not realising that we are fighting the ‘last war’ not dealing with the present conflict. So when leading a new company, leaders will be all too likely to try to replicate what worked at their last company. And when faced with a new crisis (e.g., a sudden drop in sales), they will be likely to reach for strategies that worked last time they had the same problem (sometimes known as ‘default bias’). But this will not always be appropriate. To effectively tackle a new problem, business leaders need be careful to reflect on the unique aspects of the new situation, being careful not to overgeneralize from past experience. Indeed, a tendency to stick to the ‘tried and tested’ can be a real obstacle to positive change.
2 Creating narratives Another thought pattern that can both positively, but also adversely, impact business decision- making is our mind’s tendency to create stories and narratives. While dealing with any kind of challenge, we all have a natural tendency to create a ‘story arc’ with heroes, villains, and challenges to overcome. But we often don’t notice that our own version of a story is not the only possibility, and it may not be the most appropriate. For instance, when the Covid-19 virus first started spreading across Europe and the US, politicians created different narratives to explain what was happening to the public. Perhaps the pandemic was a ‘false alarm’ that would rapidly fade away; or perhaps it was ‘like the flu’ and could not be halted, but only ‘managed’ as it ran through the population; or perhaps it was a deadly disease that could and should to be stopped by drastic action. These narratives, of course, shape the decisions that are made: is the main objective to ‘calm nerves’ and avoid an overreaction; or to slow an inevitable spread so that health services are not overwhelmed; or to shut down society until vaccination ‘comes to the rescue’? Similarly, business leaders create and use narratives, whether thinking of the pandemic or any other challenge – and the wrong narrative could inadvertently end up biasing their decisions. They might, for example, start firmly believing a narrative in which they alone can see the right strategy for the company, and need to drive it through, against resistance from others who don’t have their unique insight. This may be dangerous if the others turn out to be right. Subsequently, these narratives might prevent them from identifying
TO THE CORE
1. Making decisions is a key part of business, but occurs when bosses are confronted by unfamiliar situations where bias is most likely to strike. 2. The brain automatically seeks out precedents, but these can be misleading if they only partially resemble the current circumstances. 3. Our mind also tends to form ‘story arcs’, but these narratives may not be the only – or the most accurate – way to view things. Bosses can become trapped in their own narratives. 4. These behaviours can convince business leaders to do too much, too soon.
T he human brain is an incredibly sophisticated biological system for continuously it generally works amazingly well, our brains are subject to so-called cognitive biases, particularly when presented with new problems and situations. Decision-making is a key part of business and entrepreneurship processing new information and determining what to do. But while and often these decisions involve dealing with novel situations, where cognitive biases are most likely to strike. In this article, I outline three aspects of human thinking that can cause business leaders to make mistakes.
evidence of the contrary or lead them to only seek out information that confirms their narratives: the well-known phenomenon of confirmation bias. So, people with different opinions may be rejected as ‘blockers’ (perhaps motivated by some ulterior motive to frustrate progress); or data that seems to contradict the narrative may simply be labelled as unreliable. Leaders can easily become trapped in their own narratives, rather than flexibly shifting To avoid falling into the traps of ‘narrative-based’ thought patterns, business leaders can try to reflect on the stories that they tell, and actively consider other possible stories. It is all too easy to mistake a story for the incontrovertible truth. 3 The tendency to act too soon The third potentially problematic behavioural pattern, which stems from the first two, is a tendency for business leaders to do too much, too soon. For instance, a newly hired their thinking as new information emerges.
CEO might immediately start trying to reorganise a company, rebrand it, introduce new business strategies, hire new employees, or sell/buy some of the company’s subsidiaries or assets. Instead of evaluating the strengths and weaknesses of the company and then pondering on what is working and what could be improved, business leaders can often make big changes quickly (usually based on what worked for them in the past), hoping for quick positive outcomes, which will then be attributed to their efforts. And even if things go badly, at least no-one can accuse them of not trying! But this leads to a bias to engage in flurries of change, whether useful or not. Linking back to narrative, many business leaders see their role as that of a guru, who is supposed immediately to know all the answers. This is usually not a helpful perspective. In most cases, it is far wiser to take a step back and properly evaluate a situation first, instead of immediately trying to take decisive action. A period of learning about
the business challenges, talking with colleagues, and hard thinking could lead to far more objective analysis and fruitful choices. The human mind is incredibly successful in dealing with a hugely complex and uncertain world. But the tricks that we use – drawing on experience and creating narratives – can also lead us astray, when we too quickly pick on the wrong precedent, or create an unhelpful story. And we need to guard against the tendency to rush into action, when a more measured and thoughtful approach may be more constructive. Leadership is hard, and behavioural science certainly doesn’t provide a recipe for success. It can, though, help shape a generation of more reflective and thoughtful leaders.
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